Business schools teach that change often comes from outside the organization. However, when it comes to utilities, change is coming from the outside the industry.
One of the biggest changes to utilities' business-as-usual operations is coming from large cloud computing companies, such as Google (GOOG), Apple (AAPL), Microsoft (MSFT), Facebook (FB), Rackspace (RAX) and Verizon (VZ).
Cloud computing companies want a low to zero carbon footprint. They would prefer that their native utilities offer them carbon-free energy. Unwilling to wait, these companies are building their own utilities.
Computing companies are building their own power plants. They are taking economic positions in other people's power plants. They are assuming the risk end of long-term power purchase agreements. They are moving their power on the nation's grids. They are interacting with state and federal regulators. In short, they are moving in on the mainstream utility.
As I mentioned in the column "Not All Utilities Are Alike," there are at least six different types of utilities. Computing companies are mostly interested in energy end of the utility business, or Type 4 utilities. For the near term, it seems that most will ignore the wires end of the business. If old-school regulators and utility executives lack innovation, they will jump into the wires business.
In fact, Google has already entered the transmission line business, or Type 3 utilities. Today, it owns 37.5 percent of Atlantic Wind Connection. Once completed, Google's new transmission line will stretch 250 miles along the mid-Atlantic coast from Southern Virginia to New York City, enabling the connection of up to 7,000 MW of offshore wind power, which could provide the energy equivalent of what is used in 1.9 million households. The project helps states meet their renewable energy standards using the most abundant local resource.
Frankly, Google's Atlantic Wind Connection idea is brilliant. It is the type of idea that never gets anywhere inside utility organizations. While billed as means to connect offshore wind resources, it really serves as a jumper cable that moves bulk power from the Carolinas to New York City. It also bypasses costly right-of-way issues, five state regulatory authorities, numerous counties and a lot of property, sales and income tax.
Nevertheless, most computing companies' activities are focused on Type 4 energy production. In particular, they are investing heavily in renewable energy production.
However, they are not approaching energy production in the manner that many might expect. Most would expect computing companies to co-install solar panels on the same property as their servers. Installing solar panel behind the utility's meter means the computing company would buy less of the utility's energy, line charges, fees and taxes. Theoretically, displacing utility's energy at retail normally provides the highest returns for owners of solar and wind farms.
However, computing companies decided that behind-the-meter installations were not practical. Instead, they buy renewable energy from remote locations and wheel it to their data farm facilities.
Google describes its strategy on its website. As a utility, Google does not seek to displace their local utility's retail energy. Instead, it seeks to accomplish two other goals. First, its purchases should be additional, or actually help to create more renewable power. Second, its investments should have the highest possible positive impact on the energy industry.
Towards those goals, Google does three things:
1. Like other utilities, Google buys electricity directly from a renewable project developer in the form of a power purchase agreement. It selects a project located on the same power grid as its data-center facilities so that the power generated by the project could conceivably be used by Google. Locating facilities in the same power market ensures that it is contributing to "greening" the grid where it operates.
2. Google sells that power right back into the grid at wholesale prices. The company understands that this sale may result in a slight net loss for Google, but it expects the contract to eventually make money as power becomes more expensive over time.
3. Finally, in the process of selling, the company strips renewable energy credits (RECs) and keep them so that no one else can claim credit for the green aspect of their purchase. Google then applies those RECs to the energy used at their facilities, so that the electricity consumed can be treated as carbon free.
This three-step process puts Google and similar computing companies in the power marketing business (Type 6 utility). As such, they move their power over regional transmission organization's infrastructure to accommodate a financial transaction.
Their customers reward them. Using renewable energy provides a clear competitive advantage in federal, state and local acquisition.
Anyone looking for a competitive advantage must have renewable energy in their components or services. For investors, this means unexpected opportunities for solar companies like SunPower (SPWR) and wind companies like Broadwind Energy (BWEN).