How Manufacturers Can Reap the Benefits of Green Energy

Procuring green energy to enhance your bottom line

Across the U.S., manufacturers are making strides in changing their production processes to increase sustainability and, as a result, are experiencing the benefits of “going green.” This change has several benefits: manufacturers can see improved bottom lines and positive consumer perception, while depletion of the Earth’s natural resources is reduced.

According to a Bloomberg New Energy Finance report, renewables (such as solar and wind) will capture 72 percent of the $10.2 trillion spent on new energy generation in the next 23 years, and are expected to produce 51 percent of global power generation by 2040. Domestically, the transition to renewable energy is already well underway. The Solar Energy Industries Association (SEIA) reported that in 2016, “for the first time ever, solar ranked as the No. 1 source of new electric generating capacity additions brought on-line on an annual basis at 39%.” And through the first half of 2017, 22 percent of all new electric generating capacity in the U.S. came from solar, ranking second in that time period only to natural gas.

The trend toward renewable energy is becoming more feasible and affordable for middle-market companies, as renewable energy cost declines continue to outpace what analysts predicted just one year ago, according to the same Bloomberg report. "The cost declines that we are seeing with these technologies are so steep that it becomes a matter of time as to when they start crossing over and becoming competitive in different ways," said lead author Seb Henbest about solar, renewables and lithium-ion batteries.

Benefits of Using Green Technology

Companies that embrace sustainable manufacturing practices could reap many benefits from going green:

  • Access to tax credits. The renewal of the Investment Tax Credit (ITC) in 2015 makes it more financially feasible for middle-market companies to use solar energy. The ITC is a 30 percent tax credit on solar systems for both residential and commercial properties, with a gradual step-down of the credits until 2021 when the residential credit will drop to zero while commercial credit drops to a permanent 10 percent. In addition to the ITC, manufacturers can also look for additional tax credits, rebates or other incentive opportunities for their particular state or funding sources with the Small Business Administration.
    • While still in existence, the Production Tax Credit (PTC) for wind, an inflation-adjusted per-kilowatt-hour (kWh) tax credit for electricity generated by qualified energy resources, has not been renewed. Ending after 2019, the PTC will be phased out over the next three years, reduced by 20 percent for wind facilities commencing construction in 2017, 40 percent in 2018 and 60 percent in 2019.
  • Increased sales. The number of consumers demanding products that are not only good for them but also good for the planet is increasing. According to a 2015 Nielsen Global Corporate Sustainability Report, 66 percent of global consumers say they’re willing to pay more for sustainable brands—up 55 percent from 2014. The report also found that 73 percent of global millennials are willing to pay extra for sustainable offerings—up from 50 percent in 2014.
  • Decreased energy costs. The decline in costs for renewable energy technologies is dramatic. For example, in 1977, solar panels cost $77 per watt. Today, the SEIA reports that they are down to just $0.39 per watt. Similarly, the Department of Energy says that the cost reduction in wind energy alongside U.S. wind energy deployment showed a decrease in cost of more than 90 percent since the early 1980s.

How Companies Can Procure Green Energy

As manufacturers begin to experience the benefits of green technology, companies interested in furthering their efforts towards sustainability have several ways to purchase green power, as outlined by Bloomberg New Energy Finance:

  • Renewable Energy Certificates (REC). These certificates are proof that energy has been generated from renewable sources such as solar or wind power. When a qualifying renewable energy plant produces electricity, it can be purchased on the market. In turn, it provides extra revenue per megawatt-hour for the project owner.
  • Green supply contract with a utility. While utilities buy electricity from a range of fossil fuel, nuclear and renewable sources, this contract guarantees that the power it provides to its environmentally concerned customer will all be from the green bucket.
  • Company-purchased renewable generating equipment. Used onsite, this equipment could take the form of solar panels (for installation on warehouse roofs or in the field next to a factory), wind turbines, or a biomass power plant, perhaps making use of waste matter from the company’s main business.
  • Corporate Power Purchase Agreements (PPAs). These agreements (between an independent electricity generator and a business) on a fixed price for the power produced over the term of the contract come in two varieties: a “private-wire” deal and offsite PPAs.
    • In a private-wire PPA, a business contracts with a renewable energy developer to build a wind, solar or other clean owner project nearby and physically send it electricity down a private cable. These direct PPAs could become more common as costs to build solar and wind projects continue to decrease.
    • In an offsite PPA, the business agrees to purchase a set number of megawatt-hours per year from a green project. While the business and the renewable energy plant may be tens or hundreds of miles apart, the business takes the agreed amount of electricity from a utility at the stipulated price (which will include a charge to reflect the cost of balancing intermittent solar or wind generation), and the utility buys that same amount from the project.

Weighing the Procurement Options

As with most things, the different options for procuring green energy have both advantages and disadvantages.

For example, the advantage of buying RECs or signing a green supply contract with a utility is that either option is relatively simple. In addition, RECs or green supply contracts do not lock a business into electricity costs that could prove to be far above market prices in the future. The disadvantage with both of these options is that they don’t make the business “greener.” RECs were probably already on the market, and the renewable energy plant existed regardless of the business’ choice to purchase power from the plant. Similarly, a green supply contract is not a guarantee that new renewable power capacity was added as a result of an organization’s buying decision.

The third option of buying renewable energy equipment for use onsite is more defined and gives the company direct access to and control of the power created. The disadvantage is that space for green energy generation can be limited and may only be able to supply a part of the business’ total electricity needs.

The two varieties of corporate PPAs also have pluses and minuses. In some ways, the private-wire PPA is ideal. It is a relatively simple contractual arrangement between the business and its nearby supplier of green electricity, and the purchase price should be free of taxes. However, the disadvantage of the private-wire PPA is that the business is still dependent on the grid to provide power when the renewable energy project is not generating enough.

Based upon an agreement for a specific number of megawatt-hours, the offsite PPA gets around those last two issues, but it has its own disadvantages. For example, the contractual arrangements between the business, project owner and utility are often complex. The utility must account for the increased supply of power from the project and the corresponding fluctuating demand from the business in the context of the overall needs of the area served by the utility.

Combining Storage with Initial Equipment Purchase

Companies that purchase their own renewable generating equipment or participate in PPAs and choose to purchase their solar panels or wind turbines may also want to consider adding storage to their investment at the outset. Utilities typically charge manufacturers low kilowatt-hours charges as well as demand charges based upon the highest level of energy usage for the month. Since solar and wind energy are variable, it can be difficult for companies to offset the peak demand charges charged by utilities for times that their energy needs are not met by their green technology. In order to stay at a constant level of reduced electricity from the grid, many companies are now financing storage equipment, along with their initial investment in solar panels or wind turbines, as a way to help stabilize energy costs. Manufacturers will still be able to take advantage of the tax credit as long as the energy being put into storage comes from wind or solar.

How to Get Started on Going Green

For companies interested in changing their processes to increase sustainability, resources are available.

The EPA suggests the following tips:

  • Address sustainability in a coordinated, integrated and formal manner
  • Focus on increased competitiveness and revenues rather than primarily focusing on cost-cutting, risk reduction and improved efficiency
  • Use innovation, scenario planning and strategic analysis to go beyond compliance
  • Integrate sustainability across business functions
  • Focus more on the long term
  • Work collaboratively with external stakeholders

In addition, the organization recommends seeking out Economy, Energy and Environment (E3), a federal technical assistance framework helping communities, manufacturers and manufacturing supply chains adapt and thrive in today's green economy. The EPA and five other federal agencies have pooled their resources to support small and medium-sized manufacturers with customized assessments that can help them reduce energy consumption, minimize carbon footprints, prevent pollution, increase productivity and drive innovation.

As more middle-market manufacturers and companies find renewable energy to be an affordable and feasible alternative, the stage is set for them to reap the benefits of going green. Integrating green technology into manufacturing processes not only helps save money, but it can also help save the Earth for future generations. That’s a hard combination to beat.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.