This post is authored by Shayle Kann, the head of GTM Research and Senior Vice President at Greentech Media: a Wood Mackenzie Business.
As the inauguration of President Donald Trump approaches, the future of federal action on energy and climate change remains highly uncertain. And although nothing is set in stone, there is mounting evidence that the new administration will drastically change course from the path set out by President Obama. Among the most recent news:
- The presumptive head of the EPA has actively battled the Obama administration’s climate policies in his role as Oklahoma Attorney General
- Trump’s DOE transition team sent a list of 74 questions to the agency that strongly suggest major changes and budget cuts are forthcoming
- That same memo requests the names of DOE staffers who have attended climate change meetings and worked on social cost of carbon calculations
- In an interview on Sunday, Trump said that “nobody really knows” whether climate change is real and that he is “studying” withdrawal from the Paris climate accord
While no outcome is preordained, it is probably safe to assume that the United States. will not take significant federal action to reduce greenhouse gas emissions over the next four years. And it is possible that the federal government will begin to roll back many of the R&D and investment programs that have supported the recent domestic boom in clean energy. Initiatives already underway in a few states may act as a limited countervailing force, but the absence of federal action will be strongly felt.
Large Companies Are Already Taking Action
If the federal government steps back, the private sector may leap forward. The U.S. business community has already become an increasingly emphatic voice in the chorus of calls for greater action on climate change. Just after the U.S. election, during the Marrakech climate talks, over 300 businesses signed an open letter to the incoming president in support of the Paris climate accord and continuation of low-carbon policies. Ninety-one of these companies have annual revenue over $100 million, including DuPont, General Mills, and Intel Corporation.
Corporate America is doing more than just signing letters. Twenty-two of the Fortune 100 companies have committed to procuring 100 percent of their energy from renewables, and 71 have a public target for sustainability or renewable energy. Corporations are already on a par with utilities as the largest source of demand for new renewable energy. Large companies have contracted for 6 gigawatts (GW) of new utility-scale solar and wind projects since 2014. More than half of new wind power contracts signed in 2015 came from non-utility buyers.
Two groups of companies stand out among those who have signed the so-called RE100 pledge. The first is the early adopters, including Google, which recently announced it will be the first to reach 100 percent in 2017. These companies have paved the way for others, both because of their public commitment and because they have surmounted complex regulatory, financial, and technical hurdles to make these purchases. Google’s 100 percent renewable white paper lays out its strategy in detail for all other corporates to see and will likely act as a roadmap for others seeking to follow suit.
The second notable group is the manufacturing stalwarts—companies that may be viewed as less progressive and more risk-averse than their Silicon Valley counterparts. While the Google cohort may clear a path, these other companies could ultimately drive broader long-term private sector commitment. This group includes Coca-Cola Enterprises, General Motors, Johnson & Johnson, and Proctor & Gamble.
Meanwhile, retailers flocked to rooftop solar. Target, Walmart and Costco represent three of the top five customers for on-site commercial solar in the country.
As part of their transition to renewables, some corporations are forcing utilities to rethink their relationships with their largest customers. In fully regulated electricity markets, customers generally do not have the option to choose their specific source of electricity, but they can pressure their utilities to support their wishes. According to the World Resources Institute, ten U.S. utilities in eight states have responded to customer demand by creating “green tariff” options for large customers, double the number at the end of 2015.
In an even more dramatic turn, MGM Resorts defected from its local utility (NV Energy) to purchase its power directly from the wholesale market, partially in order to “aggressively [pursue] renewable energy sources.” Since then, four more casinos have done the same.
The Role Of Energy Companies
Large corporations of all shapes wield influence over the energy supply mix with the scale of their purchases, but energy producers and distributors have their hands directly on the dials. And they too are increasingly committed to reducing carbon emissions. Exxon Mobil Corp., whose CEO Rex Tillerson is President Trump’s Secretary of State nominee, affirmed continued support for the Paris climate accord in the wake of the U.S. election. Other fossil fuel majors have voiced similar support, though their aggregate investment in renewables thus far remains less than 2 percent of their total capital expenditure.
Utility companies may be the lynchpin of corporate transformation in the U.S. electricity sector. According to GTM Research, 23 percent of all large-scale solar installed in the U.S. in 2016 was procured voluntarily by utilities, in the absence of any federal or state mandate. Six of the top ten owners of grid-scale solar in the U.S. are affiliates of utilities, including Southern Power (Southern Company), NextEra Energy Resources (Florida Power & Light), and MidAmerican Energy Holdings (NV Energy, PacifiCorp). American Electric Power (AEP), a coal-heavy Ohio electric utility, told the Wall Street Journal, “Part of our plan to invest in renewables is to diversify our generation portfolio. All of those investments don’t change with a change in administration, it’s a long-term strategy.”
Utilities will need to go beyond renewable procurement and construction. As more renewable energy enters the electricity grid, utilities and grid operators will determine how to integrate these resources reliably, efficiently and cost-effectively. Here, too, many companies are taking a proactive approach. Among the myriad solutions being tested and rolled out by utilities are battery storage, intelligent solar inverters, new electricity rate designs, and advanced utility analytics and controls.
To the extent that the private sector is actively promoting clean energy, it is doing so largely out of its own self-interest. This is fundamental to the staying power of this nascent trend; companies will invest in new technologies if they make good business sense. The two main drivers of corporations’ can be summed up as risk and return.
The effects of climate change pose a real long-term economic risk to U.S. corporations and the domestic economy. The best estimates of this risk come from Risky Business, an initiative founded in 2013 by former New York City Mayor Michael Bloomberg, former Treasury Secretary Hank Paulson, and philanthropist and climate activist Tom Steyer. The organization’s landmark report quantifies this risk across areas ranging from coastal property and infrastructure to crop yields and labor productivity. The results are sobering, and companies have begun to pay attention.
Most large U.S. corporations have an international presence, which also means a global stakeholder base that is largely supportive of climate change mitigation. And for global organizations, climate risk may be greatest abroad. According to Verisk Maplecroft, eighteen of the twenty countries most vulnerable to climate change lie in sub-Saharan Africa and Asia.
Public companies have been forced to examine this risk themselves since 2010, when the SEC issued disclosure guidance stating that climate change-related risk must be publicly disclosed when present. Many companies now disclose such risk as a matter of routine.
Perhaps more important than the acknowledgement of climate change-related risk is the fact that, for an increasing number of companies, investment in clean energy is profitable. Cost declines for renewable energy, combined with policy support, have made those resources cheaper than standard electricity in wide swaths of the country. According to a recent series of studies from the University of Texas at Austin, zero-carbon electricity sources (wind, solar and nuclear) are the lowest-cost source of electricity generation of 64 percent of U.S. counties, taking into account both direct and indirect costs. Natural gas is the cheapest in the remaining 36 percent of counties.
Companies produce two direct economic benefits from most purchases of renewable power. First, they are generally able to achieve immediate electricity cost savings, which reduces their operating expenses and improves cash flow. Second, they typically sign long-term, fixed-price contracts which act as a hedge against fossil fuel and wholesale electricity price volatility.
And the cost of renewable energy is poised for further decline. GTM Research estimates that the average all-in cost of a utility-scale solar project will hit $0.98/watt in 2018 without subsidies, down 29 percent from the beginning of 2016 and surpassing the Department of Energy’s $1.00/watt target two years early. These continued cost reductions may be necessary to support demand if natural gas prices remain depressed, but if gas prices rise, renewables stand to be the primary beneficiary.
Will It Make a Difference?
For all its might, the private sector cannot entirely overcome inaction at the federal level. But if current trends continue, corporate activity could matter in three ways.
According to the recent White House deep decarbonization study, the commercial and industrial sectors represent 46 percent of all greenhouse gas emissions in the United States. And that doesn’t include their indirect impact on emissions from the other two major sectors: transportation (34%) and residential buildings (20%). So any significant action from the private sector can make a real dent in overall emissions, though deep cuts would have to rely on more than just changes to the commercial electricity mix.
Renewable Energy Demand
If the Trump administration deals a death blow to the Clean Power Plan, the U.S. will lose a long-term driver of growth for clean energy. The CPP was unlikely to impact near-term market prospects regardless, since the first targets were set for 2023 and early action credits for 2020–2021, but the program would have forced every state to examine its power sector mix and develop strategies for decarbonization.
In the absence of that long-term driver, corporate procurement may provide a new source of growth for wind and solar. The six gigawatts of corporate procurement to date is dwarfed by total electricity consumption from the private sector, which could support around 500 gigawatts of renewable energy to meet its entire electricity demand. And thanks to organizations like the Business Renewables Center, it is becoming easier each day for corporates to dip their toes in the water. If a meaningful share of large electricity customers join this trend, renewable energy will have a huge platform from which to expand.
U.S. participation was key to the success of the Paris climate accord, the biggest international action on climate change since the 1997 Kyoto Protocol. Withdrawal or inaction by the United States, which is responsible for 20 percent of global greenhouse gas emissions, risks a global ripple effect in which other major emitters step back from their own commitments. Already, China and India have warned the incoming administration against reneging on its climate pledge. Although there is no indication yet that these countries will rescind their own commitments, each new federal action (or inaction) will create fresh risk.
Serious commitment from the private sector can mitigate that threat. By signaling to the global community that the primary driver of the U.S. economy remains committed to decarbonization, with or without federal action, the private sector can take on a state-like role in international climate discussions over the next four years.
Corporate action cannot entirely make up for intransigence at the federal level, but it may just be enough to allow global decarbonization to continue apace.