The next renewable energy powerhouse: Apple?
When most investors think of electricity, they typically think of the nation’s major utilities. Indeed, many U.S. utilities have been in operation for decades. The utility industry is widely regarded as a haven for stability. After all, everyone needs electricity, even when the economy goes into recession. This is why investors, particularly retirees, flock to utilities. Their profits and dividends are highly consistent from year to year.
On the surface, the utility business does not seem to be an industry in danger of being disrupted by new competitors. It goes without saying that a utility cannot just pop up out of nowhere; utilities have huge amounts of assets that are very costly to finance and maintain, not to mention the regulatory hurdles of providing electricity.
But all that could be about to change. In a landmark event, technology giant Apple, Inc. (Nasdaq: AAPL) received regulatory approval to sell the excess energy generated by its solar power facilities. Here’s why this could have dramatic implications for the utility industry.
Implications are clear
On Aug. 4, Apple received approval by the Federal Energy Regulatory Commission, or FERC, for the wholesale selling of energy, capacity, and other services generated by Apple subsidiary Apple Energy LLC. This process began last year, when Apple announced an $850 million investment in a 130-acre, 1,300-megawatt solar farm in California. The filing stipulated:
“Apple Energy’s horizontal market power screens have been reviewed, and Apple Energy passes both the pivotal supplier and wholesale market share screens in those markets. Based on your representations, Apple Energy’s submittal satisfies the Commission’s requirements for market-based rate authority regarding horizontal market power. Based on your representations, Apple Energy’s submittal also satisfies the Commission’s requirements for market-based rates regarding vertical market power.”
Apple also owns 20 megawatts of generation in Nevada service area and 50 megawatts in Arizona, according to the FERC order. All of Apple’s data centers are now powered by renewables.
This is a huge development, for two major reasons. First, this represents the first approval of a non-utility based business selling energy. Second, Apple will be able to sell its energy at wholesale rates, not at market rates, since it is not a traditional electric utility and thus is not capable of affecting the price of electricity. Now that Apple has received approval, many other companies could pursue a similar strategy. There are many other large companies with huge distribution and manufacturing facilities that could follow Apple’s lead.
What this means is that there is a real danger for existing utilities. It was previously inconceivable that a large electric utility could be disrupted, but considering the many major U.S. companies that could pursue a similar path as Apple and, there is an unprecedented risk. If more huge companies become self-sustainable, it could put a huge dent in the utilities’ bottom lines. Consider that the one hindrance on solar power was that since the sun is only out during the day, large tech companies would still need traditional energy, because their data centers run 24 hours a day, seven days a week. But now, Apple will be able to trade excess capacity during the day for “net-metered” energy at night or on cloudy days. This removes the one overhang that previously limited large companies from self-supplying solar energy.
Analysts are beginning to realize the new reality. After Apple received FERC approval, Kit Konolige, an analyst with Bloomberg Intelligence, said in a phone interview, “When you own power production facilities then you would typically want to have authority to sell power. It is indicative of a number of related trends that are lowering demand for power produced by utilities.”
The takeaway from this development is that the nation’s electric utilities need to embrace renewables like solar power. Some utilities have resisted, but with the Apple news, continuing this policy poses a real danger to their business models and customer bases. As the old saying goes, adapt or die. Fortunately, there are a number of large electric utilities that are adopting renewable forms of energy in their portfolios, and these stand to be the industry leaders moving forward.
Companies to watch
Google (Nasdaq: GOOG) and many others, that may now feel compelled to build their own solar farms as well, given the cost savings and environmental benefits of solar power in relation to coal or natural gas. For example, Google is the largest corporate purchaser of clean energy in the U.S. It has expanded its own renewable energy capacity to 2 gigawatts, which the company stated is enough energy to take 1 million cars off the road. In June, Google purchased wind energy capacity in Norway and Sweden to power its European data centers. Over the long term, Google anticipates it can run its operations with 100 percent renewable energy.
Duke Energy (NYSE: DUK): Duke has been a pioneer in renewable energy and is partnering with big tech firms instead of plowing its head into the sand. Last year the company announced a deal with Google to build a 61-megawatt solar project in North Carolina.
Microsoft (Nasdaq: MSFT) is among the major U.S. tech firms that have invested heavily in renewable energy, in addition to Apple, in solar and wind farms. Microsoft has been 100 percent powered by renewable energy for two years, by procuring renewable electricity, both directly through power purchase agreements and through the purchase of renewable energy certificates and offsets.
Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.