Apple, Facebook, Google, Microsoft, Walmart, Mars, IBM, Amazon, Whirlpool, General Motors and Dow Chemical all announced long-term contracts to buy electricity from utility-scale renewable energy projects in the last year. Power marketers swarm industry conferences looking for capacity to trade. How much potential is there to bypass utilities and deal with their large customers or traders directly?

A panel discussed this question at the Chadbourne global energy & finance conference in June. The panelists are Gary Demasi, director of operations, global infrastructure, at Google, Paul Scanlan, senior program manager of energy strategy at Microsoft, Theresa Perry, global energy and sustainability manager at Cisco Systems, Rob Threlkeld, global manager for renewable energy at General Motors, and Quayle Hodek, founder and CEO of Renewable Choice Energy, which helps Fortune 500 companies buy renewable energy.

CHADBOURNE: How much interest is there among large companies in buying renewable energy directly from the renewable energy companies?

MR. HODEK: We had deal flow of about 400 or 500 mega-watts of corporate PPAs in 2013. It more than tripled in 2014 to 1,500 megawatts. Through just the first quarter of this year, we reached half the 2014 volume, so we are on track to double the 2014 volume in 2015 if the first quarter pace remains level for the full year.

There are a lot of different drivers for corporates to be doing long-term renewable energy purchases. There is a sustainability driver and a price hedge driver, and it is rapidly becoming a simple financial decision. Renewables are no longer more expensive than buying from the local utility. Many of these are virtual PPAs that function as hedges against future electricity price hikes.

MS. PERRY: Cisco Systems has had plenty of experience with people coming to us, which has been great. We have also had great experience with people responding to our formal request for proposals. We put out a request for proposals recently and had people knocking on the door to respond to it. Our experience to date has been very favorable. We have had several unique opportunities come to us in terms of the types of deals that people are proposing.

Multiple Structures

CHADBOURNE: If you look at the websites for your various companies, there is a range of contractual relationships, from simple power purchases, swaps and differences contracts to even owning facilities and being tax equity investors. Theresa Perry, I noticed that on your website that Cisco is also buying a significant amount of renewable energy credits. Has your form of participation in the renewable energy market changed over time?

MS. PERRY: We are moving away from simply buying RECs and looking for local energy projects that can sell us electricity bundled with RECs or green tags.

CHADBOURNE: Rob Threlkeld, your website at General Motors suggests the company is buying power from landfill gas projects. What are your plans to buy more?

MR. THRELKELD: Some of our landfill gas projects go back to 1993. We have a corporate goal of procuring 125 megawatts. We are looking to leverage resources within the com-munities where we have manufacturing facilities and to drive green energy to those facilities. We actually invested our own capital recently to generate our own electricity from landfill gas and solar.

We are obviously interested in the electricity prices on offer. We signed a large PPA recently with a renewable energy supplier. Offsite procurement is the easiest way to move to a green source and drive stability into our pricing. We did a big deal in Mexico for about 25% of our power with a wind farm, and we are looking seriously at doing the same thing here in the US.

I have global responsibilities, so I am following other markets as well as they evolve. Examples are Brazil and China. We are looking at a potentially diverse portfolio of renewables to serve our far-flung manufacturing facilities.

CHADBOURNE: Paul Scanlan, at what is Microsoft looking?

MR. SCANLAN: We are looking at a broad range of opportunities and trying ultimately to find the most efficient engagements in the renewables sector. To date, we have committed to 285 megawatts of new-build utility-scale projects, but we have big REC purchases as well. We are also interested in carbon offsets.

CHADBOURNE: Gary Demasi, I owe you an apology. You do not have a beard in your official photo, so I may called you by a different name. I hope the stress from choosing among different renewables proposals has not caused you to stop shaving.

MR. DEMASI: No, just trying something new.

CHADBOURNE: So tell us about your plans at Google? Google has been in this market a long time.

MR. DEMASI: We first started in 2009 and 2010 by doing some pretty large fixed-for-floating swaps in the Midwest. It was really one of the fastest ways to move toward carbon neutrality for our large data centers in the region.

We have now contracted for more than 1,000 megawatts of renewable energy globally. We have 13 major data center campuses around the world. They are all in very different markets and so it takes a multifaceted approach.

We continue to do fixed-for-floating swaps. We have done some direct contracting with our utilities. In places like Europe where the market is really deregulated, we have more flexibility to do interesting things.

We are still playing catchup in terms of growth. We are looking at doing more innovative things in the future, such as direct investment in renewable energy facilities.

We have a request for proposals out now and are open to all kinds of structures. We try to be innovative in our space in all respects, and we invite our partners to be as innovative as we are.

Special Challenges

CHADBOURNE: Quayle Hodek, contracting with renewable energy companies that are used to dealing with utilities can be an interesting experience. What are the challenges when negotiating such deals? Your experience is vast in this, so give us a sense of what you have seen in all the different sectors.

MR. HODEK: Just starting with the Fortune 500, there are hundreds of companies that either have a 100% renewable energy goal or a carbon reduction goal. The pressure may be coming from the board. It may be coming from customers.

What are the challenges? Most of these companies, even when they are spending hundreds of millions of dollars on electricity, have either been procuring electricity on a short-term basis in the spot market or are buying from the local regulated utility. Entering into a 12-, 15- or 20-year power purchase agreement is a completely different decision for them. It requires a long-term commitment that they have not had to make previously. It requires focusing on everything from avoiding derivative accounting treatment, which is a major piece of this, structuring the deal properly, doing the origination process and making sure they are talking to the right developers with the right projects, understanding local retail sale restrictions, and then making the financial case to the chief financial officer, the executive finance committee, the board or other ultimate internal decision maker, and explaining to Wall Street how this is not taking on more risk for the business, but is actually a hedge or effective hedge against electricity price risk.

These deals are not an easy lift for corporates, but they are absolutely where the market is headed. We have been in this business for 14 years. It started with companies showing an interest in promoting greater use of renewable energy by doing some unbundled REC transactions.

The companies today are trying to capture value and are considering the best way to do that, whether it is being an equity investor or the long-term offtaker or participating in some other fashion. I have said enough. Paul, you are nodding.

MR. SCANLAN: Yes. We are focused on trying to find ways to help bring renewables to the grid, and there are many ways to do that, but to Quayle’s point, there are many challenges in getting there, both internally and externally.

We are excited about the progress the industry has made. The improvement has just been incredible over the past several years in offtake pricing.

There is still work to be done. Low natural gas prices are a major headwind. One question corporates have to answer when they head down this path is: are they going for sustainability, are they going for economics, or is it some combination of the two? The value proposition is still a challenge in some markets.

For the market ultimately to reach scale, the economics are going to be important. The deals have to make sense economically.

CHADBOURNE: Rob Threlkeld, you are in a more traditional manufacturing business. Do you think there are differences in the way that your company looks at renewable energy procurement compared to these other companies?

MR. THRELKELD: We are in a transportation business, manufacturing automobiles. Oil prices dropped dramatically within the last year, and everybody said, “This is going to have a huge impact on your renewables projects.”

I asked, “In how many places in the United States are we generating our electricity from oil?”

Obviously, people in our company are tuned into fuel costs and oil and natural gas prices and follow them closely, but they have not thought as deeply about the effect of commodity prices change on electricity or renewable energy. One of our internal challenges is the education process.

One way we are trying to think about renewable energy is as a portfolio of projects, no different than a portfolio of power trains we offer in our vehicles.

Long-term contracts are a challenge because we get into derivative accounting.

The other interesting accounting challenge is dealing with the concept of a variable interest entity. Even though a wind farm is 100 miles or even 1,000 miles away, the accountants say that the fact we are 100% of the offtake means that it creates a capital risk. You have to find an offtake where you are only 50% or less.

CHADBOURNE: Theresa Perry, you are nodding your head.

MS. PERRY: Yes. I agree with much of what has been said, especially about the internal struggles of trying to educate upper-level executives who need to approve this after you have found a fantastic deal.

That has really been a difficult thing for us. The other challenge is getting the developer to understand why it is taking so long to get that approval. While we are trying to jump over internal hurdles, the developer is asking, “It’s such a great deal. What’s the problem? Are you guys upset with the deal?” It is not that at all. It is just a completely foreign business proposition.

We usually try to bring in external expertise to help us. We have done that quite a bit with different projects in different locations because we are a fairly lean team inside.

Internal Evolution

CHADBOURNE: Gary Demasi, have you seen a change in the acceptance of renewables inside Google? Tell us a bit about the progression.

MR. DEMASI: When we first started, we were making what seemed a fairly unique request of the market. Developers were accustomed to dealing solely with utilities.

Even proposing initial structures internally was a significant challenge, but our company has had a carbon-neutral pledge since 2007, and so we were given a lot of leeway to be creative in how best to reach this goal.

Luckily, we had a tremendous amount of support all the way up to the C level. We have talked to a lot of peer companies, and we understand there are a lot of hurdles that these other companies face.

We did not face a lot of those hurdles. We certainly had to make sure the accounting was done properly and that we were not triggering any kind of treatment that was undesirable.

We had a lot of support internally. As the company evolves, and as we look for more creative ways to source renewables globally, because we have demonstrated so much success, this has built momentum internally to be open to innovative structures and new approaches.

In addition to the gigawatt-plus that we have procured for our facilities, Google has also invested now more than $2 billion in renewable energy projects globally. The investments are done by a different part of the company, but the commitment to renewable energy is obviously something that is intrinsic to how we do business and something that has a tremendous amount of conviction all the way up to the top.

CHADBOURNE: Has the long term of a power purchase agreement, hedge or other contract been an issue for Google?

MR. DEMASI: The answer varies around the world and our contracts have varying terms depending on the location, but obviously term is really important to developers. They need to get these projects financed. We understand that internally, and we also believe that long-term renewable energy makes sense from a cost perspective. We would not do this if we did not believe that it made business sense for the company.

Having long-term price certainty with respect to energy has a tremendous amount of value for a company with a fairly large energy consumption at data centers.

CHADBOURNE: Several of you mentioned that renewable energy companies are used to dealing mainly with utilities. What difference does this make? How has this affected your negotiations?

MR. SCANLAN: Our negotiations have been a collaborative process. Ultimately we are talking to dozens of parties about different projects, different structures, different opportunities, both domestically and globally.

There are some similarities with their previous utility engagements. I think we are looking at a potential contract very much like the developer is, only we are on the other side of the table. Maybe it takes some new thinking to shift from the utilities space to dealing with corporates, but I see mostly similarities.

CHADBOURNE: Rob Threlkeld, to what extent do you guys integrate the developer in your internal discussions?

MR. THRELKELD: At General Motors, although each of the regions has been delegated authority for purchasing, we are the purchasing agent for energy so we are the first point of contact for the company and then we engage the other parties. What I hear internally is, “That’s great. You are the first-line contact, but then who else do you plan to involve with that process?”

The answer is I end up involving half a dozen other folks as part of the negotiating team, even though I will be the lead.

We have dollar thresholds for internal approvals. If the purchase commitment will hit $X, then it will take eight people to approve. The term of the contract may also affect the internal approvals required. It is an open, collaborative and transparent process for what it will take to get a deal done.

Obviously there will be internal hurdles. I am going through one now where all of a sudden tax staff got in the middle of something. The issue has to do with what value to assign to a piece of the land. Those things happen. We are open with our counterparties. We might say something like, “There probably is going to be a two week delay.” We usually have a pretty good idea how long it will take to get approvals.

MR. HODEK: It is really important to manage expectations out of the gate. You have a developer community that is used to dealing with banks that can move quickly and with utilities and their processes.

When you are working with corporates, it may not be clear who the final decision maker is. Will the deal have to go to the board or can the CFO or CEO sign off? How engaged has that person been already in the discussions? As a buyer’s agent for the largest corporates, we try and get everyone in the room together because it ultimately speeds the process.

When we have a list of finalist developers, we bring in everyone: finance, tax, accounting, legal, sustainability, procurement, energy, PR, marketing. Developers need to understand that there are a number of hurdles to get these deals to the finish line. Legal is certainly not the only one.

MR. SCANLAN: One of the challenges we had initially as a technology company is that some of this energy stuff seems exotic and unknown. We worked internally with legal and finance folks and across the whole spectrum, really kind of peeling the onion and getting more comfort and socializing the nature of these deals. We are a major industrial-scale user of energy. Energy is a major part of our business, so socializing that and getting more comfort with these structures was a process, but it has been successful.

Choosing Among Developers

CHADBOURNE: When you pick a developer, do you use RFPs or do you use some other process and how do you select the winner? How do you distinguish among developers? Theresa Perry, can you take a stab at that question?

MS. PERRY: We do use an RFP process, and we look at all of the responses. We first vet the developers for such basics as do they have a reputation, do they have enough financial backing to complete the project? After that, we are looking at price point. If they met all our other criteria, we end up evaluating based on price point.

CHADBOURNE: Is that the price compared to your otherwise available retail rate or price compared to something else?

MS. PERRY: We do a series of calculations. We look at the forward market price over the entire term and do several types of analyses. We are interested in what we would have to pay compared to the price for electricity from alternative sources. Because each of the offers is different –- they have different price escalators, for example –- the offers require modeling. At the end of the day, we are interested in who is offering us the best deal on price.

CHADBOURNE: Gary Demasi, how does Google choose among developers?

MR. DEMASI: We have moved to an RFP process with a fairly comprehensive set of deal parameters that work for us. We want to vet for deal parameters early. If you are not creative, then we are probably not the right customer for you.

With respect to the developer, obviously track record is really important. The specific team is really important, and the projects are really important.

With respect to the projects, the things we look at are the quality of the interconnection, permitting, delivery. Where do we want the electricity delivered? Do we want it at a hub or are we willing to take it at the node?

CHADBOURNE: When you are looking at the project and the arrangement is a hedge or other financial transaction, does it matter where the project is located? Do you look at the environmental impacts of the project?

MR. DEMASI: We have a set of standards. We consider them to be fairly high standards in terms of which projects that we want to participate in. We look for projects that are reasonably close within the same grid as our data centers. If the electricity cannot be delivered physically to the data center, which is really preferable, we will still want the electricity to be delivered within the same grid.

We have a data center in MISO. We have done projects in MISO. We have a data center in SPP. We have done projects in SPP. We prefer to take physical ownership of the power as well as the renewable energy attributes over a long period of time.

CHADBOURNE: What do you do in states where you are not allowed to take direct service? Or are you only locating data centers in states where customer choice is available?

MR. DEMASI: We are certainly constrained by market structure. We have done some interesting things with our utilities, and we have really pushed our utilities hard. For instance, we have worked with Duke Energy at length to help design a green energy tariff that is currently in the pilot stage.

We were able to secure renewable energy directly from our utility in Oklahoma, as an example. We are actively advocating in places where we are constrained by the market structure to have more freedom, to allow everyone to have better access to renewables in a scalable way.

It is not possible everywhere. There are other markets where significant policy changes will have to happen over a period of time before we can get to the kind of procurement and access to renewables that we want.

MR. HODEK: There has been a trend recently toward virtual power purchase agreements. A company might look at its load within North America or within the United States and try to find the best priced renewable asset relative to the current and forward prices of power, and do a fixed-for-floating swap transaction or contract for differences.

Most corporates refer to that as a virtual PPA. The term is more easily understood within their organizations and sounds less scary than a fixed-for-floating swap or a contract for differences. Virtual PPAs really open up the market to all developers to offer projects to a broader audience of potential buyers — to the extent the electricity is aggressively priced.

MR. THRELKELD: I think Gary and Quayle hit the nail on the head. A lot of our facilities have been in place for 30, 40, sometimes 50 years. We rank them on a global basis. We have an A, B and C list of what facilities have the best opportunity to cut electricity costs, whether it is through an RFP or a little more collaboration with the local utility to come up with a rate structure that works for us.

In some cases, it is nearly impossible to do anything. The facilities may be in a countries or utility service territories where there is not much to be done. Those facilities are ranked C. We have plenty to do to work through the A and B lists. Hopefully by the time we have done that, the regulations in places where the C plants are located will have changed.

MR. SCANLAN: For us, geography is important, but a larger consideration is price correlation. We want to find projects with pricing that is ultimately correlated to our larger portfolio. We operate a very diverse and dispersed portfolio, and finding that price correlation is very important.

Another challenge we are encountering in wholesale engagements is the divergence between wholesale and retail pricing in many markets, and there is not necessarily a correlation between the two.

CHADBOURNE: Developers who enter into traditional PPAs with utilities find the utility is interested in how the project is being built. The utility may have a preference for a particular turbine type. It may have a preference for a lot of things. How much involvement do you have in a developer’s development process, construction process, and then operation of the project?

MR. SCANLAN: Partnering with reputable developers is critical, and we have been very fortunate in that regard on our two engagements to date.

Using only tier-one technologies for wind and solar projects is critical, as well. We are only interested in late-stage developments. There is a lot of uncertainty as you go through the development life cycle of a project. We are not interested in committing before the project has reached a late stage of development.

CHADBOURNE: Gary Demasi, in cases where Google is taking physical delivery of power, how involved is it in how the project is built and later operated?

MR. DEMASI: We are not all that different from the way a utility looks at it. We very much care about the delivery of the project. We put a lot of work into it. It takes a lot of resources to negotiate a long-term power purchase agreement, so we care about it actually being delivered.

The PPA will have performance criteria in it, milestones, things like that. We try to pick quality projects that we are confident will get delivered with quality developers.

In terms of the operations, absolutely we care. We look at the quality of the technology. We look very closely at the financial models that are being developed in support of the project. O&M is an important part of that. The O&M plan is important to us.

CHADBOURNE: With the traditional utility PPA, the utility sends the PPA. The project finds its own financing. There may be some discussion about consents in the process of the financing. Is that the level of involvement you have in the financing process or have you found yourself drawn in further than that?

MR. DEMASI: That is essentially the level.

CHADBOURNE: Rob Threlkeld, how does General Motors approach these issues?

MR. THRELKELD: We deal pretty much with tier-one suppliers. We were involved with some solar projects in 2004 and 2005 where we got burned on a couple issues. We have come a long way understanding the technology and working with the tier-one suppliers. We have periodic meetings with our suppliers.

We have a lot of electrical expertise in house because our factories can run to a 30-megawatt load. We can offer that expertise to work collaboratively with our suppliers. If we work together hand in hand, the project will be successful. We like to understand the permitting and confirm that the environmental impact studies were done. We do diligence to ensure we are protecting the environment as well as sourcing green power to our facilities.

MS. PERRY: We like to know what is happening. We ask the right questions, but we are not driving how the developer does his job. We are just making sure that we are comfortable with the way he does it.

Audience Questions

CHADBOURNE: Audience questions?

MR. SCAYSBROOK: David Scaysbrook with Private Energy Partners. How do you distinguish in your procurement between greenfield projects and brand new construction?

MR. SCANLAN: At Microsoft, we have been focused on new-build projects bringing new renewable energy to the grid. We feel like that provides the most value to the industry.

MR. HODEK: We see other corporates taking similar positions. The large corporates are focusing on getting new assets built, but there is also an economic element. There may not be as big of a delta or potential savings for the offtaker on existing assets, so we are seeing a lot of new development.

MR. DEMASI: The only thing that I would add is our team just contracted to repower part of an Altamont Pass wind farm for our headquarters facility. There is the potential to upgrade some existing wind farms to be more productive.

MR. SAXENA: Himanshu Saxena from Starwood Energy Group. We support a number of developers, and those are the developers that come to you for PPA discussions. I am curious about your strategies when and if production tax credits expire for wind projects. The price for power would have to go up by at least $23 a megawatt hour. Will that change significantly what you procure going forward?

MR. THRELKELD: Obviously it will have some impact in the United States, but will not affect what we do in other markets. China is our largest market. Brazil is our largest South American market. Section 111(d) issues are another area where US policy could affect our procurements of domestic renewable energy.

MR. HODEK: PTC expiration is a major issue. We see corporates looking at solar opportunities alongside wind as a consequence of that. They are watching the cost curves very carefully. For a corporate trying to get its first deal done, the deal needs to be a slam dunk financially. It will be more challenging without the PTC.

MR. BARCOTT: Rye Barcott from Double Time Capital. Could you speak a little bit about any GAAP accounting considerations that you need to address and how you address those with CFOs and the accounting teams?

MR. HODEK: I suspect everyone on this panel deals with it a little differently.

The main thing that companies try to avoid is triggering derivative treatment where they have to mark a contract to market. There are ways to avoid such treatment. One way is to do a physical transaction with your utility partner or on your own if you plan to put a FERC license in place.

Some companies prefer to treat power purchase agreements as leases, so they structure the contract to allow such treatment.

It can be a heavy lift within organizations to figure out what is acceptable on the accounting side and then how to make that work with the sponsors and the tax equity community in a transaction that can get financed and built.

CHADBOURNE: Keith Martin.

MR. MARTIN: Let me ask two questions briefly. First, do you care whether the project is solar, wind, geothermal, landfill gas? Second, you have a lot of eager renewables developers in this audience who are eager to pick off a large utility customer. Are the utilities approaching you with special deals?

MR. DEMASI: Wind has been the most competitive from a price perspective, which is why we have done a lot of projects in the Midwest as well as Europe, but we are agnostic. We think there is a great opportunity in solar for Google moving forward. We just have not done a major solar project yet. Certainly we are open to other kinds of renewables.

MR. SCANLAN: It is the same for us. We are looking ultimately for the greatest value propositions, regardless of the technology.

MR. MARTIN: Are the utilities offering special deals to hold you in place as a customer?

MR. THRELKELD: Interestingly enough, yes. Michigan, our home base, is like an island. We have two utilities, Detroit Edison and Consumers, that are investor-owned, and each has approached us after seeing what we have done in other locations, asking how they might work with us to hold down electricity costs.

We are having some discussions with them about how we can structure deals to support the renewable energy industry and keep the rates level for everyone, not just a specific corporation getting a special deal.