Microsoft leaves its utility to buy renewables. Is that good?

Source: Benjamin Storrow and David Ferris, E&E News reporters • Posted: Thursday, July 20, 2017

A decision by Microsoft Corp. to leave a local utility and buy its own renewable power raises a question for other big companies: If your goal is to green the grid, is it better to act on your own or to work within the system?

The software giant is striking out alone. By leaving the system operated by Puget Sound Energy (PSE), Microsoft will directly contract with renewable suppliers to provide 25 percent of the power to its corporate headquarters in Redmond, Wash. That figure will rise to 40 percent after 2020. Both are above state-mandated levels for renewable procurement.

“Our local operations require a substantial amount of energy; eliminating carbon emissions from our local operations means we’re a better, cleaner neighbor,” Microsoft President and Chief Legal Officer Brad Smith wrote in a recent blog post describing the deal.

The deal represents a more amicable departure than the one negotiated by MGM Resorts International and Wynn Resorts Ltd., both of which left NV Energy in Nevada last year. In that case, the casino giants decided to obtain their own renewable energy under strenuous objections from NV Energy, the state’s principal utility.

Yet lessons learned from Microsoft’s agreement are perhaps more elusive. Groups across the negotiating table from the technology firm said the agreement’s scope was intended to be limited. Rather than acting as a tariff that could be used by other companies, the ultimate agreement provides Microsoft with a special contract. It differs from PSE’s recently implemented green tariff, which has allowed companies like Starbucks Corp. and REI to buy additional renewables from the utility.

“It’s sort of a unique circumstance, and maybe not one we want to encourage,” said Wendy Gerlitz, policy director for the NW Energy Coalition, which participated in the negotiations. The coalition’s members range from the Sierra Club to PSE. “There is concern that the more large customers that leave, the more … costs could get higher for the remaining customers on the system.”

She expressed hope that more companies would use PSE’s green tariff. A regular PSE customer gets 59 percent of its electricity from coal and natural gas. By comparison, the green-power plan is 71 percent wind power, with the remainder coming from other renewable sources.

Washington state regulators were similarly circumspect. They framed their approval of the agreement as “narrow.” In a 42-page order, regulators on the Utilities and Transportation Commission said their decision was based on Microsoft’s unique ability as a large company to participate in the wholesale market and promote the state’s goal of developing more renewables. They expressed no opinion on whether direct energy procurements by large consumers are in the public interest.

In control of its energy

The agreement means PSE will lose its biggest customer. The daily electrical consumption of Microsoft’s Redmond campus is roughly 50 megawatts, utility officials said. Despite the loss, the tech giant will remain one of PSE’s top customers. That’s because PSE will continue to feed electricity to Microsoft’s buildings not located on the Redmond campus, amounting to 20 percent of the company’s local real estate assets.

Microsoft approached PSE several years ago, asking for options to green its power supply, utility officials said. PSE came back with several options that could have met the software company’s clean energy targets. But Microsoft found them unsatisfactory.

“Ultimately, Microsoft decided that one of its highest-priority objectives is that it wanted to control that energy supply itself,” said Ken Johnson, PSE’s director of state regulatory affairs.

Johnson said that the loss of Microsoft, while large, is manageable in the context of the 2,600 MW that PSE provides across the region on an average day.

“We feel like from a company perspective, we are not negatively impacted by Microsoft’s departure of the campus,” Johnson said. “It will sort of decrease our load, but it [will] also decrease costs.”

Doug Howell, a senior campaign representative at the Sierra Club, expressed worry that the deal does little to change the underlying foundation of PSE’s generation fleet. In his view, Microsoft would do better to push PSE to close its remaining coal plants and replace them with renewables.

Instead, “you’re carving off the most important voices in the PSE territory,” he said. “They’re leaving the rest of the rate base to fend for themselves.”

Expensive goodbye

Regulators imposed a series of conditions meant to ease Microsoft’s transition from PSE before signing off on the agreement. The tech company will be required to pay nearly $23.7 million to leave, part of an arrangement aimed at offsetting the impact to consumers for paying a larger share of PSE’s system.

Microsoft will also be required to make continued payments in PSE’s energy efficiency and low-income assistance programs. The agreement does not address Microsoft’s portion of the costs associated with cleaning up the Colstrip Generating Station in Montana. PSE, which is one of six owners of the 2,094-MW power plant, has estimated its reclamation costs at $200 million.

The terms of the agreement are tightly lashed to Washington state’s renewable portfolio standard, which currently is at 9 percent and rises to 15 percent by 2020. If the state’s RPS goes up, Microsoft will have to exceed it.

“We believe this contract is a good example of how companies can work together with their utilities and regulators to accelerate the scale and pace of clean energy development,” said Michelle Patron, Microsoft’s director of sustainability policy. She pointed to the tech firm’s continued commitment to PSE’s efficiency and low-income assistance programs as an example of their ongoing partnership.

Ideally, large consumers like Microsoft would remain part of the utility’s system to encourage the growth of renewables, said Ian Kelly, who studies corporate renewable procurements at the Rocky Mountain Institute, a nonprofit. The reality is that process is slow. Many companies, he said, simply don’t want to wait anymore.

He predicted that the Microsoft agreement will result in the development of additional renewables.

“It’s a very strong signal to utilities that their big companies want them to offer renewable products,” Kelly said. “It’s time for you to step up and take renewable energy seriously, or you will lose major customers from your service territory.”