From the November 2011 issue of Treasury & Risk magazine

Buying From the Wind Farm

Google won a Gold Alexander Hamilton Award for Best Green Strategy for the financial arrangements it designed to buy wind power.

Kojo Ako-Asare, corporate finance manager; Adrian Garcia, corporate finance analyst; and Axel Martinez, assistant treasurer Kojo Ako-Asare, corporate finance manager; Adrian Garcia, corporate finance analyst; and Axel Martinez, assistant treasurer

Using renewable energy to fuel its data centers is one of the ways Google is fulfilling a four-year-old commitment to reduce its carbon footprint to zero. But electricity generated from the sun or wind isn’t the best match for the data centers operated by the $29 billion Internet search engine provider. Wind isn’t constant and sunshine is limited, while data centers have to have power around the clock. Nor can the energy be stored for later use to deal with the differences in the timing of supply and demand.

So Google’s 2010 signing of a 20-year contract to buy 114 megawatts of electricity a year from a wind farm in Iowa being developed by NextEra Energy posed a challenge, one that Google solved with a series of financial transactions involving the electricity grid and the power markets.

The electricity from the wind farm comes with a Renewable Energy Certificate (REC) attached that differentiates it from electricity produced using coal or oil. Google buys the electricity from the wind farm at an interconnect, strips the certificate and resells the electricity into the market at that same interconnect. The company then buys power for its data center, either at the interconnect closest to the center or from a utility, and attaches the certificate to that power.

“When we are buying power at the interconnect close to our data center and we couple that with the REC that was generated by the wind farm, we can say through these financial transactions that we are technically utilizing green power to indirectly supply our data centers,” says assistant corporate treasurer Axel Martinez.

“Energy is really the core of Google’s business and our goal is to make it sustainable,” Martinez adds. “It’s about really making renewable energy much more sustainable through investments to reduce the overall cost.”

One of Google’s requirements for renewable energy is “additionality”—its purchases should result in new renewable energy projects. NextEra was planning to use the purchase agreement with Google to raise funds to build the wind farm, but the banks providing the financing wanted the agreement signed by an investment-grade counterparty, and Google had no credit rating. The company viewed the alternative, providing a letter of credit or cash collateral, as overly burdensome. So Google’s treasury managed to obtain credit ratings in a speedy 45 days.

That wasn’t the only work required. To participate in the wholesale market, Google set up a subsidiary, Google Energy. And the company did an analysis to ensure that the transactions would have a positive net present value over the 20-year life of the contract, looking at such factors as wind farm output, near-term and long-term power prices and the value of renewable energy certificates.

One plus for Google is the hedge the contract provides against increases in energy costs, Martinez points out. “As prices go up for power, we get a benefit.”

Purchasing power directly from a generator was new for Google, and selling directly to a corporate, rather than a utility or municipality, was new for NextEra, Martinez says. So the process took “several quarters.

“We went back and forth with NextEra about different structures, different ways to acquire the power, before we got to this structure,” he says.

“The first time you do it is complex but once you put it in place, the next one is easier,” Martinez adds. And in fact, Google has already made a second purchase, of 100.8 megawatts of wind power from a facility that NextEra is building in Oklahoma.

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