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Is Renewable Energy a "Good" Investment?

In the world of corporate finance, solar, wind and biomass technologies may be on the verge of crossing a key threshold.

When deciding where to invest your money, you weigh the potential return against the risk. Money market accounts offer minimal risk but modest returns, while corporate stocks typically produce much higher returns at the cost of greater risk. Corporations considering major capital outlays essentially weigh the same factors, except for one caveat: low expected returns are rarely tolerated, because they act as a drag on the company’s earnings and growth.

In this context, do renewable-energy projects make the cut as a smart capital investment? The short answer is: they never have in the past. For many years, utilities, retailers, manufacturers, and other companies with high energy demands avoided solar, wind, and biomass precisely because those technologies were too expensive, a money-losing proposition both in the short and the long term. When it comes to renewables, any return on investment is measured by money saved compared with what would have been spent on traditional forms of energy over a period of years. No savings, no return.

Over the past decade, however, costs for alternative energy have come down considerably. Now, solar, wind, and biomass can be cheaper than grid energy, when viewed over the long haul, especially when federal and state incentive payments are taken into account. Those savings and incentives can be calculated as an annual yield. Which means that companies can ask the question again: are renewables a good investment?

Happy returns? Few companies lose money embracing renewable energy, but they don’t make much either, according to an Environmental Leader survey of nearly 400 companies that have adopted solar, wind, and other renewable power sources.
Credit: Mark McKie

The answer is still no. After all, many companies have pretty high standards for what is considered “good.” In the world of corporate finance, it generally means a 20 to 25 percent annual return.

But they’re getting close in some cases. In a recent survey by research firm Environmental Leader, about a fifth of 400 companies that have adopted renewable energy said that they made an ROI of 15 percent or higher (see chart). That’s at least in the right ballpark. The other significant news out of the survey is how few companies actually lost money on such projects. At the very least, renewable energy is no longer a foolish use of corporate funds.

A case in point is UPS. Several years ago, the 350,000-employee shipping giant was evaluating whether renewables made financial sense, according to an Environmental Leader case study. “Neither solar nor wind had a return on investment that would excite anybody, but solar was more palatable,” says Scott Wicker, UPS’s vice president of sustainability and building engineering.

But there were other reasons for UPS to forge ahead; for example it wanted to reduce the risk of exposure to rising fossil-fuel prices. What tipped the scales was that photovoltaic panels were more efficient than they used to be, which helped bring the cost per watt way down. So the company installed solar panels to power a major facility in Palm Springs, California. Wicker says the company is pleased with its modest return on investment—but apparently not pleased enough to roll out the technology throughout the company.

The experience of UPS and others shows that renewable energy must cross not one but two thresholds to be widely embraced by corporations. The first has already been crossed—the technology is no longer a bad investment. Now, it’s mostly a middling one, much like a money market account to an individual investor. But the threshold that some companies are now approaching is potentially even more momentous: that in some cases renewables are on the cusp of “good.” If this second threshold gets crossed, the game changes.

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