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Green Energy Becomes Critical for Manufacturing

Dec. 16, 2021
Traditional production cost metrics still drive site selection, but availability of clean power is moving up the list.

Access to renewable energy is becoming a more important factor in manufacturing plant construction and expansion, a trend economic development experts say has legs.

A strong logistics/transportation proposition and access to skilled labor remain the top priorities for most big industrial development decisions, according to site selectors. Their heavy weightings in any investment calculation aren’t going to change soon. But factors are converging to make the availability of alternative energy a more prominent consideration once the logistics and labor boxes have been checked. On a growing number of projects, clean energy has become a requirement, not a relative luxury.

Cost Effectiveness

First among the reasons is the big one: Alternative energy has become much more cost-competitive. Michelle Comerford, leader of the industrial and supply chain practice at site selection firm Biggins Lacy Shapiro & Co. in Cleveland, says buying renewable energy cost 50% or more as recently as five years ago, but that that figure is now in the single digits in the regulated market. In some higher-cost parts of the country, she adds, available incentives or credits actually make renewable power a cost-saver versus traditional sources.

Similarly, proximity to a generating site can create situations in which renewable energy is very competitive: One of Comerford’s clients in West Texas is drawing some of its power from nearby wind installations and paying a premium of less than 5% to traditional alternatives, in part because its transmission costs are lower.

Philip Hopkins, head of the Renewable Energy & Environmental Finance group at Wells Fargo, says it’s reasonable to expect costs will continue to fall in the coming years before beginning to form a base. Utilities around the country are plowing billions of dollars into projects focused on alternative energy sources, storage and distributed energy technologies that will lower costs by improving resiliency and reliability. In addition, construction techniques and installation processes will continue to become more efficient, says Matt Kisber, co-founder and chairman of solar facility developer Silicon Ranch Corp., which has built projects for Facebook, Aerojet Rocketdyne and others since its launch in 2011.

Energy Storage

The rise of large-battery technology also is changing the game, the economic development pros say. Hopkins says batteries and storage now play an important role in “a significant fraction” of projects on which his team has worked. (Florida Power & Light in December announced commissioning what it calls the largest battery storage project in the world, a facility that could power 329,000 homes for two hours and is equivalent to 100 million iPhone batteries.) That’s one factor that has helped the market for renewable energy in manufacturing go “from a push model to a pull model,” Hopkins says, as more companies proactively seek out clean energy sources.

Alcoa Inc. CEO Roy Harvey provided insight into such thinking on his team’s third-quarter conference call in October.

“There seems to be some real structural shifts that are happening inside of aluminum today that … certainly strengthens the case. It also connects with the energy market,” Harvey said while discussing the long timeline Alcoa needs to take into account for greenfield or brownfield projects. “It's a question about renewable energy. And as you look at a smelter decision, obviously that becomes immensely important that we find something that is both low-carbon and renewable.”

Silicon Ranch’s Kisber says getting all stakeholders in a big project–the company, the utility, the energy developer and local and state officials–to the table from the beginning is key to speeding the process and keeping in check marginal costs.

“A prospect could work with a company like us, but if the utility is not going to embrace that approach to renewable energy, that’s a huge obstacle to overcome,” Kisber says.

Market Fundamentals

The growing supply of clean energy is being met by rapidly growing demand–and not just because traditional sources of power are being steadily replaced or because plant construction activity has rebounded in a terrific way from the depths of the COVID-19 pandemic. The job market is playing a role in the rise of alternative energy destined for industrial uses. As many companies increasingly struggle to find and retain workers, Comerford say they are adding to their investments in automation, a strategy that is adding to their energy needs.

In one case, a project she worked on that would have traditionally called for about 4 MW of power now requires 10 MW. Such demand growth, she says, is moving energy supplies up project checklists.

Wells’ Hopkins adds that broad support from the Biden administration is adding to the momentum among various stakeholders such as investors, regulators, customers and employees. For instance, Xcel Energy Inc. President and CEO Bob Frenzel in October lauded the reconciliation then in the works in Washington, D.C., for its inclusion of 10-year production tax credits for utilities and money to fund the exploration of new technologies.

“We need to identify that next generation of generation,” Frenzel told analysts and investors on Xcel’s third-quarter conference call. “What we need is another type of emissions-free generation, and I think the infrastructure bill triples DOE funding for research and development. I think that’s critical for the industry to progress past where we expect to be, which is an 80, 85% carbon reduction by the end of the decade.”

Greening Your Image

Lastly, a factor already regularly in the headlines also  contributes to energy’s growing prominence in industrial ECD, says Dennis Donovan, a principal at Wadley Donovan Gutshaw Consulting in New Jersey. Having renewable energy as part of a good brand story gives employers a leg up in the ever-intensifying battle for talent. That’s especially the case for consumer-facing companies selling consumables such as food or beauty products but it also increasingly matters in heavy industries such as metalworking, plastics or chemicals, he says.

Simply put, many people care more today about working for a company that can claim to be part of the path forward. Big names such as Alcoa may lead the way–the company already draws nearly 80% of its energy from renewable sources–but Donovan says mid-sized and small manufacturers should get on board as quickly as they can.

“Green is going to become much more influential,” he says. “There’s no doubt in my mind that we’re headed in that direction. The train is leaving the station and you don’t want to be left behind.”

About the Author

Geert De Lombaerde | Senior Editor

A native of Belgium, Geert De Lombaerde has been in business journalism since the mid-1990s and writes about public companies, markets and economic trends for Endeavor Business Media publications, focusing on IndustryWeek, FleetOwner, Oil & Gas JournalT&D World and Healthcare Innovation. He also curates the twice-monthly Market Moves Strategy newsletter that showcases Endeavor stories on strategy, leadership and investment and contributes to other Market Moves newsletters.

With a degree in journalism from the University of Missouri, he began his reporting career at the Business Courier in Cincinnati in 1997, initially covering retail and the courts before shifting to banking, insurance and investing. He later was managing editor and editor of the Nashville Business Journal before being named editor of the Nashville Post in early 2008. He led a team that helped grow the Post's online traffic more than fivefold before joining Endeavor in September 2021.

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