Google has invested more than $400 million in renewable energy projects and its chief executive and co-founder, Larry Page, wants to make power from renewable sources cheaper than that produced from coal. Much as it came to dominate online search in less then five years, Google has grown into a major force in US renewables in less than two. Its presence in a market dominated by utilities, dedicated developers and financial institutions has no precedent.

“As a company, we think clean energy makes sense,” says Rick Needham, head of renewables business development at Google. Since November 2007, when Page outlined the initiative, dubbed RE

The online search giant has invested in six projects, either as conventional or tax and lease equity. These include $55 million in lease equity for Terra-Gen Power’s Alta wind energy centre phase IV, $168 million in equity in BrightSource Energy’s 392MW Ivanpah solar concentrating plant in California, $100 million in tax equity for Caithness Energy’s 845MW Shepherds Flat wind plant in Oregon, $38.8 million for a tax equity stake in NextEra Energy’s 169.5MW Peace Garden wind portfolio in North Dakota, a 37.5% stake in the development of the Atlantic Wind Con­nec­tion submarine transmission line off the US Atlantic coast (valued at “tens of millions” according to Needham) and Eu3.5 million ($5 million) in the Solarpark Brandenburg solar photovoltaic generating plant in Germany.

These investments are separate from Google’s other re­new­ables activities. Google Energy has signed two power pur­chase agreements (PPAs) with NextEra for electricity pro­duced by its 100.8MW Minco II wind energy centre in Oklahoma and 150MW Story county II wind plant in Iowa. It sells power from these plants on the local merchant markets to offset what it uses in its data centres in the same regions. Separately, Google Ventures has invested in compa­nies like CoolPlanetBioFuels, which is developing plant photosynthesis-based negative carbon and carbon neutral fuels.

Profit minded

Google’s project investments have two goals – good financial returns given the risks and the ability to make a “transformative” impact on the market, says Needham. In order to do this, the company looks for larger projects that are in some way innovative, such as deploying a new technology or using an alternative financing structure.

One reason for Google’s ability to provide such large financing commitments is that, unlike many technology companies its age, it is highly profitable and cash-rich. It generated a net profit of $8.5 billion on revenues of $29.3 billion in 2010, up 30.4% and 24%, respectively, year-on-year. In addition, it had $12.4 billion in cash on hand – a sizeable amount by most measures – at the end of the first quarter of 2011.

“The projects that we typically look at have been de-risked to a point,” says Needham. “They typically have a PPA, construction agreements, turbine supply agreements and an O&M [operations and maintenance] agreement already in place.” He adds that, while Google likes these comforts, it still looks for projects with innovative aspects.

The $2.2 billion Ivanpah project is a good example. It is the first utility-scale use of solar tower concentrating technology in the US. Instead of the more conventional photovoltaic cells, thousands of mirrors, in this case BrightSource-manufactured heliostats, are used to concentrate reflected sunlight onto a single receiver at the top of a tower, thus generating steam and spinning a conventional Siemens turbine. BrightSource developed the project with Google and NRG Energy providing equity investments at close, resulting in a 25-25-50 equity split, respectively. The US Department of Energy (DoE) backed a $1.6 billion long-term loan from the Federal Financial Bank with a section 1705 loan guarantee, which closed on 11 April.

Its investment in Shepherds Flat followed the same vein. The $2.13 billion wind plant will use 2.5MW GE-manufactured turbines, their first use in the US. Itochu subsidiary Tyr Energy and Sumitomo joined Google in the $500 million deal to buy 62% of the class A equity from GE Energy Financial Services (EFS) on 18 April. GE EFS and Caithness invested $702.2 million in the plant at close, which was on 16 December 2010, and will use the proceeds of a $494.1 million US Treasury cash grant to repay a majority of that equity investment. Bank of Tokyo Mitsubishi-UFJ (BTMU), Citi, Royal Bank of Scotland (RBS) and WestLB were joint lead arrangers on the $1.4 billion debt financing, with Sabadell, Santander, BayernLB, BBVA, CoBank, Dexia, Helaba, Intesa, Scotia and UOB participating. The project benefits from a US DoE 1705 financial institutions partnership programme (FIPP) loan guarantee equal to roughly $960 million.

“We tend to look at larger-scale projects because we want to have the biggest impact that we can have with the investments that we are making,” says Needham.

Transformative also refers to financial capacity. When Google bought its class B tax equity stake in NextEra’s Peace Garden wind portfolio the tax equity market had been closed to developers for as long as 18 months, according to Needham. The company provided its investment (20.5%) alongside additional tax equity from Bank of America Merrill Lynch (23%), JP Morgan (43.7%) and Wells Fargo (12.8%). The developer also closed a $78 million term loan, led by Helaba and Unicredit, for the portfolio in early June 2010. The project includes the 120MW Ashtabula II and 49.5MW Wilton II wind plants.

Peace Garden was not the first tax equity deal to close since the crunch, since EDP’s Horizon Wind, EDF’s enXco and Invenergy all closed deals between September 2008 and May 2010, many of them for deals that came to market before the crunch. But Google was one of the first non-financial services tax equity participants to jump back in. It is still one of the only ones present.

One thing Google does not plan to do is offer debt. “There are a lot of debt providers out there,” says Needham. “We want to have some equity ownership, in some sense, in the clean MWh that are being produced. We also feel that’s the place where we can add the most value.”

Google’s investments have yet to turn a potentially unfinanceable renewables project (or technology) into a bankable one. Every investment has been small and come at or just after financial close and two – Ivanpah and Shepherds Flat – had already received US DoE loan guarantees. Investments like these are good if, as Needham points out, the company simply wants to generate positive returns while touting its green credentials, but do little to encourage project lenders to lend at a lower interest rate or in a project that they otherwise would not. The company’s $3 billion bond issue that closed on 19 May could change that.

Bonds away

Officially, the proceeds of the bond issue will be used repay outstanding commercial paper and for general corporate purposes, according to the prospectus. However, with billions in cash on hand at the end of the first quarter, the issue begs the question of what the funding could be needed for. Renewable energy projects could be the answer.

By borrowing cheap and providing equity, tax equity, or debt – however unlikely the last is – to renewables projects Google could turn that $3 billion into potentially a lot more. It is paying notably low spreads on the three tranches, each of $1 billion, because of the historically low yields on US Treasury bonds. The three-year tranche priced at 33bp over the corresponding treasury bond and has a yield of 1.25%, the five-year priced at 43bp over treasuries for a yield of 2.125%, and the 10-year at 58bp over the benchmark for a yield of 3.625%.

Citi, Goldman Sachs, JP Morgan, Credit Suisse, Bank of America Merrill Lynch and Morgan Stanley are joint lead bookrunners of the issue. Barclays Capital, BNP Paribas, HSBC, RBS, UBS, Wells Fargo and Williams Capital are co-managers. Moody’s rated the bonds Aa2 and Standard & Poor’s rated them AA-.

The issuer could make returns of at least 200bp (at the low end) over Libor – an all-in rate of roughly 2.82% in May – if it lent that cash to a renewables project at current market rates. If it used the funds to provide tax equity it would earn still more. If it invests in projects’ common equity the returns would likely be higher yet.

A number of commentators have speculated that the bond issue could be part of the preparations for a corporate shopping spree, akin to Microsoft’s $8.5 billion deal to buy of Skype that was announced on 10 May, but with the com­pany’s stringent investment criteria and a limited universe of possible large and high-quality technology acqui­sitions this seems unlikely. As Needham has demonstrated, the com­pany is both willing and keen to make more potentially market transforming renewable energy investments that generate strong returns.

The $3 billion issue could be the start of something truly transformative. There are plenty of projects in or near the market whose future is unclear and where Google could make a difference. These include the 468MW Cape Wind offshore wind plant in Massachusetts, which is seeking equity and recently saw its DoE loan guarantee application put on indefinite hold, and NRG Energy’s 290MW Agua Caliente solar photovoltaic project, the largest solar photo­voltaic plant in the US to date. In addition, Google has no reservations about investing in projects abroad or in other renewable energy technologies.

Geothermal is one technology notably absent from the company’s portfolio. It is the only market-ready renewable energy source, excluding hydro, that could already provide baseload power at Page’s suggested cost. Needham says the company would “love” to invest in a project using the technology but has yet to find any that it feels comfortable with. Indeed, many recent geothermal projects, such as Ram Power’s Geysers Geothermal field in California, have suffered from lower than anticipated resource levels that have resulted in negative financial implications.

Needham thinks that there is a lot of opportunity for other large corporations, especially other technology com­panies, to make investments in renewable energy. If Google sparks interest from such sources of capital in providing equity, particularly tax-driven equity, to renewables, the knock-on effect on yields could be truly transformative. Google’s ability to break the tax equity oligopoly could be a market-moving event.