TCS Daily


Windy Publicity Stunt

By Max Schulz - January 13, 2006 12:00 AM

You're the CEO of a large publicly traded company. Among the biggest costs at your nearly 200 retail stores, bakeries, and distribution centers is your annual electric bill. So what would happen if you held a press conference to announce your company would pay an additional $110 million on top of those energy costs in 2006, though that extra payment won't gain one extra watt of power or make your operations any more efficient?

Most CEO's would brace for a shareholder revolt and expect to be served papers by Elliott Spitzer.

In the case of upscale grocery chain Whole Foods Market, however, it's a public relations coup.

Whole Foods, the trendy Austin-based company that prides itself on its environmental consciousness, announced this week that it will make the largest ever purchase of wind energy credits in the United States. The company pledged that in purchasing more than 458,000 megawatt-hours (MWh) of renewable energy credits from wind farms, it will offset 100 percent of the cost of its annual energy use. No other Fortune 500 company has done anything like this before.

This announcement was greeted with predictable cheers from the press and the environmental movement. But what does it actually mean?

One thing it doesn't mean is that Whole Foods will now get its power from wind. Though press accounts have praised Whole Foods for "going green" with this move, it actually changes next to nothing.

Whole Foods' various facilities in the U.S., Canada, and the United Kingdom will get their energy from exactly the same sources as before -- largely coal, natural gas, and nuclear energy. A handful of the company's Mid-Atlantic stores presently receive a very small portion of their power from a West Virginia wind farm. They will continue being the only outlets powered by wind since, as the company acknowledges, "it would be physically impossible to deliver electrons from a wind farm directly" to Whole Foods sites.

The credits Whole Foods is buying instead will help subsidize other consumers' energy use around the country. Producing energy from wind, biomass, and solar energy generally costs more than from traditional sources. Whole Foods' investment will allow other large consumers around the country to buy electricity from wind farms, but at prices competitive with coal, gas, and nuclear. Basically, Whole Foods will cover the spread between profitable and unprofitable electricity generation for other organizations and individuals.

Even Whole Foods' spokeswoman did not know how much it will pay to cover that spread, saying it was proprietary information. But one can take an educated guess. The company will buy its credits from Boulder, Colorado-based Renewable Choice Energy. Renewable Choice sells credits at a cost of 24 cents per Kilowatt hour per year. Whole Foods will buy 458,000 MWh, which is the same as 458 million KWh. Do the math, and the total bill facing Whole Foods runs to just about $110 million -- or more than $550,000 per location -- all to subsidize other people's electricity usage. (For the record, though she did not to know the amount, the Whole Foods spokeswoman doubted it would be as high as $110 million.)

The company claims its decision, though costly, will help avoid more than 700 million tons of carbon dioxide pollution. It is clear that this week's announcement was designed largely to appeal to a clientele that is affluent and politically liberal. The Whole Foods business model is predicated on the idea that these customers will pay higher prices for organic food from a socially conscious company. So why wouldn't they pay higher prices to promote renewable energy?

Whole Foods is explicit about its belief that it exists not just to be a successful food retailer, but to change the world. The company's website boasts a Declaration of Interdependence spelling out a corporate philosophy rooted as much in improving the environment as in turning a profit. Whole Foods shareholders know precisely what sort of a company they invest in. Indeed, its stock went up after Tuesday's announcement.

So while Whole Foods probably doesn't have to worry about negative feedback from investors, it should keep in mind that not all self-styled environmentalists are on board with wind power. Wind has certain drawbacks. For one thing, wind farms have been known to kill migrating bats and birds. Moreover, they are not invisible. Beauty is in the eye of the beholder, and to many people massive turbines dotting the landscape are an eyesore. That explains much of the opposition to a proposed wind farm off the coast of Cape Cod, where Sen. John Kerry and the Kennedy's came out against a technology they profess to champion.

For the most part, however, the company's pledge to increase its own costs in order to subsidize green power elsewhere will go over well with shoppers. Inherent in the move is the idea that traditional fuels for power generation are evil. Coal pollutes. Gas is cleaner, but still a fossil fuel. Moreover, supplies are tight. Nuclear power, well, does anyone even have to give the reasons for objecting to that?

But most Americans don't buy those arguments. The question now is whether any other major corporations will follow Whole Foods' lead. The answer, as Bob Dylan put it, is blowin' in the wind.

Max Schulz is a Senior Fellow at the Manhattan Institute.
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15 Comments

I think it's 2.4 cents per KWH, not 24 cents
2.4 cents per KWH (which is the *additional* cost of generating 1kwh of wind power over conventional sources, not the actual cost per kwh).

so

458,000 MWH * 1000 KWH/MWH * 0.024 = $11M ... not $110M

Not arguing for or against (but suprised that a TCS article would take pains to point out that the wind electrons will not be delivered to whole foods .... a point which noone claimed ... and a point that thoughtful people know does not matter since whole foods purchase will ensure that an additional 458,000 MWH of wind power reaches the grid ... and that's what matters)

JP

It is actually 2 cents per KWH or less
The author apparently has a confusion on the nature of how energy is measured. There is no such measure as KWH per Year. KWH measures one kilowatt of energy being provided for a time period of one hour. It is an hourly rate; it doesn't directly extrapolate into a monthly or annual rate.

Apparently what he did was take the residential rate of 2 cents per KWH, based on a monthly purchase of a fixed amount of wind credits and then multiplied that figure by 12 months. The residential rate of 2 cents per KWH for California residents is given by Renewable Energy Choice at http://www.renewablechoice.com/m/choose-your-size.php?st=CA

So the correct figure is just over $9 million per year, one-twelfth the figure given in the article, if Whole Foods was paying the residential rates. It is likely they are paying a significantly lower commercial rate.

No Subject
It isn't a question of how energy is measured. It's a question of what Clean Research charges for its product (wind credits).

I don't know what Whole Foods is paying -- they refused to say. What I did was look at what Clean Research charges to provide these credits and matched it up with the amount Whole Foods publicly claims it is going to buy.

Individuals can buy credits from Clean Research at a rate of 24 cents per kilowatt hour. How did I figure that out? On their website, you can buy credits for a large house by paying $15 per month to purchase 750KWh. Work it out, and it comes to 2 cents per KWh for one month. So the price is 24 cents for one kilowatt hour for one month. If you want to buy for a whole year, it's going to cost you 24 cents.

Whole Foods is claiming it will buy 458,000,000 Kilowatt Hours worth of credits. Apply that 24 cents figure to the 458 million KWh they claim they want to buy, and the figure is $110.

Is it high? Probably, but Whole foods won't say. I just went by what Clean Research charges and extrapolated.


No Subject
As I said in my other posting here, it's about what Clean Research is charging to sell credits, not what the real costs of generating wind power are.

Slight corection to earlier post
In my haste to reply, I hit send before realizing a slight typo.


I wrote: "So the price is 24 cents for one kilowatt hour for one month. If you want to buy for a whole year, it's going to cost you 24 cents."

That first sentence should read "24 cents for one kilowatt hour for one year," not month.

Correcting that typo does nothing to change the thrust of my argument.

It seems the two respondents have focused on what the price of energy is, and therefore think the figure I cited is far too big. But the article is about what Clean Research charges for its wind credits, not what the price of power generation is.

Now, are they charging too much when they charge at a rate of 24 cents per year per kilowatt hour? Perhaps, but that's a topic for a different article.


need a topic
If you don't give your post a topic, it makes it very hard to click on it directly.

one more ...
The name of the company is Renewable Choice Energy, not Clean Energy.

It still comes to $9 million, or less, not $110 million
Max,

What you are assuming is that the figure given for the Whole Foods purchase is their monthly consumption of power, so you multiplied it by 12 to get an annual figure. The figure given is the total amount of the contract, not the monthly figure.

BTW - here is a quote from USA Today giving the figure of less than 1 cent per KWH for businesses:

Whole Foods declined to state what it spends on utilities or what it's paying for the wind credits. In the 41 states with programs to promote credits, residential customers typically pay a 2-cent premium per kilowatt hour for them, while many business customers pay a 1-cent premium or less, says Lori Bird, senior energy analyst at the National Renewable Energy Laboratory, a Department of Energy contractor.
http://www.usatoday.com/money/industries/food/2006-01-09-whole-foods-usat_x.htm

I Just Contacted Renewable Choice
They say that $110 million figure is way out of line.

please give a link to the 24 cent figure
I have followed your link to the renewable choice energy site, but cannot find the purchase price for credits other than residential ... which is $5/month for 250 kwh

$5 / 250 = 2 cents per kwh (that would be 2 cents per kwh above and beyond what a residential customer pays today)

jp

sorry ... did not first read your non-subjected post ... but still wrong
you are correct ... it's 2 cents per KWH ... end of story.

"per KWH per year" does not make sense. Multiplying 2 cents by 12 is not correct.

JP

multiplying 2 cents by 12 *is* correct
And here's why: If you want to buy credits from Renewable Choice, you pay by the month. The rate you pay is 2 cents per KWh. According to Renewable Choice, that covers you for that month.

But what if you want to go for the whole year, as we are to suppose Whole Foods does? Then you have to think in terms of buying that month's-worth of credits 12 times.

458,000 MWH ... that's it
458,000 MWH
= 458,000,000 KWH

458,000,000 KWH * $0.02/KWH = $9,160,000

... and that's the end of it!

If Whole Foods bought 458,000 MWH every month, then they would be buying 5,496,000 MWH per year and it would cost $109,920,000 ... but that's not what they are doing.

They have 175 as of 4q 2005 . Assume each store uses 300 KW 24 hours a day, 365 days a year

163 * 300 * 24 * 365 = 459,900,000 KWH = 459,900 MWH

The only number above you can argue with is the 300KW ... but to get your numbers, they would have to use 12x the power... or 3.6MW per store 24 hours a day ... that, I doubt.

Even assumung my numbers are correct, thier EPS impact will be $9.2M over 69M shares or 13.3 cents/share where thier most recent year was $2.11 ... your argument still applies ... just with different numbers.

JP

Wrong-headed article anyway
I think the point of the article wasn't that Whole Foods is paying too much for a green energy policy; it was that paying any significant amount is too much, and that the policy isn't really green anyway.

At least that's what the article asserted, the author didn't make a compelling argument on either point.

1. Is buying credits actually a green policy? Yes, despite the fact that Whole Food locations won't use more electricity generated by clean sources, it will support clean sources. The whole idea of pollution credits is to bring a market-based approach to environmental awareness. It's a right wing idea that has, finally, been accepted by generally liberal environmentalists. It's beyond me why anyone should attack the concept from a right wing or free market perspective now.

2. Are wind farms more environmentally sound than coal and other carbon-based alternatives? Yes, almost certainly, despite the noise and danger to birds. Like anything, wind farms have an environmental impact, and environmentalists want to address that, and some say "no" to anything. But on balance, there are a lot fewer negative externalities from wind farms than coal generators or Saudi oil.

3. Is Whole Foods paying too much? Seems to me that's a market descision. Management at public companies makes all sorts of choices, many of which don't involve the least cost for the company. For example, they often pay their executives pretty well. Investors judge whether they like those choices and vote with their pocketbooks. That's how the system works.

Probably MUCH less than $9 million
If you follow Renewable Energy Certificate (REC) markets as Lori Bird does (see her referenced above) you'll see that large purchasers such as Whole Foods, who buy hundreds of thousands of MWhs annually, get a significant discount over a small residential purchaser paying 2 cents per kWh for the REC. I imagine the Whole Food purchase is perhaps four percent of the cost that Max Schulz claims it is.

You figure a guy who worked for the secretary of energy would understand concepts like volume discount, credit trading, and energy pricing but it is clear he does not. Even his corrections that appear in this "discussions" section demonstrate that he does not understand the difference between a kW and a kWh.

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