Google Reaps Tax Breaks in $1.4 Billion Clean Energy Bet

On a Northern California farm where silage for animal feed once grew, Google Inc. (GOOG) is generating power from more than 100,000 solar panels to heat nearby homes - - and double down on an area of energy many investors shun.

The Galt solar farm, 20 miles south of Sacramento, is one of 15 alternative-energy projects that Google has funded since 2010 as part of a more than $1.4 billion investment in clean power production. That makes the Internet search giant the biggest backer of U.S. alternative-energy projects over that stretch, excluding financial institutions and utilities, according to Bloomberg New Energy Finance.

More than half of Google’s energy projects are in solar, a market that’s cratered. Panel prices have plunged 58 percent since 2010, after Chinese manufacturers glutted the industry, sending U.S. developers Solyndra LLC and Evergreen Solar Inc. into bankruptcy. Yet Google is moving to succeed where others faltered by avoiding panel production and instead capitalizing on controversial tax incentives that can produce investment gains of more than 10 percent a year, according to analysts.

“We look at projects that will give us attractive returns,” said Rick Needham, who joined Mountain View, California-based Google in 2008 as director of energy and sustainability.

Green Facilities

While clean energy is becoming a focus for many technology companies -- Facebook Inc. (FB) is developing a wind farm in Iowa and aims to generate at least a quarter of its data center power from renewable sources by 2015 -- none are spending like Google. With $60 billion in cash, the company announced energy investments of almost $400 million in 2013.

Google, with the approval of Chief Executive Officer Larry Page, is seeking creative ways to put its cash to work and spread renewable energy worldwide. The company’s data intensive operations also require electricity to run.

In 2007, Page said Google “was a large consumer of energy due to our data centers, so we’re a natural customer,” adding that the company could “generate positive returns.”

Google is plunging in as venture investors pull back on solar. The amount of dollars invested fell more than 70 percent last year from 2011 as deal volume dropped by almost 40 percent, according to the National Venture Capital Association.

Google also has its home state, the nation’s biggest solar market, to thank for much of its expansion. In 2011, California’s Democratic Governor Jerry Brown signed a law requiring that renewable sources make up 33 percent of the electricity supply by 2020. Texas is another alluring state, as the country’s biggest wind producer.

Recurrent Projects

Google’s solar push has been aided by Recurrent Energy, a solar-project developer owned by Sharp Corp. In November, Google and private-equity firm KKR & Co. financed six Recurrent projects in California and Arizona. Two years earlier, Google invested $94 million, teaming up with KKR to finance four Recurrent developments around Sacramento, including Galt.

“More projects can get done when the costs come down,” said Michael Metzner, chief financial officer of Recurrent. “We can now provide solar power at costs that are quickly approaching those of conventional energy.”

Google uses tax-equity financing, a government incentive that allows it to lower its tax obligations by investing in renewable energy. Solar projects can produce returns of 10 percent to 14 percent annually, with about half the profit tied to incentives, according to Paul Maxwell, director in the energy practice at Navigant Consulting in Folsom, California.

Consumer Costs

Google’s tax-equity investments in energy are surpassed only by JPMorgan Chase & Co. (JPM), U.S. Bancorp and MetLife Inc., Bloomberg New Energy Finance data shows.

Providing tax breaks to cash-rich companies distorts the market and passes costs to consumers, said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Furthermore, for Google investors, “do they want a software company or do they want an alternative energy company?” said Lynch, a consultant to the energy industry.

Google has been openly supporting clean energy since 2007, when it created a research group within its philanthropic arm to develop cheaper renewable power. Early efforts were in part to help Google in its data centers, which suck down energy to handle billions of monthly search queries and YouTube videos.

Page ended the initiative in November 2011. “Other institutions are better positioned than Google to take this research to the next level,” the company said.

Utility Deals

Google’s wallet remained wide open. Needham, who runs the clean energy group, was scouring the country -- and globe -- for utility-scale projects to fund.

“A big place that we thought we could have an impact was even beyond our own operations,” Needham said. The company asked: “What are the things that we can do to really help drive us to what we hope would be a clean-energy future?” he said.

Google’s solar projects are diverse. In 2011, it started a $280 million fund for SolarCity Corp., helping the residential solar provider expand rooftop service. Late last year, Google invested $103 million in a Southern California solar plant that provides energy for 80,000 homes.

With the Galt plant, Google’s cash is going toward the production of enough power for 7,000 homes. The energy from 134,000 photovoltaic panels attached to steel girders feeds into the Sacramento Municipal Utility District, which pays for the energy. Google shares in the revenue.

Flat Land

The Galt land was formerly used by a local farmer to grow silage, or fermented cow feed. The 200-acre property is ideal for solar power because of the bright sun and flat topography.

“It’s a lot of days of sunshine here, and the weather is very predictable,” said Andrew Griffiths, director of asset management at Recurrent.

Google’s clean-energy effort also includes wind, with investments of $275 million in two West Texas wind farms since late 2012 and $75 million in an Iowa plant. At the end of last year, there was a record amount of wind-enabled energy generation under construction, according to the American Wind Energy Association.

Like solar, wind investments can generate returns of 10 percent to 14 percent a year, said Saad Qais, a vice president at Mainstream Renewable Power, which has projects worldwide.

The investments carry risks. Atlantic Grid Development LLC, which was planning an undersea power-transmission line backed by Google, changed directions last year, because the wind farms it aimed to connect weren’t being built fast enough.

Scorched Birds

There are also environmental concerns. At the Ivanpah solar plant near the California-Nevada border, 44 birds have died since early December from the intense heat, NRG Energy Inc., the project operator, said last month.

Needham said Google is focused on limiting the environmental harm from its projects and has a monitoring plan in place.

More than that, Google is promoting efficiency. The Galt plant uses technology that requires limited maintenance, keeping costs low. And to keep the grass from getting too high, the plant relies on sheep to graze the land.

“This is kind of a proven way of building utility-scale solar,” Kojo Ako-Asare, Google’s head of corporate finance, said while walking among the hundreds of rows of panels at Galt. “What drives a high-quality solar plant is all economics.”

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Ari Levy

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