How Apple is making money off of its landmark solar deal

March 27, 2015, 2:03 PM UTC
Apple solar site California
The power grid that leads into the site of the California solar farm that will provide Apple with electricity.
Photograph by Katie Fehrenbacher

There’s a key aspect of Apple’s high-profile solar deal in California that’s been largely overlooked—until now.

When Apple announced to the world last month that it would be spending an eye-popping almost $850 million to buy solar power from a solar farm to be built in central California, clean energy fans naturally cheered. But there was another common reaction by industry watchers, too: confusion.

Apple (AAPL) has long been known as one of shrewdest negotiators in the tech industry, and its tendency to make ultra aggressive deals has even led to partners struggling. But on the surface of Apple’s solar deal, the few financials they released just didn’t look all that competitive compared to the latest low cost solar panel farm deals that are being done.

Apple’s deal, announced in February, is to pay $848 million for the electricity from about half of the 280-megawatt solar farm, or 130 megawatts, over 25 years. PG&E (PCG) agreed to buy up the other half of the power, or 150 megawatts. Solar developer First Solar (FSLR) will develop the site and provide the panels.

Various back-of-the-envelope estimates at the time of the announcement suggested that Apple’s deal could buy solar electricity for as low as eight cents to as high as 14 cents per kilowatt hour. It was hard to know the terms exactly—and there are many factors to consider in these complicated deals—since Apple wasn’t disclosing them. But there’s been a lot of speculation about why the overall price isn’t lower for the capacity.

But the key factor that has been overlooked in these calculations is that, while Apple and PG&E are splitting the solar power from the farm almost down the middle, PG&E’s deal is actually only for 15 years. Apple’s is for 25. After 15 years, Apple plans to buy up the solar power from the entire 280-megawatt site. So any financial calculations need to incorporate the fact that, in the last 10 years of the deal, Apple will be getting double the electricity.

At the Wall Street Journal’s Eco:nomics conference on Thursday, Apple’s vice president of environmental initiatives, Lisa Jackson, confirmed as much in an onstage interview. She said: “Something that most people don’t understand is that on the back end of the deal, it goes from a 130-megawatt deal to 280 megawatts. Toward the end of the 25-year period—I’m not going to say when—we get the rest of that.”

You can just go look at California Public Utility Commission documents or even PG&E’s for that matter to see that PG&E’s deal is for 15 years. PG&E just needs to sign clean energy deals for 10 years and greater to get them counted for California’s Renewable Portfolio Standard, which requires utilities to get 33 percent of their electricity from clean power by 2020.

This big boost in capacity on the back end makes Apple’s solar deal look even more impressive than originally thought. Navigant Research analyst Sam Jaffe estimates that Apple’s deal is to pay around 8.2 cents per kilowatt hour, which is below commercial rates of 10 cents per kilowatt hour (not counting demand charges). That deal will look like “an extreme bargain” he says in the 2030’s when electricity rates will be significantly higher due to inflation.

Jaffe says: “This isn’t a good investment for Apple. It’s an excellent one. It’s a far better use of their investment capital than just about anything else. They are tripling their return over the next best similarly risked investment vehicle.”

During the onstage interview on Thursday, Jackson also provided more detail on just how much money Apple will be able to save in the long term compared to what it would be paying to buy electricity from the power grid in the more traditional manner. She said Apple could save “hundreds of millions of dollars” by agreeing to buy the fixed electricity rates (that slightly escalate over time) compared to how grid rates have historically risen.

Apple’s CEO Tim Cook originally said that the solar deal made “business sense” when he made the announcement in February. But with substantial savings like these, it could lead to more and more big companies to seek out these types of commercial solar contracts.

Beyond the economics

Apple solar site California map
A map of the proposed solar site in California.Kinison Brown/County of Monterey, California
Kinison Brown/County of Monterey, California

A little over 150 miles North of the Santa Barbara resort where Jackson made her comments about the solar deal, sits the sprawling, rural grasslands that will eventually be home to the high-profile solar farm. The 3,000-acre site is about seven miles south of the tiny town of Parkfield, and it sits on a section of a 72,000-acre cattle ranch known as Jack Ranch that is owned by Hearst.

Construction hasn’t started on the site yet. On Wednesday, I drove up to the edge of the project on the way down to the Santa Barbara event. The only public road currently available up to the area is called Turkey Flat Road, from which the area takes its name, which takes you right up to a big gate that blocks entrance to the private land. And yes, there are turkeys to be found there (saw one!), as well as handfuls of roaming cattle, hawks, and other animals.

Beyond the fence, the land will soon likely be cleared and the solar panels installed on poles. Jaffe predicts that the farm will use single access trackers for the panels, which would result in 5.5 hours per day of average solar capacity in Monterey County. The solar site is supposed to take 12 to 18 months to build, and construction is supposed to start in the middle of this year.

Eventually First Solar will build out the main access point to the solar site from Highway 41 in San Luis Obispo County, which is on the other side of the project from Turkey Flat Road. The area will also get a transmission line, and two substations, in addition to the existing transmission line and transmission capacity near by.

As I learned when I visited the Topaz solar site last year, the sheer size of these sprawling solar panel farms is hard to fathom when just looking at megawatt and kilowatt-hour numbers on paper. Driving and walking around (or even flying over) the areas do them far more justice.

Months of environmental reviews are conducted on these sites before construction is started, or approved, even when the land is former grazing land and not sensitive untouched land as it is for this project. In the future, some in the solar industry think that solar panel projects like these will become smaller and more modular in size in order to become more accommodating to the land and local residents.

However these sites ultimately look down the road, they represent a major future for U.S. energy. Apple has positioned itself at the forefront of this coming wave. In 2014 the U.S. installed 6.2 gigawatts of solar panels, up 30 percent from 2013, according to the Solar Energy Industry Association. New solar capacity built in 2014 represented a third of all of the new electricity capacity built in the U.S. And there’s expected to be another 8.1 gigawatts of solar panels installed this year.

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