E is for Energy: How Alphabet is Gaining Competitive Advantage Through Smart Energy Investments

The Silicon Valley giants are moving well beyond the laptop and mobile phone screens to diversify their business. Apple is branching into the banking business with ApplePay, IBM the big-data media business with the WeatherChannel, and Alphabet into automated logistics business with self-driving cars and drones to fulfill their services. So, why not energy?

Energy consumption by technology companies has seen staggering growth in the last few years. As internet companies like Alphabet, Facebook, Netflix and Amazon are moving into the Fortune 500, they have become some of the biggest consumers of energy worldwide. In 2013 U.S.-based data centers alone used 91 million MWh of electricity (2.4% of total U.S. energy demand). Energy is the lifeblood of their operations and a mission-critical resource in digital business models.

Many ambitious tech companies are taking the energy provision of their production and operating processes into their own hands in an additional vertical integration play.

So how do they get the energy they need to power their electronic data services for billions of customers? How do they deal with energy efficiency and their carbon footprints?

Simply put, firms like Alphabet and Apple are not only looking at energy from a consumption point of view. They are actively exploring opportunities of producing energy themselves and providing their services from this energy to gain a competitive foothold.

Let’s take a look at Alphabet. With the 2013 acquisition of smart thermostat maker Nest, Alphabet positioned itself to be a player behind the meter.

Alphabet and specifically Google is in the business of organizing the world’s information. A maturing Internet of Things industry has the potential of developing electronic devices that are able to talk about their energy needs. Aggregating this information can then enable real-time auctions for the power they need. Sounds an awful lot like the Adwords business model…

As a major consumer of energy, Alphabet and especially Google is committed to power its operations with 100% renewable energy. Google is one of the US corporations to sign the American Business Act on Climate Pledge.

From the pledge: “We believe that by directly investing in renewable energy projects, we can help accelerate the shift to zero-carbon power and create a better future for everyone.”

Google committed to triple its purchase of renewable energy by 2025. Focusing on renewables is not an altruistic act. As Google puts it: “For our part, these contracts not only help minimize the environmental impact of our services—they also make good business sense by ensuring good prices.”

However, Google started building and acquiring its own energy capabilities long before 2015 and before it restructured into Alphabet; energy and climate problems have been on Google’s radar for almost a decade now. It started a major renewable energy initiative in 2007 named Renewable Energy Cheaper than Coal (RE<C), one year after the first Google data center opened. RE<C was an effort to drive down the costs of renewable energy; the goal: “to produce a gigawatt of renewable power more cheaply than a coal-fired plant could, and to achieve this in years, not decades.” Since RE<C Google shifted it’s focus to purchasing and investing in renewable energy projects. It started buying renewable energy at scale in 2010 with large and 10-20 year contracts. With its long-term commitments, Google backs investments in renewable facilities by traditional energy providers and hopes to proliferate the adoption of renewables.

Besides the projects that deliver renewable energy for Google’s operations, Alphabet has invested over $2.5 billion into 22 large-scale renewable energy projects around the world (from Kenya to Sweden, from Germany to Chile).

One of Alphabet’s own projects is Makani, which operates under the X division. X believes incremental improvements to existing technologies will not be enough to boost global adoption of wind energy. Makani aims to develop a new wind turbine, energy kites, which work in the places that don’t meet the criteria for conventional turbines. Another interesting project using more Googlesque tech is Project Sunroof, mapping the world’s solar potential and helping consumers to calculate the best solar plan.

HfS views Alphabet’s energy strategy as a good example of additional vertical integration. Internet services companies are hugely reliant on reliable energy supply. Its strategy comprises of investment in the long-term supply of renewable energy (by purchasing), enhancing the development of access to renewable energy sources for a wider audience (by investing) as well as tapping into the new business opportunities the energy transition offers (e.g., Nest).