Google Inc’s (GOOG) application to the U.S. Federal Energy Regulatory Commission (FERC) seeks to authorize the company to procure and market electricity. While some may view the initiative as a play in a new market, Google’s intention appears fairly obvious to us.
 
Google is moving a step closer to its stated intention of becoming “carbon neutral”.  The company has been buying carbon offsets for the purpose. Offsets are instruments that may be purchased by carbon emitting companies that are used to finance renewable energy and energy efficiency projects.
 
If Google could purchase renewable energy directly from a project, it would be eligible to receive Renewable Energy Credits (RECs), which would again take it closer to its carbon neutral goal.
 
The problem here is cost. Despite subsidies and regulations, renewable energy remains relatively more expensive, so procuring it for internal use could be inefficient. Therefore, we expect that initially, Google is likely to procure energy, receive RECs and sell to outsiders. Alternatively, if it is able to generate sufficient income from these sales, Google could use the surplus to fund its own energy needs.  
 
Google is not new in the energy space. The company has dabbled with a power meter (an energy tracking software for households), invested in startups such as AltaRock Energy and Potter Drilling, and developed a mirror for increasing the efficiency of in-house solar panels.
 
While most of the large technology companies are developing solutions to increase efficiency, The Department of Energy (DOE) has also stepped in with stimulus money for qualified projects from companies such as Alcatel-Lucent (ALU), Hewlett-Packard Co. (HPQ), International Business Machines (IBM), and Yahoo Inc. (YHOO).
 
We are very positive about Google and expect the company to continue moving from one success to another. However, we currently have a neutral recommendation on Google shares.
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