Wal-Mart: Here comes the sun

NEW YORK (Fortune) -- Wal-Mart is looking to the sun for power - and to save a few pennies on its electric bills.

The giant retailer says it will install solar rooftop panels at 22 facilities in California and Hawaii that will provide as much as 20 megawatts of electricity, for prices less than it currently pays local utilities.

Wal-Mart (Charts, Fortune 500) will purchase the electricity from BP Solar, a unit of global energy giant BP (Charts) based in Frederick, MD, from SunEdison, a privately held firm headquartered in Beltsville, MD, and from SunPower Corp. (Charts) of San Jose, which provides solar power to Wal-Mart's experimental store in Colorado.

This deal matters for two reasons. First, it's a vote of confidence in the technology of generating electricity from solar photovoltaic panels; that business is already growing by 30 percent a year in the United States. Second, it's an endorsement of a relatively new business model in which the solar power companies pay the upfront costs of installations and retain ownership of the systems, and enter long-term contracts to sell electricity to their customers.

Because of the attention devoted to all things Wal-Mart, and the ongoing frenzy over green business, this initiative is also going to provided more visibility to the solar industry.

"If you are going to put solar on roofs, it's best to have the biggest roofs. Wal-Mart is the Super Bowl of roofs," says Scott Sklar, a veteran solar industry executive who now advises commercial, industrial and government buyers of renewable energy.

To put these deals in context: Wal-Mart's 20 megawatt purchases far exceeds the 1.6 megawatt solar-electricity system being built by Google (Charts, Fortune 500) at its Mountain View, Ca., headquarters. The Googleplex solar system remains the largest single corporate solar installation in the United States

Another way to look at it: In 2006, a total of about 100 megawatts of electricity was installed by residential, commercial and government buyers who are tied to the grid (as opposed to solar power for homes or businesses in remote areas), according to the Prometheus Institute for Sustainable Development, a nonprofit group.

"Wal-Mart could roll this out to a lot more locations if they get comfortable with it, and there's no reason why they shouldn't," says Travis Bradford, the founder and president of Prometheus. "It looks like they are now trying to figure which vendor to go with, in typical Wal-Mart style."

Other retailers are also rolling out solar rooftop installations. Whole Foods Markets (Charts, Fortune 500), Staples and Lowe's already have installed rooftop power systems. Kohl's Department Stores and Target (Charts, Fortune 500) recently announced that they will buy solar-powered electricity.

To be sure, solar energy remains a relatively small business, providing less than 1 percent of the nation's electricity. It's also dependent on government subsidies. Wal-Mart's solar suppliers will take advantage of a federal investment tax credit for solar installations, which has been extended through 2008. And the company chose California and Hawaii for its rollout not merely because the sun shines there, but because both states offer programs to lower the upfront costs of solar installations.

The solar industry says incentives are needed to drive the production of solar systems to a size where costs come down. "Scale is critical for us to get to the point where we don't need incentives any more," says Julie Blunden, vice president for public policy at SunPower. A single-megawatt installation typically requires a capital investment of $6 to $9 million, a sum which has deterred buyers in the past.

In any event, Wal-Mart won't have to pay the capital costs of its rooftop panels because they will be built and owned by the three providers; it has signed 10-year contracts with each provider to buy electricity. Wal-Mart, as a result, will begin saving money over current utility rates "as soon as the first day of operation," says David Ozment, the company's director of energy.

Wal-Mart says each solar power generating system can provide up to 30 percent of the power for a store. This is especially valuable during the summer months, when the cost of electricity bought from the grid is higher.

The economics of solar-powered electricity, which produces no pollution after the installation is complete, should improve even more if the federal government taxes or regulates emissions of greenhouse gases, as it is expected to do.

The solar power initiative nudges Wal-Mart closer to its long-term goal of being supplied by 100 percent renewable energy. The company is also strongly pushing energy conservation and experimenting with wind power as part of its ambitious effort to achieve sustainability.