A battle for clean-energy assets is brewing between green-minded oil giants and the utility companies that currently dominate the fast-growing business.
Last week, Portuguese utility EDP became the latest energy producer to raise its ambitions for renewable energy—it plans to double capacity by 2025. It joins an increasingly crowded field, consisting not just of other forward-thinking utilities but also the European oil and gas supermajors.
Among the latter, BP won two 1.5 gigawatt U.K. offshore wind leases in February by bidding almost double the amount fetched by similar-sized leases at the same sale. A handful of auctions around the world in the coming year will further test the new competitive dynamics—and perhaps highlight the risks. Future returns for investors will depend on companies paying sensible prices.
Oil and gas shares have fallen amid growing uncertainty about petroleum’s future profitability. Renewables are an obvious opportunity: Demand for clean power is expected to boom as economies decarbonize and transport and industry electrify.
BP has promised to increase its renewables capacity from 2.5 GW to an extraordinary 50 GW by 2030. In addition to the U.K. leases, it has partnered with Norwegian peer Equinor for offshore wind in the U.S. and owns 50% of solar-developer Lightsource BP. French giant Total wants to increase its renewables capacity fivefold to 35 GW by 2025, and more than double that again by 2030. Shell plans to invest $2 billion to $3 billion into clean-energy projects through 2025.
But they are not entering virgin territory. The biggest global operators of renewable assets today are utilities such as Iberdrola, Enel and U.S.-focused NextEra. They have similarly ambitious plans to increase production. Unlike the oil and gas giants, they also have renewable supply-chain expertise and experience in permitting, transmission infrastructure and regulated power markets. Their existing green credentials also lower their cost of capital, as investors clamor for green shares and bonds and lenders start to consider climate risk.
If renewables roll out at anything like the rate required to limit climate change according to the 2016 Paris agreement, there should eventually be enough growth to meet everyone’s ambitions. In the short run, however, there could be bottlenecks as the supply of assets and infrastructure struggle to match the rollout plans. Permits for new production sites and electricity lines aren’t always easy to obtain.
As many oil companies have partnered with or bought existing developers, some in the green-energy industry argue it is simply the same old competitors with a different name. However, the oil majors add to the equation deep pockets, a high risk tolerance and a new strategic rationale to do deals.
The renewable ambitions of BP, Shell and Total could also present an opportunity for the established players, which often sell part of their multiyear wind and solar projects as they progress. Shared ownership is commonplace in the oil and gas sector too. Motivated buyers could generate higher returns and cash for the likes of Iberdrola to recycle back into new projects.
Iberdrola Chairman Ignacio Galán expects to win some auctions over the next year. It would be a warning sign if he fails and only oil majors prevail. With their greater experience in the sector, the utilities are more likely to sit out than overbid. Some oil supermajors may not be so disciplined, as 2020’s vast asset write-offs attest.
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