Oil and gas Majors in renewable energy: Finding the right business model
In the first two editorials in this series, we gave an overview of solar and wind project choice for oil and gas Majors and discussed scaling up renewables investment. In our final piece, we’re getting specific about business models in renewable energy that oil and gas majors would do well to focus on – targeting the models that offer Majors the highest returns.
As seen in a figure from our most recent report on oil and gas Majors in renewable energy, there are three typical business models in renewables.
Majors can succeed in high risk, high complexity projects when it comes to technology and geography. The same holds true for business models. Corporate power purchase agreements (corporate PPAs) and merchant renewables projects are the most complex business models in renewable energy, which have both high risk and – potentially – high returns.
Unlike many smaller competitors, the Majors have brand recognition and existing customers among large companies as well as the resources to manage complex transactions. As a result, Majors may have competitive advantage in corporate PPAs.
Corporate renewables procurement in the United States alone is on track to surpass 5 gigawatts by the end of 2018, with significant deal activity from large tech companies such as AT&T, Apple, and Facebook as well as an influx of new buyers – indicating that the market for corporate renewable energy procurement is maturing.
More work remains to be done to open this market to new companies and new locations, however. Financing and delivering renewable energy projects that are backed by corporate PPAs is more challenging than a typical renewables PPA, giving oil and gas Majors an advantage over smaller competitors. Existing relationships with large industrial consumers of electricity can also provide a path to sales.
Merchant renewable investments: where competitive advantage for oil and gas Majors pairs meets high returns. In fact, out of all types of renewable energy business models, the risk-return profiles of merchant renewables investments align the most closely with oil and gas projects.
Merchant renewables are on the rise. As more and more subsidy-free renewable projects emerge, with no minimum price for electricity, developers are being exposed to wholesale prices.
For merchant renewables, size and expertise lends oil and gas Majors a competitive advantage. The Majors can absorb higher risk investments more easily than smaller players can. Majors also have power trading capabilities, allowing them to hedge their position. Finally, the Majors have strong balance sheets and may not need project finance at all; this proves an advantage since project finance is more expensive for high-risk merchant investments.
A strategic transition
Integrating vertically into power is new territory for the Majors, but it’s a promising area. Leaders across oil and gas are looking at diversification into renewables to avoid future business challenges.
Indeed, the energy transition is already in progress, and it might happen even faster than mainstream forecasts expect. Investments made today will help define which companies remain relevant in the energy landscape of the future.