Commodity traders look to boost renewables exposure ahead of peak oil

The world's biggest independent commodity traders are set to ramp up their investments in renewable energy as demand surges for clean fuels and investors increasingly look to back low-carbon projects.

Trafigura believes renewables energy can be a "significant contributor" to its existing oil and metals-focused asset and trading business, providing a "third pillar" to its established operations, the trading house's CEO Jeremy Weir said Sept. 29.

Weir said the company's recent push into wind and power projects is a "natural progression" for the commodity trader despite concerns that returns from some renewables investments are low compared to other energy sector projects.

"We'll be looking at investments in the OECD but also in other emerging market places so there's balancing out in terms of what the opportunities should be, and we're comfortable with what those returns are," Weir told the FT Commodities Global Summit.

Weir's comments come a day after the trading house announced the creation of a joint venture with fund manager IFM Investors to invest in 2 GW of solar, wind and power storage projects globally.

Under the deal, Trafigura will contribute around 250 MW of early-stage capacity to the venture, Nala Renewables, and provide long-term offtake agreements on market terms.

"We are seeing that people want to see change, we listen to our stakeholders and we're adapting," Weir said. "Our business is about adapting to different market pressures, different market environments."

US battery storage

Most of the world's biggest independent trading houses make the bulk of their earnings in the oil and gas markets, where demand is expected to start declining in the coming decades. But renewables are booming and are set to see their share of the global energy mix surge from 5% in 2018 to 45% by 2050, according to BP's central long-term forecast, led by a jump in wind and solar capacity.

Marco Dundand, CEO of oil trader Mercuria, said his company has recently agreed to invest in a $1.5 million US-based renewable energy fund with two private equity firms. The fund, Broad Reach Power, is investing in utility-scale battery storage operations in the US.

Dundand said he expects Mercuria to direct half its investments into renewables in the next five years. But he sounded a note of caution over green investments, pointing to "billions of dollars" lost in the past by poor investment choices in renewable energy.

"One has to be a bit cautious in order to avoid that but if one wants to exist in 10 years' time and don't want to be in renewables, I think it's going to be tough," Dundand said.

Vitol, the world's biggest independent oil trader, already has about 500 MW of investments in renewables energy already online or soon to come online, its CEO Russell Hardy said, adding that Vitol has a "similar sized pipeline we'll invest in over the coming years."

Investor imperative

Vitol, which owns a power plant and is planning a carbon-capture project in the UK, wants to grow its low-carbon businesses, Hardy said.

"That means our power trading, that means carbon offset investing and those areas of our business will hire people and will grow," he said.

Speaking in May, Vitol's senior investment manager Steve Brann said Vitol was looking to build a renewables portfolio in Africa with investments in wind and solar power projects.

Brann noted, however, that renewables projects are "a crowded place" with headline returns generally "well below 10%".

Meanwhile, rival trader Gunvor has set itself a target to invest 10% of the company's equity value in renewables, its CEO Torbjorn Tornqvist told the event.

The investments will range from the support of existing technologies such as wind and solar, wind, and batteries to green energy innovation, he said.

"There's no doubt that from policymakers and banks to investment funds are demanding that something be done here and you won't get support for your business unless you have the sustainability aspect," Tornqvist said.