trending Market Intelligence /marketintelligence/en/news-insights/trending/X9Z9oYVK7cNULNWHOF4_RA2 content esgSubNav
In This List

Oil majors say their big balance sheets will lend an edge in merchant renewables


Street Talk | Episode 116: Early remediation, not Basel III endgame, the answer to avoid repeat of spring 2023 bank failures


Gauging the Impact of Rate Changes, Growth, and Foreign Fluctuations on the US Economy


The Rising Importance of Sustainability in Credit Risk


Next in Tech | Episode 134: Observability and new operational models

Oil majors say their big balance sheets will lend an edge in merchant renewables

SNL Image

A solar farm managed by Lightsource BP in the U.K. Oil major BP invested $200 million in the developer in 2017.
Source: LightsourceBP

Oil majors Royal Dutch Shell PLC and BP PLC say their big balance sheets and track record in energy trading will give them an edge over other developers in the burgeoning market for unsubsidized renewables.

For the past two decades, developers have been able to rely on long-term fixed revenues from generous feed-in tariffs for newly built renewable assets, lowering entry barriers. But moves to phase out support schemes amid steep declines in the cost of renewable generation, and the resulting rise of merchant wind and solar assets, will favor the largest players, according to BP and Shell executives.

"In the present model, you can do a lot with relatively limited equity, [but] as the market shifts away from subsidies and revenue certainty, for sure there will be challenges — a lot of the existing developers will struggle in that world where you need bigger balance sheets to compete," Mark Gainsborough, executive vice president of Shell New Energies, told an audience Oct. 21 at the BNEF Summit in London.

As a result, Gainsborough said, "We see that we have an even stronger role to play in a subsidy-free world."

Over the past few years, both BP and Shell, alongside European peers like Equinor ASA and TOTAL SA, have made forays into a range of businesses long dominated by electric utilities and independent developers.

Shell has bought U.K. retail supplier First Utility Ltd. and recently snapped up seabed leases for offshore wind farms in the U.S., while BP has instead focused on solar photovoltaics through an investment in U.K. developer Lightsource BP Renewable Energy Investments Ltd.

According to Nick Wayth, chief development officer of BP's Alternative Energy business, project development in particular offers advantages to those that can finance a larger portion of the assets up front.

"The trend towards subsidy-free and more merchant generation is actually a dynamic that, in our view, plays to some of the capabilities that a company like BP has," he said at the conference.

Risk and reward

Wayth added that BP sees attractive opportunities in merchant renewables, despite the added risk. The lower returns achieved in renewables investing when compared with traditional oil ventures does not tell the full story, he said.

"There's a lot of focus on the return dynamics of renewables versus upstream oil and gas — well, the reality is [that] comparing a solar or wind asset that's providing often a very stable, creditworthy backed [power purchase agreement] for 25 years is not the same risk profile as drilling an exploration well in the Gulf of Mexico," he said. "You've got to think of risk and reward together."

Julian Pouget, a senior vice president in French oil major Total's renewables division, has argued that leveraging a strong balance sheet to get favorable financing terms and then selling stakes in its assets can actually help the company achieve higher returns on renewables than on oil and gas projects.

In addition to large balance sheets, experience in trading commodities — including electricity — will also give oil majors a leg up in competing with the incumbents, according to Shell's Gainsborough.

"We're one of the biggest suppliers to the challenger [retail electricity] brands in the U.K. already, so we already have large supply positions and trading and optimization capabilities," he said.

Subsidy-free market

Although the market for merchant renewables is still in its infancy, there have already been announcements for 12.2 GW of subsidy-free solar projects in Europe, according to Pietro Radoia, an analyst at BloombergNEF.

The vast majority are located in Spain and Portugal and are backed by power purchase agreements, or PPAs, with utilities and traders, who can more easily hedge the volatile output from wind and solar plants and tailor electricity volumes for corporate consumers, Radoia said.

Many developers are betting that demand for renewable energy from corporate consumers will provide an alternative revenue stream to subsidies, and companies from Alphabet Inc.'s Google LLC to Dutch brewer Heineken NV and French rail operator SNCF are increasingly signing PPAs to directly source renewable energy.

But some warn that suitable offtakers are scarce, meaning financiers and developers alike will have to become more comfortable with merchant projects. Maria Pedroso Ferreira, a senior manager at Portuguese utility EDP - Energias de Portugal SA, said that, even for mature technologies like solar and wind, EDP's investors require a mix of merchant and PPAs in order to minimize risk across the company's portfolio.

"We would try to have a balance," she said.