Time for Multinationals to Invest in Renewables

Renewables will never break through economically and will remain perpetually dependent on subsidies. There are technologies which could have serious long term potential such as geothermal and tidal power but major investment is needed to bring costs down. Somewhere in this mix is the transformative step which will lift the cost barrier and reshape the market. It is time for multinationals to step in, says Nick Butler in the Financial Times. Read More

Nick Butler in the Financial Times 13 July 2014

Why are renewables moving so slowly? Of course the output of renewable energy is growing in absolute terms and in terms of market share in most countries in the world. But the growth starts from a very low base. On the International Energy Agency’s latest numbers, renewables provide just 13 per cent of total global energy needs at the moment, and will provide only 18 per cent by 2035. If traditional biomass is excluded the figures are 7 per cent and 14 per cent.

The problem is cost. Electricity produced from offshore wind and solar costs somewhere between 50 and 100 per cent more per MW/hr than power from natural gas and, with some variations, will continue to do so for the next decade unless one makes the assumption that gas prices are going to increase. Onshore wind is cheaper and in the US in particular is the closest of all the renewables to being competitive without subsidies.

Some of these costs are falling but not by enough. Solar in particular is seeing some cost reductions but the costs of other renewables are stubbornly high. The result is that the sector remains a subsidy dependent business. Reliance on subsidies creates a public policy risk, particularly if climate change slips down the political agenda. The second problem is that the need for subsidies is growing. International market prices for gas and coal in particular are falling – driven down by the impact of US shale gas production, a general excess of supply and limited demand growth. And there is no prospect, even in the European Union, of a carbon price on the scale necessary to make renewables competitive.

As a result of all this, investment in renewables is slipping. The IEA’s projection that almost a third of global electricity will be generated by renewables by 2035 looks very optimistic.

Relative prices are not the only problem. The renewables sector is fragmented. Supply is predominantly local, adding to the risks of changes in public policy. Most of the small companies involved have too little capital to invest seriously in the science and technology which could transform particular systems or, in the case of advances in storage which I wrote about a few weeks ago, the market as a whole.

“Small” is inherently attractive to many advocates of renewables but what the business needs is size and breadth. It is time to create a renewables multinational – or better still, three or four. What could multinationals do that small local companies can’t achieve?

First they could spread risk geographically. If you work in 10 or 40 countries – or even 100 countries as the real multinationals do – it would reduce the risks of subsidies being cut in any particular jurisdiction.

Multinationals could also spread risk by investing in a range of different technologies – from wind, to solar to biofuels and so on. In that way it would be possible to keep up with advances across the sector and to avoid the constraints of placing all one’s bets on a single prospect. Next there are potential economies of scale, for instance in manufacturing, and the potential for standardisation. And perhaps most important of all a renewables multinational would be more likely to have the financial capacity, and sufficient investor confidence, to invest in research and development.

As things stand renewables will never break through economically and will remain perpetually dependent on subsidies. Solar technology is improving but it is hard to see much progress in the basic efficiency of offshore wind. There are technologies which could have serious long term potential such as geothermal and tidal power but major investment is needed to bring costs down. And then there are the changes in grid and storage technology. Somewhere in this mix is the transformative step which will lift the cost barrier and reshape the market. Given the scale of the global energy market the prize is very big.

Can this be done? Could a renewables multinational be created? The answer must be yes.

Companies such as Exxon, Shell and BP have all dabbled in renewables, often to the point of realising that the business is too small and unprofitable to be of commercial interest when there are more immediate opportunities in their traditional oil and gas business. In such circumstances it is hard for any renewables project to compete for capital. But all the energy majors retain an interest in the sector even if their current philosophy is to wait for a second mover advantage – i.e. to buy in when others have worked through the initial risks and problems. So some new thinking is needed.

Ten years ago when I worked at BP we came up with the idea of creating a renewables multinational by combining BP’s alternative energy business with that of Shell as part of a wider combination of the two companies. The overall deal, as described in John Browne’s book Beyond Business, never happened but I think this specific idea remains valid, and of course need not be limited to those two companies. A multinational could also be created by the combination of some of the more successful companies in the renewables sector, or by a set of determined external investors.

Multinationals tend to be much disliked by the green lobby, but are in fact the most powerful agents of global change ever invented. They can develop technology, both internally and by working with universities and smaller businesses. And they can then bring that technology to market across the world with a speed and reach which can’t be matched by smaller entities. Many see multinationals as being too powerful but in this case their influence is exactly what is required to push governments to shift policy – not towards more subsidies but in the direction of enabling steps which could make the industry more economically viable such as investment in new grids which can limited the problem of intermittency and through the funding of scientific research.

Nick Butler is Visiting Professor and Chair of the Kings Policy Institute at Kings College London.

Nick Butler is an investor in, and an adviser to a number of companies and institutions in the energy business. The views expressed are solely those of Mr Butler. This material is not intended to provide and should not be relied upon for investment advice or recommendations. Readers are urged to seek professional advice before making any investment.

Source: http://blogs.ft.com/nick-butler/2014/07/13/its-time-for-a-renewables-multinational/