Big Oil Squeezes Renewable Energy Profits as Commodities Rally
The world’s largest oil companies are bidding up prices for renewable energy projects, squeezing profits from wind and solar farms just as they’re needed most to avoid climate catastrophe.
Companies ranging from BP plc to Total Energy SE are paying top dollar for clean energy assets as they transition away from fossil fuels, boosting competition and reducing margins for developers. Wind giants Orsted A/S and Vestas Wind Systems A/S reported diminishing returns in the first quarter, while turbine maker Siemens Gamesa Renewable Energy SA lost money as materials stalled.
Shrinking profits are a worrying sign for an industry that needs to invest at least $92 trillion by 2050 to sharply cut emissions to stem the worst effects of climate change. They also come at a time when governments are dealing with record gas and electricity prices, a headache for world leaders trying to scrap an ambitious climate deal when they meet in Scotland in November.
“Sometimes you end up with very low remuneration of capital, below normal,” said Bruno Bensson, chief executive officer of the renewables arm of Electresite de France SA. “It’s not healthy, it’s not sustainable.”
Green energy is now the cheapest source of electricity in most parts of the world, leading to a growing number of companies in the space. BP last year set a target of increasing its renewable energy capacity from 3 GW to at least 50 GW. TotalEnergies plans to have 100 GW of capacity by 2030, while Royal Dutch Shell plc is also growing rapidly in the space.
Increasing competition is being met by a limited pipeline of projects. Auctions of offshore wind sites in the UK saw record prices earlier this year as oil companies led by BP battled for the right to develop projects in the Irish Sea.
Akshay Returns
“We see that European oil companies are now firmly establishing themselves in renewable energy,” said Christian Rinning-Tonsen, CEO of Norwegian utility Statkraft AS. “It will certainly reduce returns, but oil companies also have return requirements of the same size as ours, so the entire industry is dependent on finding an economic balance here.”
Oersted, the top developer of offshore wind farms, said return on capital employed fell to 7.5% in the first quarter, down from 11% in the same period a year ago. Another wind developer, Vestas, saw returns of 17.4 per cent to 12.2% in the first quarter of 2020. Investors will keep an eye out for any signs of diminishing returns as two Danish firms report this week.
Siemens Gamesa lost 314 million euros ($369 million) in the three months ended June. The Spanish developer was mishandled this year because of the rising cost of steel, which accounts for much of the turbine’s weight.
Even Equinor ASA, an oil and gas company that has become a major developer of wind farms, has had to live up to investor expectations, estimating returns from its renewable projects at 4% to 8%. This is lower than last year’s forecast of 6% to 10%. .
solar module
“If you look at renewable energy – just renewable, nothing connected to it – you get to a stage where returns are going to plateau and maybe go down a little bit in the following years because of increased competition,” Francesco Stares, CEO of Italian utility Anel SpA, said on Businesshala TV. “We are of the view that an integrated utility strategy is a more secure position.”
Solar module prices are up more than 16% in 2021, while the cost of key commodities such as steel and copper have risen this year. This has forced wind turbine manufacturers to raise prices for their customers. Shipping costs, which have skyrocketed as the world emerges from the global pandemic, have also added to the long list of challenges facing renewable energy companies.
Producers of green energy bargain to sell the electricity produced before construction begins. While that strategy helps them obtain financing, it can also leave them exposed to swings in material costs.
InerGex Renewable Energy Inc., which builds renewable energy projects in Canada and the United States. “Our industry is vulnerable,” said CEO of Michel Letelier. Increase your customer and price. “
To be sure, there are still no indications that the loss in profits is weighing down investments. A record $174 billion was spent on solar, offshore wind and other green technologies and companies in the first half of the year, according to BloombergNEF. This is 1.8% higher than the same period a year ago.
Still, there are concerns that some projects could be canceled or delayed, making climate goals harder to achieve. According to the International Energy Agency, limiting temperatures to 1.5 degrees Celsius above pre-industrial levels would require wind and solar capacity to grow at a rate five times higher than the average of the past three years between 2020 and 2050.
“The industry has been restarted,” said Javier Barbaro, CEO of French renewable energy firm Neon. “It can sometimes destroy some of the value of some of our projects, but that hasn’t led us to give up on any projects. I think some people who had very little buffers are now putting some projects on hold. Leaving, or postponing them as much as possible.”
Source: businesshala
