Low Carbon Energy Super Major–What Will It Look Like? | Nomura Greentech

Year in Review - 2019


PJ DESCHENES

Low Carbon Energy Super Major–What Will It Look Like?

PJ DESCHENES

AMBITION OF ICARUS
A compelling framework in the world of renewable energy actually sprang from the biggest “Failure” in the history of our sector. On July 21, 2015, SunEdison Inc. held an investor call to announce its second multi-billion acquisition this month – the $2.2bn purchase of residential solar PV developer, Vivint Solar – and positioned itself as a “supermajor” in renewable energy, to take aim at the large, incumbent oil and gas companies.

The supermajor “tagline” quickly turned into “punchline” as SunEdison plunged into bankruptcy nine months later, after peaking at over $9bn of market capitalization. SunEdison’s supermajor framework was in part an unapologetic encouragement to investors following a string of overpriced acquisitions. After all, the largest energy companies have annual revenues in the $100s of billions, much larger than even SunEdison at its peak.

…OR FRAMEWORK FOR THE FUTURE
However, SunEdison’s ambition frames a question for other companies pursuing growth in low-carbon energy today – many following a pivot akin to the one MEMC (SunEdison’s previous name) made from a struggling manufacturer of silicon wafers in the early 2010s. What will the supermajor of low-carbon energy look like?

We see three areas of capability for companies seeking incumbency in low-carbon energy. First, development of new energy resources from resource identification through ownership of production assets. Second, optimization of energy production assets through operations and risk management. Third, supply of energy to end consumers, ranging from retail to commercial supply and including distributed energy.

The coming decade of continued growth in low carbon energy will create opportunities for leading companies in a number of business models.

ENERGY DEVELOPMENT AND OWNERSHIP
The identification, development, conversion and marketing of energy from low-carbon sources is the most visible, and capital intensive, activity of low carbon energy companies today. Leading companies are building sophistication in development with “mega projects” that require long-term planning and investment to drive the cost of energy down through economies of scale and by connecting strong resources to end markets.

Large offshore wind development, which is increasingly dominated by large energy companies, provides an example. The cost of offshore wind energy has fallen from nearly $200 per megawatt hour (“MWh”) five years ago to less than $65 per MWh today.

Large companies are also aggregating demand around large energy projects. It is increasingly common to see multiple corporate buyers of energy from a single large wind or solar PV project.

We see leading low-carbon energy companies continuing to grow through M&A in energy development. BP, ENGIE, Equinor, Orsted and Shell have all made one or more acquisitions of renewable energy development platforms in the last three years, and we expect more transactions in this area of the value chain.

ASSET OPTIMIZATION
As portfolios of energy production assets grow, so does the opportunity to create value through asset optimization and risk management. Areas of risk that leading companies address include resource production, commodity price, operations and residual value.

Resource risk is interesting. As intermittent energy resources like wind and solar further penetrate the energy mix, growing renewable energy companies are diversifying energy sources and pursuing energy storage.

In the United States, some companies are turning to risk management products that address the paired risks of resource production and energy price. REsurety is an example of a company that works with energy asset owners to structured contracts to shift these risks to insurance companies. REsurety has structure risk management contracts for over 6 gigawatts (GW) of renewable energy power plants to date.

We also see commodity trading as a growing area of importance for low-carbon energy companies. Large oil & gas companies like BP already have a large presence in electricity markets as well as markets for environmental commodities related to low-carbon energy, such as Renewable Energy Credits.

ENERGY SUPPLY
Supplying end users creates both market opportunity and a natural hedge. Demand for both low-carbon energy, as well as distributed energy production, is a growing market for retail, commercial and industrial customers in many geographies. Especially for fragmented energy users, creating “sticky” customer relationships for commodity products represents a challenge for future low-carbon energy companies.

Electric vehicle (EV) charging and distributed solar are channels to energy supply customers that could create stronger customer relationships. Several large oil companies, including BP with ChargeMaster and ENGIE with EVBox, are growing EV charging networks to attract customers as EV penetration increases.

THEY MIGHT BE GIANTS
How low-carbon energy companies will grow and evolve remains to be determined. Developing and optimizing energy production assets, and integrating downstream into energy supply, are strategies that parallel fossil energy while also driving capture of fee pools along the value chain.

Where will a durable low-carbon energy supermajor come from? Perhaps from among oil majors like BP and Shell that have integrated models in conventional energy and are investing heavily to provide low-carbon energy to downstream customers. However, these companies are still sub-scale in low-carbon energy relative to international IPPs, like Enel, ENGIE and RWE, which already have large generation portfolios and millions of downstream customers.

We can also look to pure-play low-carbon energy companies, which are still relatively young but also unencumbered by legacy business models and assets. The coming decade of continued growth in low-carbon energy will create opportunities for leading companies in a number of business models, including technology OEMs, such as First Solar and Vestas; distributed energy, such as SunPower and SunRun; and IPPs, such as Brookfield Renewable Power and Clearway Energy. Even Tesla, now in the realm of $100bn of market capitalization, has aspects, and potential ambitions, to make a play for supermajor status among low-carbon energy of the future.

Low Carbon Energy Super Major–What Will It Look Like?

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