FILE PHOTO: General view of the Walney Extension offshore wind farm operated by Orsted off the coast of Blackpool, Britain September 5, 2018. REUTERS/Phil Noble/File Photo/File Photo

Big Oil Squeezes Renewable Energy Profits as Commodities Rally

Bloomberg
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August 10, 2021

By William Mathis (Bloomberg) —

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 from BP Plc to TotalEnergies SE are paying top dollar for clean energy assets as they transition away from fossil fuels, boosting competition and compressing margins for developers. Wind giants Orsted A/S and Vestas Wind Systems A/S reported lower returns in the first quarter, while turbine maker Siemens Gamesa Renewable Energy SA lost money as materials rallied.

Shrinking profits are a worrying sign for an industry that needs to invest at least $92 trillion by 2050 to cut emissions fast enough to prevent the worst effects of climate change. They also come at a time governments are tackling record gas and electricity prices, a headache for world leaders trying to iron out 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 Bensasson, chief executive officer of the renewables arm of Electricite de France SA. “That’s not healthy, that’s not sustainable.”

Green energy is now the cheapest source of electricity in most of the world, drawing a growing number of companies into the space. BP last year set a target to boost its renewable energy capacity to 50 gigawatts up from less than 3 gigawatts. TotalEnergies plans to have 100 gigawatts of capacity by 2030, while Royal Dutch Shell Plc is also growing quickly in the space.

Rising competition is being met by a limited pipeline of projects. Auctions for offshore wind sites in the U.K. saw record prices earlier this year as oil companies led by BP battled for the right to develop projects in the Irish Sea.

Renewable Returns

“We see the European oil companies positioning themselves strongly into renewables now,” said Christian Rynning-Tonnesen, CEO of Norwegian utility Statkraft AS. “It will take down returns, of course, but oil companies also have return requirements of a similar size to us, so the whole industry is dependent on finding an economic balance here.”

Orsted, the top developer of offshore wind farms, said returns on capital employed fell to 7.5% in the first quarter, down from 11% in the same period a year earlier. Vestas, another wind developer, saw returns fall to 12.2% from 17.4% in the first quarter of 2020. Investors will keep an eye on any signs of diminishing returns when the two Danish firms report this week.

Siemens Gamesa lost 314 million euros ($369 million) in the three months ended in June. The Spanish developer was wrong-footed this year by the surging price of steel, which accounts for most of a turbine’s weight.

Even Equinor ASA, an oil and gas company that has become a major developer of wind farms, has had to tame investor expectations, projecting returns from its renewable projects at 4% to 8%, down from the 6% to 10% forecast last year.

Solar Modules

“If you look at renewables — just renewables, nothing else attached to it — you reach a stage where the returns are going to plateau and probably go down a little bit in the next years because of increased competition,” Francesco Starace, CEO of Italian utility Enel SpA, said on Bloomberg TV. “Our view is that the strategy of an integrated utility is a much safer position.”

Solar module prices are up over 16% in 2021, while the cost of key commodities like steel and copper have surged this year. That’s forced wind turbine makers to raise prices for their customers. The cost of shipping, which skyrocketed as the world emerges from the global pandemic, has also added to the long list of challenges facing renewable energy companies.

Producers of green power tend to strike deals to sell the electricity they produce before construction begins. While that strategy helps them obtain financing, it may also leave them exposed to swings in the cost of materials.

“Our industry is vulnerable,” said Michel Letellier, CEO of Innergex Renewable Energy Inc., which builds renewable power projects in Canada and the U.S. “Unfortunately you get caught because your costs to build are so high and you can’t go back to your customer and increase the price.”

To be sure, there are still no signs that the squeeze in profits is reducing investment. 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. That’s 1.8% more than in the same period a year earlier.

Still, there’s concern some projects may get scrapped or be delayed, making it harder to achieve climate goals. Limiting temperature increases to 1.5 degrees Celsius compared to pre-industrial levels will require wind and solar capacity to grow at a rate five times higher between 2020 and 2050 than the average from the last three years, according to the International Energy Agency.

“There’s been a restart of the industry,” said Xavier Barbaro, CEO of French renewable energy firm Neoen. “It may sometimes destroy some value of some of our projects, but that didn’t lead us to abandon any project. I think some people that had very little buffer are now abandoning some projects, or postponing them as much as they can.”

–With assistance from Josh Saul, Francois de Beaupuy and Isis Almeida.

© 2021 Bloomberg L.P.

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