OPINION: The energy industry has a tough nut to crack to deliver a successful transition away from fossil fuels towards clean energy sources, and that is the profitability of renewables assets.
One consequence of Russia's invasion of Ukraine one year ago was an apparent speeding up of the deployment of renewable energy systems, as countries looked to cut back on fossil fuel imports in favour of domestic solutions in line with net zero targets.
An International Energy Agency report published earlier this month forecast that renewables and nuclear will dominate future growth in new energy supply, and suggested that a tipping point in power generation-related carbon emissions is within reach.
So far, so good, but a shift to a renewables-based energy model does not just happen. It needs developers, builders and financiers on a massive scale, and policies that spur these players into action.
Among those players are oil and gas companies. Not everyone agrees, but big oil has the expertise — think offshore operations, engineering, project management, trading and logistics — not to mention the financial resources to develop huge renewable and low-carbon energy projects.
But will investment continue if the returns are not really there?
Dilemma for oil and gas companies
This is a dilemma for oil and gas companies with transition plans, and for society as a whole. Many commentators seem to forget that promises of cheap, clean energy do not often address the question of who invests, and why.
The past year delivered balance sheet differences in returns between fossil fuels and renewables that could not be starker, with conventional operations producing record profits and new energy businesses lagging.
Equinor saw both extremes, posting nearly $75 billion in 2022 earnings across liquids, gas and upstream, while renewables registered a $184 million loss.
Investors are now hooked on high returns and have less enthusiasm for fast-growing but lacklustre renewables.
Like other oil majors in the same situation, Equinor is at pains to tell investors that returns will improve, pitching a “shareholder-friendly” transition strategy that would entice, rather than alienate investors, and deliver healthy margins.
Financial analysts tell Upstream they see average returns on renewables — when they do turn a profit, that is — firmly in the single digits.
This is meagre, given the current double-digit inflation and rising interest rates.
Power from renewables
Government intervention is not helping either.
The European Union last September placed a revenue cap on power from renewable sources — "inframarginal electricity producers", in Commission bureaucratese — at €180 ($191) per megawatt hour, with the authority collecting anything extra.
The measure will weigh on renewable earnings far more than the comparable windfall tax on oil and gas, and complicates the outlook for renewable operators.
All this can be a drag to investor interest. It is no coincidence that BP rowed back on its initial pledge to cut fossil fuel output by 40% by 2030 against a 2019 baseline, opting for a more palatable — and shareholder-aligned — 25% reduction.
Even in an energy transition context, operators have to show good returns to stay in business and keep investors engaged. That is how capitalism works, after all, and is especially true at a time when fossil fuels are such big business.
Profitability of renewable assets has to go up, but so far, oil majors have yet to find a way to make that happen.
(This is an Upstream opinion article)
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