Big oil buying into green
2018 looks set to be another big year in renewables deal-making for the oil majors
Shell took another big leap into the renewables business this week with the purchase of a 43.8% stake in private equity backed US solar developer Silicon Ranch in a deal worth as much as $217m.
Silicon Ranch operates a slew of solar projects across California and the northeast, and has more recently turned its attention to the southeastern states of Georgia, Mississippi and Tennessee, where the solar industry is less developed. The company has 880 megawatts of installed capacity with another 1 gigawatt in the pipeline, which will vault it into the upper echelon of US solar developers. The deal gives Shell an option to increase its stake in Silicon Ranch in 2021.
It is the latest move from Shell to expand its New Energies business and deepen its presence in wholesale electricity markets. Last year, it took a stake in Texas-based MP2, which holds a diverse portfolio of solar, storage and energy trading services. Shell is already the third-largest wholesale electricity seller in the US. It also recently bought First Utility's UK business, giving it a slice of Britain's retail electricity market.
The Anglo-Dutch major signaled its intentions to continue expanding its new energies business by stepping up its investment target for 2018, from less than $1bn a year to $2bn. It is still a relatively small slice of the overall capital budget, which is around $25bn, but growing quickly and significant in the global renewables business.
It clearly has big plans for its new solar business. "The strategic partnership provides Shell a platform to establish a successful global solar business by aligning with a proven team in the second-largest solar market in the world," the company said in the statement. It has quickly built a strong team at its San Francisco-based New Energies unit, including Boris Schubert to head up the solar team.
Oil majors have been snapping up renewables assets as wind and solar costs have plummeted, making them more economically competitive, and governments push for a lower carbon energy system after the Paris accord.
BP returned to the solar business in December after exiting it in 2011 with a $200m deal to buy a 43% stake in Lightsource, which is building solar projects across Europe, India and the Middle East. Total has bought stakes in solar companies, electric vehicle charging networks and advanced battery makers, and plans to spend $0.5bn a year on its own new energies business. Statoil is looking to step up its spending from around $0.75bn a year now to more than $1.5bn a year after 2020 and has developed, among other renewables projects, the world's first floating wind farm. Eni and Repsol have lagged, but are looking to catch up with projects of their own. Oil majors, with the notable absence of the American companies Chevron and ExxonMobil, have spent more than $3bn on green deals in the last few years.
This year could see an acceleration of that green deal-making, especially if higher oil prices hold and give the majors more spending power. "As the oil majors move from a cashflow rebalancing year in 2017 to a cashflow surplus year in 2018, we expect some of that to find its way into renewables," Oswald Clint, an analyst at Bernstein Research, wrote in a recent note.
Bernstein screened thousands of renewables companies and compiled a list of the 10 most compelling, topped by Scatec Solar. Bernstein reckons oil majors will be looking for companies that are currently profitable, Shell for instance is targeting 8% to 12% returns on its renewables investments, and can deliver growth and scale. Most notable about the list is that most of the companies have highly diversified portfolios, both geographically and technologically and have been able to corner profitable areas of the global renewables market.
Scatec Solar, for instance, has tripled its installed capacity over the past four years thanks to projects from Rwanda to Honduras to Egypt to Brazil, among other places. It is the kind of portfolio an oil major's global scope and financial firepower could supercharge.