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In the Energy Sector, a New Kind of Hybrid Emerges

6 MINS READFeb 16, 2018 | 09:00 GMT
Wind turbines spin alongside the Drax power station, the biggest coal-fired plant in Europe.
(CHRISTOPHER FURLONG/Getty Images)

Wind turbines near Selby, England, spin alongside the Drax coal-fired power station.

Highlights
  • Fossil fuel companies will continue to invest in green technologies, either through external acquisitions or through in-house initiatives, as renewable solutions such as solar power, wind power and energy storage become cheaper and more prevalent.
  • Companies in Europe are leading the push, but firms in Asia and the Americas will catch up.
  • As the costs of green technologies keep falling and more companies realize the benefits of diversifying their energy sources, a new class of hybrid energy firms will emerge, helping to ease hostilities between the fossil fuel and renewable energy sectors.

The global transition away from fossil fuels and toward more sustainable energy sources is well underway. Though the rise of green technologies such as solar panels or electric vehicles may seem to bode ill for the international oil industry, many oil companies are trying to change with the times. Royal Dutch/Shell, for example, spent $217 million in January to buy a 43.8 percent stake in Silicon Ranch, a U.S.-based solar developer. Rather than competing against low-carbon technologies, fossil fuel companies are increasingly working to incorporate them, setting the stage for a new class of hybrid firms to emerge in the global energy industry.

Riding the Wave of Renewable Energy

Historically, the major fossil fuel firms have avoided renewable technology. Part of their wariness stemmed from a distrust of the climate policies driving the innovations. ExxonMobil, for instance, has acknowledged climate change in its corporate strategy only in the last decade or so. Beyond the climate change controversy, many fossil fuel companies were unfamiliar with the business models underlying green technologies and skeptical of the sector's commercial viability. Those firms that embraced renewable energy early on — such as BP, which rebranded from British Petroleum in 2001 in an effort to broaden its horizons — struggled with the transition. Having changed its name and launched the "Beyond Petroleum" marketing campaign, BP, the first major oil firm to acknowledge the risks of climate change back in 1997, invested $8 billion in wind and solar manufacturing. The projects, however, turned out to be unprofitable, and BP shuttered its renewables division in 2013. Similarly, Shell ended an unsuccessful foray into renewables in 2009, though it continued its efforts with biofuels.

But the rise of green technologies over the past few years has been too dramatic for the world's leading oil companies to ignore. Renewable power sources have made significant strides in the electricity sector, and today the costs of power from solar and wind sources are in many cases lower than the price of constructing new coal plants. Renewable electricity generation, moreover, accounts for a large fraction of electrical output in countries such as Germany, Denmark, the United Kingdom, Spain, Italy and Uruguay, as well as several U.S. states. The market for batteries and energy storage devices is also growing as prices for these items drop and technologies such as electric vehicles and grid-scale storage advance. In light of these developments, the world's fossil fuel giants are turning their attentions, and their investments, toward green technologies.

World Consumption of Renewable Energy by Source, 2010-2016
Several major oil firms recently have expanded into renewable energy. In 2016, French oil company Total SA acquired Saft, a battery maker, and BP bought a stake in solar developer Lightsource the following year. ExxonMobil, meanwhile, has invested in biofuels and carbon capture and storage. And in addition to a sizable share of Silicon Ranch, Shell also purchased Texas-based rooftop solar developer MP2 Energy last year, along with NewMotion, a Dutch company that makes charging stations for electric vehicles. While these companies have focused on absorbing smaller firms specializing in green technology, other oil industry leaders have started their own in-house ventures. Chevron, for example, has a long-standing geothermal energy program. Statoil, an innovator in offshore wind generation, has built the world's first floating wind farm off the coast of Scotland — setting an example for other oil companies to follow by retooling its offshore drilling expertise for an alternative application.
 
The latest bid to go green in the oil industry looks promising compared with Shell or BP's earlier explorations in sustainable energy. For one thing, renewable technology today is more mature and better aligned with market forces than it was 20 years ago. For another, shareholders are encouraging oil companies to diversify into clean technology, worried that fossil fuels will lose ground to alternative energies as climate change policy evolves.

The Utility Behind Green Technology

Yet relative to utility companies, the world's major oil firms are lagging in the push toward renewable energy. Utility providers have outpaced them since power generation has become the most commercially viable sector for renewable technologies. European electric companies such as Iberdrola and Enel lead the pack and have begun extending their green energy services to Latin America, one of the biggest growing markets for renewable power. The United States, however, isn't far behind. Across the country, an array of states — including Texas, Iowa and North Dakota as well as California and Vermont, the traditional beacons for the U.S. environmental movement — are scaling up renewable energy operations. The U.S. utility Xcel Energy recently scrapped plans for new coal plants in Colorado in favor of building more cost effective renewable power plants. The company, which also shut down two old coal plants and replaced the lost capacity with renewable energy and natural gas, estimates that by 2025, renewable generation will account for more than half of its electricity output.

Renewable Power Generation Costs vs. Fossil Fuel Costs
Asian countries, too, are getting in on the trend. China, for instance, is restructuring its massive electricity market. One of its five electricity behemoths, China Guodian Corp., merged in 2017 with the Shenhua Group Corp., China's biggest coal-mining firm and a leading generator of coal-fired energy, to form the world's largest power generation company, China Energy Investment Corp. Renewable energy makes up 15 percent of net capacity for the new company, which boasts the largest wind portfolio on the planet. At the same time, India's largest power generator, NTPC Ltd., has set ambitious targets for incorporating solar technology.
 
As the cost of energy storage solutions continues to fall, the electricity sector will probably turn more and more to renewable energy sources. Storing energy, after all, will go a long way toward addressing variable generation, which limits the utility of wind and solar power sources. It will also give electric vehicles a boost, making them affordable and practical for a wider range of consumers. Low-cost storage at scale is still several years away. Nevertheless, the current double-digit rate of decline in the technology's price will probably guide major oil companies to acquire firms producing storage devices and electric vehicles, much as it has encouraged them to embrace clean energy in the past few years.
 
The cheaper and more prevalent renewable energy becomes, the more difficult it will be for the fossil fuel industry to resist taking a bigger stake in green technology. And so, the diversification in the energy industry will continue, reducing the divide between fossil fuel and low-carbon technologies, not only in the marketplace, but also in politics.

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