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Renewables Beating Fossil Fuels Across the Board
Despite the pandemic, solar energy bounced back late and went on a tear in 2020.
Third-quarter installations totaled 3.8 GW, an increase of 46% YoY and accounting for 43% of all new electrical generation installed during Q3, according to a quarterly Solar Market Insight report by Wood Mackenzie and the Solar Energy Industries Association (SEIA). The strong quarter puts 2020 on track to become the third-largest year for solar installations, despite some impacts from COVID-19.
A nationwide backlog is expected to spill over into 2021, boosting installations some 26%, according to the Solar Market Insight.
According to the U.S. Energy Information Administration’s (EIA) latest inventory of electricity generators, developers and power plant owners plan for 39.7 gigawatts of new electricity generating capacity to start commercial operation in 2021. Solar will account for the largest share of new capacity at 39%, followed by wind at 31%.
As MRP noted back in November, the International Energy Agency (IEA) anointed solar power the “new king” of global electricity markets after becoming the cheapest form of electricity in history.
For utility-scale solar projects completed this year, the average cost of electricity generation over the lifetime of the plant (called the levelized cost of electricity) was between $35 to $55 per megawatt hour in some of the world’s biggest markets ― the US, Europe, China, and India. The cost for coal, in comparison, currently ranges between about $55 and $150 per megawatt hour.
Along with an increasing economic edge, money managers and investment banks are beginning to heed the call to scrutinize environmental, social and governance factors.
CleanTechnica notes that leading investment firms such as Blackrock have begun to withdraw funds from companies that exacerbate the effects of climate change, too. BlackRock, the world’s largest asset manager, recently told clients that environmental sustainability will be a key factor in investment decisions going forward.
Last June, Goldman Sachs shared their expectation that spending for renewable power projects will become the largest area of energy spending in 2021, surpassing upstream oil and gas for the first time in history. The multinational investment bank and financial services company also expects the clean energy sector to reach a $16 trillion investment volume through 2030, eclipsing fossil fuels.
Big Oil Buying into the Clean Energy Future
As Reuters notes, The COVID-19 pandemic brought forward forecasts by energy majors, producers and analysts for when the world’s demand for oil may peak.
Rystad Energy, Norway’s biggest independent energy consultancy, sees global oil demand peaking at 102 bpd in 2028, revised down from a previous prediction of just over 106 million bpd in 2030.
Royal Dutch Shell has held off on giving any official prediction for when they expect peak oil, but CEO Ben van Beurden told reporters this year that pandemic may have already brought about a peak in demand. “Demand will take a long time to recover if it recovers at all,” van Beurden said. Shell has warned the value of its oil and gas assets may fall by $22 billion after shaving up to $4.5 billion from its portfolio in the final quarter of the year.
In two aggressive projections, Britain’s oil and gas supermajor, BP, forecasts COVID may have pulled peak oil all the way forward to 2019. Though a third, more conservative scenario from the company sees oil demand peaking at around 2030, BP has already ramped up its development of renewable energy assets in an effort to diversify their holdings for the future.
Back in 2017, BP took a 43% stake worth $200 million in Lightsource Renewable Energy, creating the joint venture Lightsource BP. BP then increased its ownership in the solar energy developer to 50% in 2019.
The company recently announced that its Impact Solar project, located 120 miles northeast of Dallas, Texas, has successfully completed construction and entered full grid-connected commercial operation.
Generation from the 260 megawatt Impact Solar project will deliver clean, cost-effective energy for the equivalent of more than 41,000 homes in the Texas market. By providing this renewable power, Lightsource BP is eliminating the carbon equivalent of emissions from over 68, 000 fuel-burning cars.
Elsewhere in Texas, the company has secured a proxy generation power purchase agreement (pgPPA) with the Capital Solutions unit of Allianz Global Corporate & Specialty (AGCS), in partnership with Nephila Climate, for electricity generated by Lightsource bp’s 153 megawatt Briar Creek solar farm. Project is of a size that would allow the offset of 223,440 metric tons of CO2 annually, equivalent to taking 45,815 cars off the road.
BP’s investment in Lightsource is part of the company’s broader plan to be a net-zero company by 2050 or sooner. As part of the strategy, by 2030 bp plans to increase low carbon investments to around US$5 billion a year. This includes developing around 50 GW of net renewable energy generating capacity – a 20-fold increase on the 2.5 GW to date. BP also maintains ownership of BP Pulse, one of the largest electric vehicle charging networks in the UK.
BP is not alone in their pursuit of a more renewable-oriented portfolio.
French energy giant Total SE, for instance, saw its stock price jump earlier this week when the company announced it would pay $2.5 billion for a 20% stake in the world’s largest solar developer, India’s Adani Green Energy Ltd., the latest move by an oil major to expand in renewable power.
Per the Wall Street Journal, the Adani deal gives Total exposure to a leading renewables business in India, one of the world’s fastest-growing markets for energy demand. Adani has 54 wind and solar projects in operation across the country, including one of the world’s largest solar projects in Kamuthi, Southern India. As part of the deal, Total is also taking a 50% stake in a portfolio of Adani’s solar assets.
Total plans to spend $3 billion a year on renewables by 2030, around 20% of its annual investment budget and up from $2 billion last year.
Per Reuters, BP and Total expect to own about 20 GW of wind turbines and solar panels by 2025. Spinning off these operations into separately managed entities, and selling one-third stakes, would allow them to maintain operational control while raising cash.
The traditional energy industry has been the worst-performing sector on Wall Street for a decade even before the pandemic hit. In 2020, its backslide was historic. The Energy Select Sector SPDR Fund, whose holdings include ExxonMobil and Chevron, lost more than 50% between January and October. Obviously, something has to change if these firms want to ramp up their returns and maintain their dividends in a world where oil demand is in decline and natural gas prices remain near multi-decade lows.
The question many are now asking is whether or not legacy energy firms can make solar as profitable as their oil and gas businesses.
Some analysts are skeptical, but it is worth noting that the inherently lower business risk of renewables distinguishes it from the oil business. As OilPrice.com notes, renewables do not require massive investments taking decades to fully develop in inhospitable and unfriendly places like the ocean floor. Their projects are bankable as soon as they have contracts signed.
Per Forbes, Hurdle rates – a measure of risk akin to weighted average cost of capital (WACC) – for today’s fossil fuel projects are calculated around 10-20% whereas renewables are in a much safer 3-5% range.
What we do know for certain about the energy industry, however, is that increasing investment in renewable assets like solar energy will only continue to rise in coming years, boosting adoption and deployment across the board. |
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