The latest renewable energy trend: focus on the impact on the oil & gas sector
The latest renewable energy trend
In recent times, we all have heard about the “Go green” trend, in particular for the oil & gas companies. The renewable energy market is not merely a profitable investment, in addition it is also an ethic investment choice. The investors are claiming for top dollar purchases which are observant of the ESG metrics.
The world is in a perpetual evolution, in this moment more than ever. The COVID-19 pandemic emergency and the OPEC failure in the crude oil market might be the driving forces for a shift towards the renewable and clean energy, in particular in the oil & gas sector which is currently in collapse. We are in a turning point.
The renewable energy
First of all, it is important to point out the principal renewable energy types in a nutshell:
- Solar energy which comes directly or indirectly from the sun;
- Onshore and offshore wind energy which is collected by specific turbines;
- Hydroelectric power which is derived from water;
- Bioenergy, which is obtained by the employing of biomass/biofuels.
Moreover, there are also other kinds of energy, such as geothermal energy, ocean energy which could be considered part of the hydropower and the innovative wave energy. However, Solar, wind and biofuels are the most engaged type of energy worldwide.
The solar energy has the record in the investment in renewable energy until 2019. The silver medal instead goes to the wind power (chart 1).
In addition, it is fundamental to highlight that the investment in clean energy is not homogeneous in every world area. Considering the following division AMER (North, Central and South America), EMEA (Europe, Middle - East and Africa) and APAC (Asia Pacific), it is clear that the investment is concentrated in APAC and EMEA countries (graph 2). Nonetheless, the amount of investments in renewable energy in American countries is quite consistent taking into account the fact that they are still strongly reliant on traditional energy sources.
The renewable energy investment by asset class
The asset finance has a main role in the investment in renewable energy scenario rather than the other categories such as private individuals’ small-scale solar plants, public markets and venture capital (VC) and private equity (PE) (chart 3). The asset finance class comprises both on-balance-sheet funding and non-recurse project finance. Bonds and other related deals have a marginal role in the mentioned category.
Photovoltaic (PV) projects and wind power remarkably have the greatest share in the asset finance.
The graph 3 displays the contribution by distinct asset classes to the overall investment. M&A deals are excluded owing to the fact that they re-engaged existent capital without originating new brand money. However, M&A is a key activity in the renewable energy sector due to the “financing continuum” (Bloomberg NEF, 2020). Indeed, the current money is recycled into new opportunities throughout M&A activities.
Finally, it is interesting to focus the attention on the role of the investment funds in the renewable energy markets. The most adopted financing vehicle for renewable energy investment seems to be project financing. The advanced application of project financing (structured finance) is the driving force for institutional investors. A key challenge is the perception of renewable energy projects as high-risky.
In recent times, the funds with a long-term perspective such as pension funds are acquiring renewable energy companies. Usually, the fund’s aim is to recover and subsequently improve the capacity of the plants. The whole process is significantly expensive; hence, the return is in the long run with a wide timespan.
In the last thirty years, the institutions’ incentives have played a key role in the construction of renewable energy plants. Nonetheless, subsidies provide by governments and institutions have been extremely variable in period considered.
Rapid and sustained employment of renewable energy system is encouraged by the most effective policy of the feed-in tariffs (FITs). The FITs could be structured in several ways, each with its own strengths and weaknesses. The remuneration structure of a FIT policy could be divided in two broad categories, namely one which depends and the other which is independent on the electricity price. There are several advantages and disadvantages of these different FIT models with different implications both for investors and for society.
To conclude, the clean energy market has been a crucial debate in recent years both from the profit and ethic point of views. However, nowadays the shift towards a greener and sustainable company is still incredibly low. If we take into account the major oil & gas company, the latest announcements about this change of policy in the direction of a cleaner company were extremely conflicting. What emerges is the final purpose to change the market sentiment towards the oil & gas companies which are now fingered as the ‘devil’.
In the end, the current scenario has changed. The pandemic emergency is hitting each economy worldwide. In addition to this, the OPEC failure between Russia and Saudi Arabia has caused the free-fall of the crude oil price. The traditional energy market currently is disrupted.
Hence, I want to leave all the readers with a question: are the pandemic and the oil price plunge accelerating the oil’s demise? I hope that all this bad is happening for a reason. We need a redemption and protecting the environment might be the starting point.
Graph 1: Global new investment in renewable energy by sector
Graph 2: Global new investment in clean energy by region
Graph 3: Global new investment in renewable energy by asset class
Source: Bloomberg NEF
Ashutosh Agrawal (2012). Risk Mitigation Strategies for Renewable Energy Project Financing, Strategic Planning for Energy and the Environment, 32:2, 9-20, DOI: 10.1080/10485236.2012.10554231
Bloomberg NEF (2020). Clean Energy Investment 2019 | Bloomberg NEF. [online] Available at: https://about.bnef.com/clean-energy-investment/ [Accessed 28 April 2020].
Bloomberg NEF (2020). Global Trends In The Renewable Energy Investment 2019. [online] Available at: https://wedocs.unep.org/bitstream/handle/20.500.11822/29752/GTR2019.pdf [Accessed 28 April 2020].
Couture, T., & Gagnon, Y. (2010). An analysis of feed-in tariff remuneration models: Implications for renewable energy investment. Energy policy, 38(2), 955-965.
Autore: Lisa Ragazzi, M&A Senior Associate