Opinion: BP's Long Road to Renewable Power

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In this opinion, Energy Intelligence Senior Reporter Philippe Roos argues that BP faces a tricky and crowded landscape as it embarks on its ambitious renewable power targets. Roos is Energy Intelligence's subject matter specialist for alternative energy and previously served as an energy specialist at the World Bank and Credit Agricole. BP's ambition to reach 50 gigawatts of renewable power capacity by 2030 is one of the most striking elements of its new strategy announcement. Indeed, CEO Bernard Looney and its management team spent much time during this week's BP Week trying to convince the audience that BP's power strategy, which focuses on massive capacity additions while avoiding the retail market, was not only "realistic and achievable" but also the most likely to deliver double-digit returns. BP joins the power sector as a serious competitor, but it also faces a long road ahead. Looney was right to emphasize that while 50 GW -- half the UK's total capacity today -- looks huge, it only amounts to about 1%-3% of projected new wind and solar additions to 2030, depending on scenarios. This is actually comparable to BP's and the other oil majors' market share in global oil and gas production. But while the majors arguably make up for national oil companies' abundant and cheap resources with superior skills and technology in the oil business, they are unexperienced newcomers in the power sector. And while 50 GW is modest in regard of the world's needs, it is 20 times BP's current capacity. It is also exactly what France's EDF is targeting for 2030, but EDF has already 28 GW in renewable capacity and has been a leading electricity company for decades. To keep its targeted 1%-3% market share in renewable generation -- and achieve its climate targets -- BP would at least need another fivefold increase in capacity between 2030-50, to 250 GW or more. So can BP deliver on such a bold target and, at the same time, provide returns of at least 8%-10%? Looney's insistence on BP's partnership with the UK's Lightsource and its "incredible" capabilities is not necessarily reassuring. Lightsource, now Lightsource BP, is certainly a respectable solar developer, but it is one among many comparable midsize developers around the world. It is true that BP, as Looney emphasized, has excellent project development and management skills. It can add value to projects, for example by bundling intermittent generation with controllable conventional power or by offering fixed-price contracts to customers. "We love complexity," Looney insisted. The problem is renewable generation is rather simple. Technologies, which are available to all generators, have matured rapidly. Building a solar photovoltaic (PV) or onshore wind farm is essentially as easy as developing a real estate project. Offshore wind is more complex but this might not last and it is essentially a niche. The International Energy Agency's 2°C scenario, for example, foresees that global offshore wind capacity could reach 350 GW by 2050, a seemingly substantial amount but modest compared to onshore wind's 2,600 GW and solar PV's 4,800 GW. Cheap financing is also widely available. Renewable projects typically yield 5%-6% now, down from 10% just a few years ago, and this will probably continue to fall lower as the market and investors' appetite keep growing. BP could still double its returns on projects, but it remains to be seen how much of this would come from its unique project management and integration skills, and how much from just financial engineering skills that many companies and investors share with oil companies. BP's choice not to enter retail power marketing may also become problematic as the energy transition "increases the bargaining power of consumers with economic rents shifting away from the upstream," as chief economist Spencer Dale noted during BP Week. Financial engineering -- through leveraging projects or selling equity stakes in them -- basically consists of not owning assets but still making money out of them. This is certainly positive and in line with BP's strategy of developing capital-light businesses such as trading and advisory services. But, together with the expected decline in capital-intensive oil and gas operations, the capital-light approach may progressively turn BP into a service company -- a profitable one but, presumably, a much smaller one than today's industrial giant. In fact, oil companies may not have much of a choice. From its strategy announcement, it seemed that BP was now seeing 1.5°C-2°C global warming as a realistic base-case scenario. Its new Energy Outlook unveiled during BP Week confirms this and shows drastic shifts in oil scenarios. While last year's base case projected demand in 2040 would reach 104 million barrels per day, the new base case -- called Rapid Transition -- assumes only 57 million b/d in 2040 and 47 million b/d in 2050 (see graphs). That's in line with the Intergovernmental Panel on Climate Change's average 1.5°C-2°C trajectory where oil demand drops to 15 million b/d by 2100. Even BP's new business-as-usual scenario assumes a decline from 98 million b/d in 2019 to 89 million b/d in 2050. While the shift in gas scenarios is not as sharp, BP now sees demand peaking around 2035 in the base case. By contrast, it kept growing until at least 2040 in last year's base and even Rapid Transition scenarios. This year's projections, however, might still be too optimistic. BP is probably right in projecting that developing Asia's shift away from coal will generate substantial gas demand, but its assumption that gas plus carbon capture and storage will play a key role in decarbonizing power generation and in producing massive amounts of blue hydrogen is questionable. Similarly, biomethane's low predicted market share -- at 6%-10% of total gas consumption by 2050 -- might prove too conservative.

Gas Demand, Coal, Oil Demand, Carbon Capture (CCS), Hydrogen, Renewable Electricity
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