Euro Majors Build Scale in US Renewables

• Several European majors have recently completed deals focused on US renewables project pipelines in a move to scale up their clean power presence as part of their drive to net zero. • Early project entrances at the pipeline stage could add value in an industry known for thin margins and may see later benefits from economies of scale. • Expertise via developer partnerships will help with project delivery, but execution risk cannot be ruled out. The Issue Recent deals by Repsol, BP and Total, focused on the renewable project pipelines of US project developers, flew somewhat under the radar without a high-dollar M&A splash. But those deals will be instrumental for these European majors in building the scale necessary to reach the massive clean power targets that are at the center of their energy transition strategies. While the investments are not guaranteed they also provide a blueprint for their US footprint in years to come, and others might pursue a similar model. Repsol announced in May that it would take a 40% stake in project developer Hecate Energy, with the transaction and business rationale the focus of Energy Intelligence’s Q&A interview with Repsol this week (related). BP recently stepped up its US presence with a deal for the 9 gigawatt project pipeline of US player 7X Energy. Total also inked a similar, if smaller, US deal in February. Repsol Plans Since individual solar projects tend to be relatively small -- in the 100 megawatt to 200 MW range -- the pipeline approach lets companies target a range of them all at once, allowing them to subsequently scale up. Chicago-based Hecate, in which Repsol bought a 40% stake, has a portfolio of more than 40 GW of projects under development. That includes 16.8 GW of solar projects at advanced stages of development and 4.3 GW of battery storage capacity. The portfolio has major potential given the company's ambitious generation goals. The Spanish major currently operates 1.1 GW of renewable power capacity and aims to have 7.5 GW installed by 2025 and 15 GW by 2030 as part of its overall drive to net zero (EIF Dec.2'20). For Repsol, the US brings a strong opportunity in its size and growth potential -- as well as low costs, a strong resource and stable regulatory environment -- Joao Costeira, director of renewables for Repsol's electricity and gas unit, told Energy Intelligence. US solar is a sector poised for rapid growth, with developers adding almost 12 GW of capacity across the entire US last year, according to the Energy Information Administration. Another 15.4 GW is expected in 2021. Peer Strategy BP’s $220 million acquisition of the 7X projects represents about 9 GW of utility-scale solar projects, equivalent to 64% of the company’s current pipeline. The UK major is no stranger to the pipeline approach. The company’s 50-50 solar joint venture (JV), Lightsource BP, already working on a range of US projects and set to develop its new ones, is adapting a similar approach it has used in Europe. The moves aim to help BP expand renewable electricity generating capacity from 2.5 GW in 2019 to 50 GW by 2030. Total, also in February, penned a more modest but similar deal with developer SunChase Power and Map RE/ES for a pipeline of 2.2 GW of solar projects, and 600 MW of battery storage assets, all of which are in Texas (OD Feb.5'21). That deal brings the French major to developing 4 GW of renewable capacity in the US, contributing to its objective to reach 35 GW of renewable capacity by 2025 and 85 GW by 2030 and well over 250 GW by 2050. Pipeline Prospects Entering projects early, in the pipeline stage, could allow companies a leg up on economics, allowing them to farm down assets and boost returns. Later entries -- likely coming at a hefty price tag -- make marginal project economics even slimmer. That may be compelling as top oil players have faced scrutiny over whether their returns expectations from renewables are too optimistic, with Equinor recently lowering its target to 4%-8% from 6%-10% (EIF Jun.16'21). With the latest renewables deals, BP is targeting returns of 8%-10%. Repsol believes the projects in the end can produce a double-digit equity internal rate of return. Expertise via project development specialists could help teething troubles as the companies aim to scale up in the US. European majors have touted their project management expertise as an asset in new sectors. But the companies could still confront execution risk as they aim to go big in an industry distinct from their historical core oil business. Peer Approaches Other European majors have also ventured into the US to help fulfil their renewable power targets. But they have taken a range of approaches, including in offshore wind, which tends to see larger individual projects developed in phases. Equinor has penned deals to provide 3.3 GW of power to New York State via the Empire Wind 1 and 2 projects, as well as Beacon Wind 1 (EIF Apr.21'21). BP last year inked a $1.1 billion deal for a 50% share in a pair of those projects (OD Sep.10'20). Royal Dutch Shell also has a 50% share in two offshore wind projects under development, some 1.6 GW at Mayflower Wind off Nantucket/Martha’s Vineyard and 2.5 GW at Atlantic Shores off New Jersey. Shell is developing solar through its Silicon Ranch unit, with an operating capacity of about 1.1 GW. It is also focusing on energy distribution and helping customers offset their emissions, such as a partnership with GM that offers Texas customers a renewables plan that provides free electric vehicle charging. Italy's Eni, for its part, teamed up with Falck Renewables in 2019 for a JV to develop onshore wind and storage projects. The JV is already present in five states and is targeting capacity of 1 GW by 2023. US majors Exxon Mobil and Chevron have remained largely uninterested in large-scale renewable power investments in their home country, unimpressed by the returns and doubtful of whether they can bring unique value, although Chevron has dipped its toe in the sector via a modest venture capital investment. Kathrine Schmidt, Houston Recent US Renewables Project Pipeline Deals by Euro Majors Operator Developer Size BP 7X 9 GW pipeline Repsol Hecate Stake of 40% in developer with