Q&A: Repsol’s US Opportunity in Green Power

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Spanish energy producer Repsol has long held a substantial energy footprint in the US, including oil investments in the Gulf of Mexico and Eagle Ford Shale. In May, Repsol substantially stepped up its footprint in the country’s renewables space through its acquisition of a 40% stake in project developer Hecate Energy. Hecate has a large portfolio of 40 gigawatts of renewable and storage projects under development, of which 16.8 GW are solar projects at advanced stages. Repsol hasn’t been the only company targeting pre-final investment decision solar projects: BP announced a deal last month for the 9 GW solar pipeline of 7X Energy. Joao Costeira, director of renewables for Repsol's electricity and gas unit, spoke to Energy Intelligence about the opportunities the company sees in the US market. Q: How did the deal for Hecate come together, and how did you decide what transaction to pursue? A: The US is, in our perspective by far, the most interesting renewables market in the world. This was enhanced by the results of the presidential election. We had our mind made up way before. First is the rule of law. You have a stable regulatory and legal framework. You have very clear legislation, a very clear judiciary system. That’s very important when you’re investing for the long term, 30 years or more. The other one is, for sure, the need for energy. The US is probably one of the few countries in the developed world that grows substantially. [Not just] replace existing capacity, you can add new [capacity] because of the growth of the country. One [factor] is affordability. Renewables thrive if they’re affordable. We cannot keep on relying on subsidies forever. The US has a very good solar resource, and very good wind resources in some areas. Generally, renewables are affordable and are the cheapest way to produce energy. If you add the three, the market is very attractive. Q: What about from a Repsol corporate perspective? A: We are lucky enough to already be in the US in oil E&P and also trading. We have a structure with legal capabilities, tax capabilities, all of that. So it just makes it easier for us. What were we looking for? We needed a certain size. You don’t come to the US to make a few hundred megawatts. You come to the US to do gigawatts. Hecate had one of the biggest independent pipelines of projects in the US. Trusting Bloomberg, they always say they are between the third- and fifth-largest solar pipelines in the US. There was another criteria that for us was very important. That has to do with profitability. We’ve seen a lot of transactions being made in the US recently, even a few years back, where a lot of value was given to operational assets. There’s very little value to be created once you acquire an operational asset. Capex has been invested. Probably contracts have been signed for the next five to 10 years, financing has been done. How much more can you extract from those assets? We always have this very clear objective of finding projects we can enter at a relatively early stage and participate in the derisking of the project. Determining the capex of those projects by determining pricing, procurement, and operating them. Hecate really fits well into that because they have very few operating assets. Those were the main drivers. Their capabilities, which are among the best in the US, mainly for siting and development. Siting [strategic geographical placement and permitting] is paramount in the US. They really know their game. When you add it all up, it looked like a very good fit and we reached an agreement. Q: How did Repsol determine the right operating model for renewables? A: We are buying a minority stake in a development company. That means this company will originate projects and bring them to ready-to-build, shovel-ready status. But from then onward, if we decide to acquire those projects for which we have a preferential right, then it’s Repsol on its own. It will be 100% Repsol. We will build them, we will operate them on their own. Hecate is a development company, it will remain so. We hope they keep doing the fantastic job they are doing. When it comes to operations, it will be ourselves. Their shareholders are not interested in getting into operations. Q: Is that a model for how Repsol wants to do other deals in this space? A: The endgame is that Repsol will be the operator of the assets. The other endgame is that we have to make money out of it. This is not greenwashing, it is about sustainability. Sustainability has to do both with the environmental side and the economic side. For this line of business to be profitable, according to our shareholders' expectations, we really should participate in the most important parts of the value chain. It was very important for us that Hecate was focused on one area that kick-starts the whole thing, which generates value for sure. That will allow us to then take over and consolidate a business model which is very much similar to what we are doing in other countries. In Chile we have a partner for development, construction and operation. And in Spain we do it alone. But the principle is the same, we are present in all parts of the value chain. Q: What comes next for Repsol in ramping up renewable power generation? How do you evaluate the opportunities out there and the prospects of returns? A: With this partnership with Hecate, together with what we have done in Chile and what we are developing in Spain, we have a very clear visibility in reaching our 2025 targets, and also a clear path to 2030. We are very comfortable with that. The way we see the industry as a whole going forward, the inevitable growth that comes with the energy transition, will create enough opportunities for most conventional players to have more than their share. The opportunity that’s being generated by the energy transition is so huge, we really shouldn’t be looking at the guy next door. I really don’t think we are competing against each other. We are only competing against time. For 2025 I believe we have enough optionality to reach our targets. Going forward, this deal and the other things we are doing provide us with good visibility. But we cannot discard, of course, any further moves that will have an impact beyond 2025. To 2025 it’s about delivery, delivery and delivery. Q: Repsol has a substantial Latin America presence in its oil portfolio. Beyond Chile, was that region also considered for ramping up renewables investments? A: We do look, we are continuously monitoring opportunities elsewhere. Here we were faced with an alternative. If you’re going to the US, you’re going to do a substantial amount. If you don’t go to the US, countries like Brazil are definitely an option. We chose the US, so right now that’s the priority. Going forward a country like Brazil, where Repsol already has a presence, has had very stable legislation and regulation when it comes to energy. For now, we won’t be making any moves into Brazil. There’s another issue that has to do with the fluctuation in the currency, which makes the economics rather challenging. Your revenues are in reals and your capex is in dollars. There has been some fluctuation on that that would make an investment tougher. Going forward we certainly consider Brazil a country to watch and a country to care about. Q: What kinds of returns are you targeting with these projects? A: What we have always stated is from an equity [internal rate of return (IRR)] perspective, once everything is said and done, we will have a double-digit equity IRR. We’re keeping that. Q: Is financing an issue? Is there any boost to renewables in project financing that you wouldn’t get with an oil project? A: These are very different businesses, even more so on the renewables side if you decide to do PPAs [power purchase agreements]. The financing possibilities available are different. One thing is for sure: Financing is a key part of the business model. Even more so in renewables, when you consider once the capex is incurred, the rest almost comes for free. You don’t have a fuel price, you don’t have a gas price. It’s really a business model that is more focused on capex, and financing has a bigger impact than in some business models. The way you finance them is paramount to the profitability and even the feasibility of the investment. We are considering anything from project finance, green bonds, equity bridge loans, you name it. That’s probably one of the areas where you have also seen more innovation. We are considering options to maximize value and at the same time take benefit from the strength of the company balance sheet. Q: Any final thoughts? A: I’d like to stress that this move into the US is one of the cornerstones of our going green strategy, which has been very clear. That has been clearly transmitted not just in our organization but also in our KPIs and our compensation as managers. It’s not like we’ve been forced into this. We were the first ones to state we would become carbon-neutral. I would tend to say we’re putting our money where our mouth is for quite awhile now, and we will continue to do so. The US has for us the most interesting, most promising renewables in the market in the world, by far. I would say it’s the cornerstone of our strategy going forward. We’re very glad we made this deal, and we are very excited about transforming it from a deal to reality. I don’t think the energy transition is an energy revolution. It’s a transition. We have to keep the best of what we have, and bring in the best of what we will have. We should really do this in a logical, sustainable manner. We will need fossil fuels for quite awhile. We cannot just simply replace every vehicle on the planet. We cannot stop flying. We just need to make a stable way forward like the one we believe we have expressed in our business plan, with very clear goals to 2050. And take each step of the way in a logical economical manner. The climate challenge is there and is not going away.

Leadership Interviews, Renewable Electricity , Corporate Strategy , Electricity Prices
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