Posted on: August 25, 2020

Share this page:

 

As the energy transition grows pace, increasing numbers of oil and gas companies are looking to include an element of renewable energy in their corporate strategy. As with oil and gas itself, the range of opportunities within the ‘renewables’ label is wide and varied and decisions must be taken about strategic direction before considering specific transaction opportunities.

1) Innovation vs Projects

Does the company want to invest in new renewable technologies or in generation projects themselves? Supporting new technology generally requires less capital investment and may generate higher returns but it does carry a higher level of risk. The development process for renewables projects however, broadly mirrors similar oil and gas assets, and so oil and gas companies may see greater opportunities to add value by participating in early stage project development.

2) Geography

Where is the company already operating and does this presence in specific markets give it a competitive advantage? A local presence may be valuable for supporting new renewable energy developments (e.g. for license applications) and existing in-country operations may provide a captive buyer for power generated. These are likely to be particularly important in developing countries.

In developed markets, well-established renewables developers will have a strong foothold and potential returns are likely to be lower, in part because subsidies have already been reduced or removed. At the same time however, licensing processes should be well understood and an offtake/PPA market may already exist, which reduces development risks.

3) Underlying resource

Which resource is most abundant in the chosen geography and which technology is best suited to the environment, i.e. solar, wind, hydro? The selected technology will have an impact on timescales and project complexity, e.g. solar can be deployed quicker and generally requires less consenting and less engineering input than hydro.

4) Utility scale vs decentralised solutions

To some extent, the scale of projects in any given country will be driven by the natural resource available, e.g. in countries with significant hydro resource, large-scale hydropower projects may dominate the energy mix. Similarly, where large plots of land are readily available, utility scale wind or solar may offer the best development opportunity. For large projects, the national utility may need to be the off-taker so the terms (e.g. term, currency, government guarantee) of any PPA will be key – some countries’ PPA offers are still considered un-bankable.

To reduce the capital investment required, a company may prefer to target smaller, decentralised generation solutions such as a commercial rooftop solar. For these assets, consideration will need to be given to the ultimate off-taker – if selling into the grid then availability and stability of related infrastructure will need to be confirmed and if selling by private wire then the credit quality of buyers will need to be established.

5) Stage of development and partners

As with oil and gas, entering the project development cycle at an early stage is riskier but offers potentially higher returns. Early stage development should also require lower capital outlay than, for example, the construction stage. Experienced technical partners will be key to designing and delivering an operationally efficient project and maximising returns. The availability of high-quality partners and contractors should therefore also be part of the decision-making process when selecting a target market.

Again, as in oil and gas markets, early stage development gains can be crystallised by selling a project pre-construction. If this is the chosen strategy however, some elements of the development strategy need to be tailored towards this including using only recognised, financially stable partners and contractors, ensuring land and licence rights are fully secured and transferrable, and having a strong PPA lined up or ideally contracted at an early stage.

With our combined oil and gas and renewable energy expertise, Gneiss Energy is uniquely placed to advise on the formulation of a renewable energy strategy by oil and gas companies.

By fully integrating into the strategy development process, we bring together our analytic screening process, renewable energy development experience and relationships with developers and contractors in international markets to help our clients leverage their existing operations and competitive advantage to create additional value for shareholders.

Related Article

Investing in Renewables: Reasons to be cheerful, one, two, three...

READ FEATURE ARTICLE

Andrew is a senior corporate and structured finance professional with over 20 years’ experience of domestic and international equity, debt and structured finance transactions and with a focus on renewable energy projects since 2010. Andrew previously worked at leading investment banks Barclays Capital and Morgan Stanley in London and New York and boutique advisory firms Quayle Munro and Melville Financial Partners. He established Lonburgh Capital in 2013, which merged with Gneiss Energy to provide integrated corporate finance advice across traditional and renewable energy resources. Andrew holds a First Class MA (Hons), Economics and Management from the University of St Andrews and is an independent board director on a number of project companies and finance vehicles.

Share this page:
Loading