BDO Knows: Technology - June 2017

June 2017

BDO-Knows-Tech-Renewables-Alert-6-17_pic-x675.jpg


The Future of Renewables


Download PDF Version

By Basil Karampelas and Timothy Clackett

On June 1, President Trump withdrew the U.S. from the 2015 Paris Agreement—a move that sent ripples of shock throughout the energy industry and elicited strong reactions from state and local governments, organizations and individuals. While renewable energy—including wind, solar, hydropower, biomass and geothermal—has been on the public conscience for years, Trump’s decision rapidly thrust the sector back into the spotlight and reminded the world of the significant role it has yet to play.

The fact remains that alternative energy has quickly become a more serious contender in the global energy boxing ring in recent years. Much of this growth has been driven by technological advances, regulatory developments and various other factors. While it still has a long way to go before it surpasses oil, gas and coal, it is making up a bigger slice of the global energy pie each year.

For traditional energy companies, the rapid growth of renewables has significant implications for the industry’s long-term growth and sustainability. Should traditional energy companies wish to stay competitive, innovative and successful in today’s volatile, low-price environment, they must continue to diversify their energy portfolios to keep pace with the broader global shift to low-carbon alternative fuels. For many companies, this means continuing to invest in and offer multiple types of energy from different energy sources (including clean energy), beyond their current offerings.


Renewables on the Rise

According to the U.S. Energy Information Administration (EIA), renewable energy sources, led by solar and wind, accounted for about 10 percent of total U.S. energy consumption and about 15 percent of electricity generation last year. The EIA forecasts that this percentage will increase in the future, with total utility-scale solar generation capacity increasing by 48 percent from the end of 2016 to the end of 2018, along with increases in total wind capacity.

Global forecasts predict the international renewable market will accelerate at a much higher rate. According to a 2017 report by the Energy Transitions Commission, which includes senior leaders from General Electric Oil & Gas, Schneider Electric, Royal Dutch Shell, BHP Billiton Ltd. and several other key energy players, it will be “feasible in many geographies to build a near-total-variable-renewable power system” by 2035, which will make “renewables fully competitive with fossil fuels.”

The report further estimated that the 2040 global power mix outlook could consist of: 45 percent intermittent renewables, such as solar and wind; 35 percent other zero-carbon power sources; and 20 percent fossil fuels. While these predictions are ambitious, those from a McKinsey Global Institute report mirror a similar pace of growth—surmising that renewables could grow from making up four percent of total global power generation today to 36 percent of global electricity supply by 2035.

Much of this growth is happening in Asia, which accounted for 62 percent of total renewables jobs in 2016, according to the International Renewable Energy Agency’s annual report.

While these reports are based on various scenarios and assumptions, they indicate broader industry sentiment that renewables are the future—even if fossil fuels are the standard today.


Technological Innovation and Regulatory Pressures Drive Sector Growth

While numerous factors contribute to sector growth, two of the biggest drivers are the same forces transforming all industries: technological innovation and regulatory pressures.

While solar cells and wind turbines have been around for decades, technological advances have significantly brought down the cost of production in recent years. In fact, Bloomberg reported that solar prices have dropped 62 percent since 2009 and is expected to become cheaper than coal on average globally by 2025. Energy experts further predicted that onshore wind energy will see a median cost reduction of about 35 percent by 2050. Meanwhile, investments and advances in solar and wind storage continue to be made: Tesla, for example, has recently released the Powerwall 2, a rechargeable battery that integrates with its new solar roof to provide backup power at home in case of utility outages or natural disasters.

The emergence of cleantech, including electric vehicles (EV), is also likely to contribute to a decrease in global fossil fuel consumption in the coming decades. According to Goldman Sachs analysts, 25 percent of cars sold by 2025 will have electric motors, up from five percent today. While many of these cars will be hybrids that still rely partly on fossil fuels, it can be expected that overall petroleum dependency will decrease as more EVs make their way to the streets.

State and local policies aimed at reducing greenhouse gas emissions also play a significant role in pushing companies toward innovation and energy diversification, should they wish to remain in compliance—perhaps even more so than federal and global policies.

The most recent example of the power welded by state and local governments can be seen in several states’ reactions to Trump’s withdrawal from the Paris climate accord. Despite the order, many states, cities and organizations pledged to continue upholding the accord terms and limit their emissions. Their response is a strong indicator of the bifurcation between the views of the executive branch and local views on the importance and role of alternative energy in the future.

Other state policies include the state renewable portfolio standards (RPS), which require utilities to sell a specified percentage or amount of renewable electricity. The standards have already been adopted by 29 states, Washington, D.C., and three territories as of late April, with ambitious goals to increase state-wide usage of alternative energy. California, for example, aims to increase the percentage of renewable energy in its electricity mix to 33 percent of retail sales by 2020.

The Regional Greenhouse Gas Initiative, an initiative made up of seven northeastern states, has also set an ambitious goal to source 42 percent of its energy from renewables by 2030.


The Need for Energy Diversification

Many energy companies have already begun the process of diversifying their energy portfolio mix, either through external dealmaking or internal research and development, to meet regulatory and competitive pressures. According to Bloomberg New Energy Finance, acquisitions in clean energy totaled $117.5 billion last year, with $72.2 billion coming from renewable energy project acquisitions and $33 billion from corporate M&A.

One notable transformation is Denmark’s Danish Oil & Natural Gas (DONG) Energy’s recent shift from producing fossil fuels to renewables. Formerly an oil and gas company, DONG Energy has become a major champion of green energy in recent years, and is now the world’s largest offshore wind farm company with plans to divest its oil and gas business this year.

Other oil and gas companies have also taken strides to diversify, albeit on a smaller scale. In early March, Royal Dutch Shell’s Chief Executive Ben van Beurden announced the company’s plans to increase its investment in renewable energy to $1 billion a year by the end of the decade. Beurden further noted that the oil and gas industry risks losing public support if it does not transition to cleaner energy, according to Reuters.

Saudi Aramco, the world’s largest oil company, has also toyed with the idea of investing $5 billion in renewable energy firms to diversify from crude production. BP’s website states that “renewables will play an increasingly important role in a lower carbon future…projected to grow seven times faster than all other energy types combined.”

With many renewable energy company valuations depressed due to low commodity prices, now may be a good time for companies to diversify via external dealmaking opportunities.


BDO Insights: Looking Toward the Future

The path to green energy adoption and investment is not easy. Recent events in Washington indicate that the road may be even more difficult going forward, at least in the U.S. For traditional energy companies, the cost of acquiring, designing and/or building renewable energy technologies and the necessary infrastructure can be quite high. For renewable energy companies, ensuring that their technologies are commercially feasible, scalable and attractive is an ongoing challenge—especially in a market that’s becoming increasingly competitive. Sustained low oil prices globally may also reduce consumer incentives to install and use alternative energy sources, at least temporarily.

Despite the challenges, clean energy presents an opportunity for energy and cleantech companies to maintain relevance as the industry shifts and propel their business into the future. With renewable energy forming a bigger proportion of the energy mix year-over-year, traditional energy and cleantech companies must begin to take steps to capitalize on the green revolution, if they haven’t already—or risk being left behind.

Basil Karampelas is a managing director in BDO’s Business Restructuring and Turnaround Services practice and works with many companies in the energy, chemical and renewables sectors. He can be reached at bkarampelas@bdo.com.

Timothy Clackett is an assurance partner and national leader of BDO Technology’s cleantech initiative, and can be reached at tclackett@bdo.com.