Why Big Oil Can't Get Renewable Energy Right

The writing is on the wall for big oil companies. Renewable energy is now cheaper than energy from fossil fuels in places with an abundance of sun or wind, and with costs falling, it won't be long before it's cheaper just about everywhere in the world.

At the same time, the appetite for oil is waning in developed parts of the world. The U.S. and the European Union are in the midst of a long decline for a number of reasons, from higher prices to more efficient vehicles.

US Oil Consumption Chart

US Oil Consumption data by YCharts.

This data isn't new to big oil, and they know the long-term threats facing their industry. So, why can't they adapt and evolve to the energy industry of tomorrow?

Seeing the problem
It isn't as if big oil doesn't see renewable energy coming. BP (NYSE: BP  ) changed its logo to look more "green" and, until fairly recently, had its own solar panel business. Chevron's (NYSE: CVX  ) renewable energy business that focused on geothermal plants made a $27 million profit last year.

Huge projects like this are where big oil can invest in renewables. Source: SunPower.

But both BP and Chevron shut down these renewable energy businesses to focus on fossil fuels. They see the problem, and they know there's a solution, but executing on it is harder than it seems.

A tale as old as time
This is something we see time and again as industries are disrupted by new technologies. It isn't like Walmart didn't see the Internet coming, or Kodak didn't think digital cameras had a future. The problem is that they don't know how to evolve from what was and is a profitable business to a business that will one day be the future.

Changing business models and cultures is great on paper, but very few companies can do it successfully -- big oil is no different. 

Big oil may not know how to go renewable
In solar, it's particularly difficult. I recently asked SunPower's  (NASDAQ: SPWR  ) investor relations vice president, Bob Okunski, about the prospect of Total (NYSE: TOT  ) , which owns 66% of SunPower, buying out the solar company. He said that more than anything, Total might not know how to run a solar company.

Residential solar is providing huge value for installers like SolarCity and SunPower, but big oil has almost no exposure. Source: SolarCity.

When Total bought its majority stake in SunPower in 2011, executives came to the U.S. to meet with management and learn more about the company. Total's executives asked to see a 10-year plan, something that big oil us used to outlining both internally and to investors. But no such plan existed at SunPower because the industry changes so quickly that the plan would be obsolete within months.

This fast pace suits a smaller company like SunPower or SolarCity, but it's foreign to a company used to making decade-long investment decisions.

How to solve it
None of this means big oil can't and won't somehow invest in newer forms of energy. They can buy projects that will generate revenues for years to come and just hold them on the balance sheet, something Total is starting to do.

The YieldCo has also become a popular wind and solar investment, allowing companies to bundle projects into a single investment vehicle. Big oil is used to invest in projects that have 20+ year revenue potential, so these would fit well in their portfolios. 

As for manufacturing solar panels or any other components, I think that opportunity has passed. Big oil isn't nimble enough to be in the technology of renewable energy; it has proven that time and again. Instead, that will be left to smaller, more focused companies, and big oil may play in the market by buying projects, which doesn't come with the same upside for investors. 

At the end of the day, big oil hasn't found a way to invest in renewable energy and shape the market, which is a theme we've seen seemingly dominant companies in industries over and over again when disruptive technologies are introduced. 

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Read/Post Comments (7) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On June 08, 2014, at 6:10 PM, DocScience wrote:

    Big oil doesn't do renewables because renewables don't compete with oil.

    Oil powers cars, trucks, ships, trains, and airplanes. Not electricity (unless you are very unlucky).

    Solar and wind make electricity, sometimes but don't power cars (except a tiny number), trucks, ships, trains (except those areas with electrified railroads), and airplanes.

    Not their markets, not their customers. Not their business.

  • Report this Comment On June 08, 2014, at 9:46 PM, blpwdr wrote:

    While indeed renewable energy, notably solar and wind are on the horizon, until there is a significantly affordable way to store the energy they produce, it will always be an 'also ran' when it comes to powering the grid. Both currently actually present significant issues and problems for major utilities when it comes to incorporating their output into the grid. Wind by far is worse than solar when it comes to predictability. IF the oil companies want to find a niche, focussing on renewable energy storage capacity would be the way to go. OR, as they will soon find out, just buy solar, wind, or other renewable energy product manufacturers and reap the rewards without any of the inherent risks. The use of CHP technologies are now becoming more focussed in industrial processes, and AD is running right there with them. It's all about consistency of power production. Knock out commercial and industrial dependence on fossil fuels, THEN tackle transportation with things like hyrdogen fuel cell technologies. The world went from horses to horsepower in less than 25 years. Phase II is in the works.

  • Report this Comment On June 09, 2014, at 9:22 AM, jacamar wrote:

    Talk about the uninformed, this author doesn’t understand the oil industry. Yes some renewables for producing electricity has come on stream, but they do not compete with liquid fuels. Government mandated ethanol replaced some of the oil based gasoline, at the expense of the food and in many cases the environment. If you look at when crude oil consumption started dropping, the world was entering into a recession. The author mentioned fuel efficiency and this is one thing he has got right. Vehicle fuel efficiency standards had increased. As it turns out, there is considerable concern today that OPEC will not increase output as demand in the rest of the world is accelerating faster the reductions in the developed countries. Demand for crude will remain high no matter what happens with solar and wind. Also, the author should factor in the cost of natural gas for electricity production. NG current cost in the U.S. is about ¼ the cost of crude oil in terms of BTUs. I doubt that solar and wind come anywhere near NG in cost of electricity production. Just remember who you are going to call on at night with the sun goes down and the wind dies down.

  • Report this Comment On June 09, 2014, at 11:33 AM, speculawyer wrote:

    They just don't give a crap. Renewables are a pretty thin-margin business and they are accustomed to making much bigger bucks.

    They know you are addicted to oil so why should they change? They won't. It is up to YOU to transition away.

  • Report this Comment On June 09, 2014, at 11:34 AM, speculawyer wrote:

    Hey DocScience . . . ever hear of the electric car? And electricity competes directly with natural gas when used to power a heat pump for heating.

  • Report this Comment On June 09, 2014, at 2:06 PM, ferdiefor wrote:

    This author is misinformed to the extent that petroleum based products are a rapidly growing source for petroleum. So the good news is we are using less oil for automobiles but petroleum based products are becoming a huge growth driver.

    These products are refined and more importantly their end product can be exported. As such we are seeing a renaissance for petroleum. Left to providing oil exclusively for the old auto and other related industries the author would be correct.

  • Report this Comment On June 09, 2014, at 8:12 PM, wowgoner wrote:

    Power utility should get into electric car business.

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