When an electric energy pioneer like General Electric (NYSE:GE) reconfigures its entire energy business, investors should take note. That's exactly what happened last week when GE Power announced it would cut 12,000 jobs, or 18% of the division's workforce, reducing the company's exposure to traditional power plants.
What wasn't affected was GE's staffing or investments in renewable energy and energy storage. In fact, these emerging energy assets are what's disrupting fossil fuels more broadly. GE has made the first step to reducing exposure to fossil fuels -- now the question may be "What's next?"
What GE's layoffs tell us
As part of a plan to cut $1 billion in structural costs at GE Power, there will be about 12,000 positions eliminated up and down the business. Weak fundamentals in the power plant business overall were the drivers of the move, with the press release saying:
Traditional power markets including gas and coal have softened. Volumes are down significantly in products and services driven by overcapacity, lower utilization, fewer outages, an increase in steam plant retirements, and overall growth in renewables. GE Power is right-sizing the business for these realities and is focused on improving operational excellence and reducing its footprint and structure, which will help drive significant improvements in cash flows and margins.
Notice that growth in renewables was given as a reason for the reduction in GE's power business. As wind and solar energy have come down in cost, they've replaced traditional coal and natural gas power plants as the fuel of choice for new power plants around the world. And there's no reason that's going to change. What's unclear is if GE is going to transition from the dying fossil fuel business to the growing renewable energy business.
Is GE taking renewables seriously?
If GE is hoping to play a meaningful role in renewable energy in the future it's going to have to take the industry more seriously. GE sold its thin-film solar business to First Solar (NASDAQ:FSLR) in 2013, largely exiting the solar market. In wind, GE is a market leader in turbines, but pricing pressure has compressed margins for the industry as a whole. Energy storage is the third leg of renewable energy disruption, and GE hasn't made a meaningful play in the industry so far, ceding market share to AES (NYSE:AES), Siemens, and Tesla (NASDAQ:TSLA).
The only segment where GE seems to have taken renewable energy seriously is financing. The company has financed $5 billion of projects over the last three years. But that level of investment isn't going to drive earnings for a $153 billion company.
To take renewable energy seriously, I think GE needs to start putting its balance sheet to work, scooping up assets and developing projects around the world. Buying First Solar or SunPower (NASDAQ:SPWR) would make sense, although SunPower is majority owned by Total (NYSE:TOT) today. With SunPower, in particular, it could invest in the manufacturing scale necessary to become profitable and increase market share to become a top-3 manufacturer.
Acquiring yieldcos like 8point3 Energy Partners (NASDAQ:CAFD), Atlantica Yield (NASDAQ:AY), or Pattern Energy (NASDAQ:PEGI) would also make sense as a cash flow business. GE could use its immense balance sheet and low borrowing costs to generate strong returns on the equity it invests, becoming a major player in renewable energy project finance.
Battery storage is the game changer for GE
The big play GE needs to make is in energy storage. There's no clear technology or company leading the energy storage business in its current nascent state, and GE could fill the role of an industry leader. But it'll have to invest in battery technology and manufacturing capacity to make it a meaningful part of the power business. It's not yet clear that GE is willing to do that as it pares fossil fuel power operations.
GE can see that it needs to make a transition from fossil fuel power plants to renewable energy and storage, but making that transition is easier said than done. If GE doesn't make the move soon it could be left in the dust by more focused and nimble competitors.