Why have renewables not caught on as they should?

Michael McDonald writes a good article in oilprice.com why the world has not figured out an effective business model for renewable energy and, until so, the full potential will not be achieved.


What Is Holding The Green Revolution Back?

In all the press that alternative energy sources get, one fact is often omitted. While Green energy has been around for years, today there are no alternative energy companies that come even close to rivaling the size of the oil majors. Why is this? Solar power, wind power, and other renewable energy sources have made, at best, incremental progress in overtaking conventional energy sources even as governments around the world have pushed renewables with all their might. At the end of the day, the simple fact is that renewable energy sources have not caught on and resulted in a wave of new jobs as many once expected they would.

The reason for this incontrovertible fact is controversial. On the one hand, some people like former Royal Dutch Shell employee Adriaan Kamp suggest that oil companies have simply failed to see the writing on the wall and are too myopic too move beyond their area of expertise.

If the reason that green energy has yet to become a major money maker is that mainstream companies have not yet embraced the technology, then there is still a vast fortune to be made in the space. German energy giant E.ON appears to think there is some value in green energy. The firm announced last November that it was going to focus on renewable energy, power distribution and customer solutions. E.ON announced that its legacy conventional power generation, energy trading, and exploration & production assets would be spun-off as part of a new company. This strategy is novel among major energy firms and could presage moves by other major energy players in the future.

Yet E.ON’s actions may never catch on at other firms. The alternative explanation to the myopic conventional energy executive argument is that renewable power sources simply do not provide enough profit to be worthwhile for serious corporate investment. Even with today’s low oil prices, hundreds of companies are looking for opportunities to buy oil rights in high producing areas around the globe.

In contrast, renewables projects are slow to develop, fraught with bureaucratic red-tape, and characterized by low margins. Given the much higher levels of profit in conventional energy, there is a real question as to whether major energy companies will ever be interested in shifting their resources to renewable fuels. Indeed, the irony of the green power revolution is that it has been accompanied by historically high conventional energy prices, which in turn has resulted in even greater interest in conventional energy.

Companies like British Petroleum, under John Browne, moved to go “Beyond Petroleum” and explore profit opportunities in renewable energy. But all of this effort and energy ultimately did not lead to substantial new business lines or a dramatic increase in profits. Instead BP, Chevron and others have sold off their renewables businesses and redoubled their efforts in conventional energy generation. At the end of the day, it just does not look like renewable power is profitable enough to displace serious investment in conventional energy sources.

While there may be truth in both the myopic oil company and unprofitable alternatives stories, ultimately the reality is that many forms of alternative energy have been part of mainstream business for fifteen years now. And in that time, very few big companies have developed that are built around the renewables business. This suggests that oil companies like Exxon Mobil know what they are doing when they buy back their own stock rather than invest in renewable energy projects. It’s possible that Tesla, Solar City, and other innovative companies will ultimately be able to find a way to make big profits in new areas of energy. But that will probably require a completely different skill set than the one found at most energy companies today. At this point, the world has not figured out an effective business model for renewable energy, and until we do, the green revolution will remain unfulfilled.

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