IP Week virtual: Unlocking value in the alternative energy chain

IP WeekOn the first day of the IP Week Virtual (23-25 February 2020), Andy Brogan, global oil and gas sector leader, Ernst & Young (EY), has described the potential factors driving and unlocking value in the alternative energy chain

According to him, when operators are looking at the alternative energy, they’ve got a different risk equation. There are two main dimensions: one is to look at the role that the company wants to play in the whole value chain and a number of discrete roles that companies can take; and the other is to look at what's the best way to finance that role. In this regard, the low cost financing is going to be a requirement for success in the space.  Because alternative energy is a business, that has fairly low risk assets, therefore low cost financing is going to be a requirement for success in the space.

There is also a certain amount of complexity compared to what the larger companies have been used to in terms of balance sheet financing. Hydrogen technology is set to play an important role that has the highest return. It’s going to have a long lead time after managing a considerable amount of uncertainty. However, many people, investing in that technology, will not be the one that's adopted. It's an investment model that is familiar to the tech industry, but it's an investment model that the energy industry has often struggled with. Notwithstanding the fact that everybody has venture funds these days. This is much more with the traditional skillset in the large integrated companies and in terms of the sort of practical value chain of implementing current technologies and alternative energy, this is probably the highest risk part.

Another role that links to developer is the role of capital aggregator. Because the large energy companies have got very sophisticated in developing trading groups and functions and treasury functions, this is an area where they should be able to compete and outcompete the incumbents. The actual construction of the assets is also aligned to what the current energy companies do. The operation of the asset is aligned to what the energy companies do, but operating wind farms, solar parks etc. is not the same kind of margin business. 

The operators are likely to see opportunities to trade around those assets. If you integrate that with trading around the legacy hydrocarbon assets, then that should yield a significant opportunity for those companies that have particularly the trading capabilities. The final role as in any system is to actually be at the front end to the consumer, and actually be an energy, either retailer or providing B2B supply contracts. All of those roles have different risk profiles, and they all need to be matched to the right financing structure. The good news is most of those funding instructions actually exist.

Alternative energy is not the same model as renewable and for this, the operators need a different approach. The companies, which are blessed with sophisticated and scaled energy trading businesses, are ideally suited to take a demand-led approach to this. It just requires a slightly different approach. The other key differentiator is that the ones, which have the most candid conversation with their investors earlier about what their investors really want, will be the ones that find it easiest to manage through the ups and downs.

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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