WEMO24-Compiled Report-Interactive compressed (002) 4154-7882-8116 v.1 - Flipbook - Page 51
Considering this gap between the internal rate of return (IRR) on oil
and gas and on wind and solar, it’s unsurprising that most of the oil &
gas companies stick to their core business. While it's easier to invest in
wind and solar, these companies have less of a competitive advantage
in electricity markets, which are more volatile than oil markets.
Renewables also rely on subsidies and tax credits. Even if these
incentives are quickly decreasing in many parts of the world, they
can make renewables look more attractive in the near term without
creating a more volatile spot market for electricity. Corporate powerpurchase agreements can offer more reliable revenue streams. But
often very large-scale renewables projects will need to compete in
more volatile power markets.
Support mechanisms is not a new phenomenon in energy systems:
Fossil-fuel subsidies surged to a record $7 trillion in 2022 according to
the International Monetary Fund (IMF), the equivalent of 7.1% of the
global gross domestic product.
Nevertheless, the more mature renewable energy players are now
looking to optimize their capital and operational expenditures and
differentiate themselves through innovation, their goal being to
increase profitability and reach levels of IRR way above 10%. They
intend to do this while quickly growing their assets base.
FIGURE 2
Weighted average net margins of renewable energy companies, large utilities and oil & gas majors
30%
Uitlities
20%
Oil majors
10%
Polysilicon
0%
Solar PV integrated
-10%
-20%
Wind manufg. China
-30%
Q1
Q3
Q2
2022
Source: IEA, Renewables 2023
Q4
Q1
Q2
2023
Q3
Wind manufg. nonChina
WEMO 2024
In 2023, the weighted average net margins of renewable energy
companies were significantly lower compared to large utilities
and oil majors. For instance, according to the International Energy
Agency (IEA), while oil majors reported net margins of around 1015%, renewable energy companies averaged around 5-10%, as show
on figure 2. This is why strategic steps must be taken to ensure the
profitability of renewables.
Expecting renewables to achieve self-sufficiency without significant
reforms in electricity markets is unrealistic. It's time to acknowledge
that renewables won't reach a level of self-sufficiency that has never
been demanded of coal, oil, and gas.
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However, while renewable companies in advanced economies saw
improved profitability in 2023, lower prices for natural gas and
deeper market penetration by low-cost renewables are starting to
put pressure on wholesale electricity prices, creating uncertainties
for their revenue streams.
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Weighted average margin
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