Renewable-based power generation is rising. As the market evolves, what will it take to succeed, and what kinds of players will win?
Over the past decade, renewables have developed from niche technology to global industry. With environmental concerns rising to the top of global and regional agendas, the debate has shifted from “When will renewables take off?” to “How much faster will they grow?” As the cost of renewables continues to fall sharply and their growth rates soar, a virtuous cycle is set in motion. The need for clean power in emerging economies only adds to the momentum.
Earlier concerns about intermittency and grid stability are fading as countries increase their share of electricity generated from renewable sources and as battery costs plummet. In Germany, for instance, renewables represented 38 percent of gross electricity consumption in 2018, up from 25 percent in 2013. At the same time, battery costs decreased from $650 per kilowatt-hour (kWh) in 2013 to $176 per kWh in 2018. 1 Volume-weighted price for lithium-ion battery packs. See Logan Goldie-Scot, “A behind the scenes take on lithium-ion battery prices,” BloombergNEF, March 5, 2019, about.bnef.com. According to McKinsey’s latest Global Energy Perspective Reference Case, renewable-based power generation will represent more than half of the global total by 2035. 2 In McKinsey’s Global Energy Perspective Reference Case, capacity is projected to rise from 301 gigawatts (GW) to more than 3,259 GW by 2035 for solar photovoltaic, from 469 GW to 1,558 GW for onshore wind, and from 16 GW to 304 GW for offshore wind.
Until recently, governments’ support programs shielded renewable companies from market risk, while technology risk and high barriers to entry shielded them from significant competition. But all that has changed. Today’s industry is coming under enormous cost pressure from extremely competitive reverse auctions. At the same time, the technology risk is falling as suppliers mature, allowing new entrants to join the fray. Nontraditional renewable players, such as institutional investors and oil and gas majors, are investing significant sums to play their parts in the global race for renewables.
Companies will soon have to contend with another layer of complexity as they take on responsibility for system integration and must meet new requirements, such as flexibly ramping generation up and down and adding storage to their sites. They will also be exposed to merchant risk as the share of guaranteed revenues from feed-in tariffs and public power-purchase agreements (PPAs) declines and commercial terms become more stringent. What will it take to succeed in this rapidly evolving market, and what types of players will win?
To cope with the challenges of the new environment, companies will need to pay attention to three dimensions:
Given the challenges of the new environment, we can expect to see fundamental shifts in the renewable-player landscape. We have identified three archetypes whose well-defined global and regional strategies position them for success:
We have seen similar developments in other global sectors that have reached a more mature stage in their industries’ life cycles. In oil and gas, for example, a few large supermajors, including Exxon Mobil and Shell International, drive global market development; strong national oil companies, such as Petrobras and Saudi Aramco, thrive; and engineering and technology specialists, such as Halliburton and Schlumberger, complete the picture.
The fate of most renewable players will depend on how well they cope with the trends affecting the industry. Winners will focus on the following:
Given the factors outlined, few players will be able to rely on a strategy of “business as usual.” Companies need to decide which archetype to embrace, if they haven’t already done so, and then execute flawlessly along all critical dimensions.
Renewables supermajors are thriving, growing, and operating profitably but may be struggling to establish global operating models appropriate to their newly attained scale. Even so, their experience along the integrated value chain and their ability to benefit from scale economics and balance cyclicality across regions and technologies means they are in a strong position to address industry challenges.
On the other hand, geography specialists will survive only if they can derive competitive advantages from their deep local connections. Although well positioned to develop excellence along the value chain in their chosen regions, they will need to find ways to reach sufficient scale and manage cyclicality.
Specialized, agile players must use their distinctive skill sets to create strong positions in clearly defined niches. They should be able to benefit from cyclicality but will need to find a sustainable operating model to ensure profitability.
Players not embodying one of these archetypes are unlikely to survive. They will not be able to compete with the supermajors on scale or to match the distinctive geographical and value-chain capabilities of geography specialists and specialized, agile players.
As the renewable sector enters an era of global competition, it’s time for industry participants to reflect on their positions, define their aspirations, and ensure that they are on the right path to realize their objectives.