{"id":334,"date":"2020-10-05T17:10:27","date_gmt":"2020-10-05T17:10:27","guid":{"rendered":"https:\/\/ulysses-pm.com\/?p=334"},"modified":"2025-03-06T15:24:42","modified_gmt":"2025-03-06T15:24:42","slug":"renewables-and-the-cost-of-capital","status":"publish","type":"post","link":"https:\/\/ulysses-pm.com\/index.php\/2020\/10\/05\/renewables-and-the-cost-of-capital\/","title":{"rendered":"Renewables and the Cost of Capital"},"content":{"rendered":"

[vc_row woodmart_css_id=”665fa7a84b0b7″ responsive_spacing=”eyJwYXJhbV90eXBlIjoid29vZG1hcnRfcmVzcG9uc2l2ZV9zcGFjaW5nIiwic2VsZWN0b3JfaWQiOiI2NjVmYTdhODRiMGI3Iiwic2hvcnRjb2RlIjoidmNfcm93IiwiZGF0YSI6eyJ0YWJsZXQiOnt9LCJtb2JpbGUiOnt9fX0=” mobile_bg_img_hidden=”no” tablet_bg_img_hidden=”no” woodmart_parallax=”0″ woodmart_gradient_switch=”no” woodmart_box_shadow=”no” wd_z_index=”no” woodmart_disable_overflow=”0″ row_reverse_mobile=”0″ row_reverse_tablet=”0″][vc_column]\t\t\t \t\t\t\t\t\t

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\n\t\t\t\t\tConventional Wisdom has (or has had) it that investments in renewables return \u201cmid single digits\u201d, while those in upstream oil and gas, \u201cmid teens\u201d. You do not have to agree exact numbers to accept that, to the extent this characterization has any validity, it represents a meaningful difference in expectations.<\/p>\n

So, when a company says it is going to reduce its \u201cmid teens\u201d returning share of investments by some 40% (1 million boped) over the next 10 years, and maintain its growth with investments yielding \u201cmid single digits\u201d, what does this imply ?<\/p>\n

OK, bp doesn\u2019t quite say that; it acknowledges a difference in the headlines but says that it can address the difference through broadening its presence in the energy value chain, and by delivering energy as a service. As of today, at least, the market is intrigued, but uncertain of the company\u2019s ability to do this (or even if the business model is capable of achieving the stated result).\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t<\/div>\n\t\t[vc_single_image image=”336″ img_size=”full” alignment=”center” css=”.vc_custom_1717607323035{margin-bottom: 0px !important;}” parallax_scroll=”no” woodmart_inline=”no”]\t\t\t

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\n\t\t\t\t\tSource: https:\/\/www.bp.com\/content\/dam\/bp\/business-sites\/en\/global\/corporate\/pdfs\/investors\/bpweek\/bpweek-low-carbon-electricity-energy.pdf<\/em><\/p>\n

However, the debate around this does not seem to address some more basic questions about investment and returns. CAPM would have that the return on an expected cash flow stream (or business \/ market segment) should reflect the systematic risks of that cash flow or business \/ market segment. Which then immediately raises a question with respect to the investment in renewables, as to whether the \u201cmid single digits\u201d is below what returns should be to be consistent with this theory, and whether that level of return does in fact reflect the risks involved. If the former, what is the business case for investment (\u201ccapitalizing\u201d learning curve to exploit first-mover advantage ?) or, alternatively, is market sentiment ignoring a lower risk profile and, as a result, a prospective change in the company\u2019s risk profile ? Certainly a company with lower variability in its earnings expectations (all else being equal) should be valued based on a lower discount rate, and be callable of returning higher levels of cash flow to its capital providers without compromising its future business.\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t<\/div>\n\t\t[vc_single_image image=”337″ img_size=”full” alignment=”center” css=”.vc_custom_1717607402466{margin-bottom: 0px !important;}” parallax_scroll=”no” woodmart_inline=”no”]\t\t\t

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\n\t\t\t\t\tThere is a further aspect to all this that also does not seem to be discussed; namely, is \u201cmid teens\u201d either the correct or the appropriate future expectation for upstream oil and gas investments, and “mid single digits” the appropriate equivalent for renewables ? To assume so presumes a constant external environment. If, however, the expectation is for the one to have improving conditions with regard to regulation and access to capital, and the other to have a continuing tightening of the same conditions, then the baselines for each need examining.<\/p>\n

I suspect both need further examination. However, like the sage advice to \u201cbuy low and sell high\u201d, it may be instructive, but it is all about the timing \u2026.\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t<\/div>\n\t\t[\/vc_column][\/vc_row][vc_row][vc_column width=”1\/5″][\/vc_column][vc_column width=”1\/5″][\/vc_column][vc_column width=”1\/5″][vc_single_image image=”773″ img_size=”full” alignment=”center” onclick=”custom_link” css=”” parallax_scroll=”no” woodmart_inline=”no” link=”https:\/\/ulysses-pm.com\/index.php\/blog\/” el_class=”blogimg001″][\/vc_column][vc_column width=”1\/5″][\/vc_column][vc_column width=”1\/5″][\/vc_column][\/vc_row]<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"

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