BP’s New Solar Venture
BP’s return to the solar sector, as a developer of solar power stations, rather than a manufacturer of panels, is further evidence that the renewable sector, even at its most potentially interesting, is less a technology business and more the securing of entitlements to land development rights, grid connection, market infeed and supported or guaranteed income. Bluntly, it is rent-seeking.
It is now almost six years to the day since BP Solar closed its panel manufacturing operations, in December 2011, and though it has since gradually built up a large Alternative Energy business, including 2.3 GW of wind power in the United States, it has scrupulously avoided flying anywhere near the sun, let alone close enough to be dangerous. But that appears to have changed this week with BP announcing that it would be buying a 43 per cent share in the solar developer and operator Lightsource, which will henceforth to be known as Lightsource BP.
BP will pay $50 million immediately on completion of the deal, and a further $150 million over the next three years. The joint announcements by the two companies tells us that “The great majority of this investment will fund Lightsource’s worldwide growth pipeline”, a pipeline that amounts to some 6 GW of capacity (to put that into scale, the UK currently has about 12 GW installed, and Japan well over 40 GW).
This prospective growth is about three times the 2GW capacity currently managed by Lightsource. Of this 2 GW it developed about 1.3 GW, about 290 of them in the UK, investing, the company tells us, some £2.5 billion since 2011.
$200 million for 43 per cent of such an apparently large business would appear to be good value, assuming that the assets are of fair quality, and this does seem to be a productive portfolio by solar standards. The press release describes the 2 GW under management as supplying the equivalent half a million homes. Assuming about 4 MWh of electricity per household, this suggests a portfolio production of about 2 TWh per year, and a load factor of about 11%. That would be towards the higher end of northern european productivity (the best of UK load factors are about this level), but lowish in comparison to, say, Japan, where load factors of around 20% are currently achieved. It will be interesting to see how the 6 GW to be built with BP’s investment shapes up, which will depend on the choice, the design, the quality of equipment, and the management of the schemes.
One thing that is quite certain is that BP will not be making the panels themselves. By acquiring Lightsource, BP is, in the words, of Bob Dudley, the group CEO, “coming back to solar, but in a new and very different way”. This is emphatically not manufacturing. Lightsource is, as the company itself says, a “solar development company, focused on the acquisition, development and long term management of large-scale solar projects.”
The importance of this change should not be underplayed, since it reveals much about the fundamental character of the renewables sector in general. In a quotation supplied to the The Times, Dev Sanyal, BP’s chief executive for Alternative Energy, expands on Bob Dudley’s remarks in a very revealing way: “We don’t regret divesting of solar manufacturing. […] We were in the wrong part of the value chain.”
If Big Oil, in the corporate person of BP, turns its nose up at the manufacture of solar generation equipment as “the wrong part of the value chain”, this suggests that the sector, like much else in renewable energy, is not in its fundamentals a technology business. Quite otherwise, it is a matter of obtaining contractual entitlements, land use permits, grid connections, feed-in tariffs, production tax credits, and other state backed contracts giving support. Less charitably, we might simply call these things state-backed rents, and the business of securing them rent-seeking.
Doubtless that is the right part of the value chain for BP’s shareholders, but from the public’s point of view this truth must be regarded as particularly disappointing in connection with solar, which is the only large scale option for the generation of renewable electricity that is sufficiently new to be a strong candidate for technological invention and innovation. While the photovoltaic effect was first observed in the mid-nineteenth century, practical solar cells did not appear until a hundred years later, in the 1950s. Wind, hydro, and biomass in its various forms, all have much deeper histories and are fully established. It would be churlish for even the most hardened critic of renewables to deny that by comparison solar has real technological interest. However, as the BP/Lightsource deals shows, that potential is simply not what stimulates major investment in the sector; it’s the wrong part of the value chain. This can’t be what the governments designing the world’s incentive schemes expected, but it is unfortunately what they have created. Deployment has been rewarded in advance of technological adequacy, and sensible companies such as BP do what the policies reward.