BP positive on green power as oil slumps


February 12, 2016

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Oil giant BP is at the sharp end of the oil price rout. The company this month reported its largest ever annual loss — $6.5bn — and said it would cut 7,000 jobs by the end of 2017. If there is anyone who has to think hard about the future of world energy, it is BP.

We feel sorry for people at risk of losing their jobs, but BP’s management is as much to blame as the oilmen in Saudi Arabia. BP was once a leader in renewables, but has bet the house on fossil fuels over the last 25 years. We’ll come back to that later.

That is why its 2016 ‘Energy Outlook’ makes more interesting reading than usual. This is BP’s attempt to forecast how the energy landscape might evolve over the next 20 years, including the role of renewable energy. The report identifies three key trends.

First, it says global energy demand will continue to grow. Not much surprise there given that the world population is 7.4 billion now and set to reach around 8.8 billion in 2035; and we are seeing growing demand across Africa, the Americas and Asia. Manufacturers may become more energy efficient, but demand will keep growing.

Second, it says that carbon emissions will grow throughout this period, but at a slower rate than in the last 20 years. BP says this shows that more action is needed to curb emissions on top of pledges made at COP21 talks in Paris, including carbon pricing.

And third, it says that the fuel mix will keep shifting over the next 20 years. BP predicts fossil fuels will remain the dominant sources — well, it would do! — and account for 80% of the world’s total energy supply in 2035, including 60% of the new demand. In contrast, it says all renewables would only supply 9% of all energy in 2035.

But that headline figure hides some relatively bullish predictions for renewables. For one thing, that 9% is three times the current level; and also means that total capacity is set to grow fourfold by 2035.

It says the main driver for this growth will be big cost reductions in renewables, with the cost of onshore wind set to fall 25% over the next 20 years and solar 40%. And it says that renewables will meet one-third of new energy demand over the period.

As BP chief executive Bob Dudley writes: “Renewables are set to grow rapidly, as their costs continue to fall and pledges made in Paris support their widespread adoption.”

The report adds that the big challenge for renewables will be integrating them into the grid. If sources like wind and solar are to provide one-third of power generation in the European Union by 2035 then integrating them into the grid will “become an increasing constraint”. It shows why it is important for wind investors to keep pushing to develop new storage.

It also shows some serious holes in BP’s strategy.

Last year, the Guardian reported that BP slashed its investments in renewables over the last 25 years. In the 1980s and 1990s, the firm invested billions in clean energy projects, including solar power, wave power and energy efficiency; but, in 2015, only a fraction of its investment globally was outside fossil fuels.

That is fine while oil prices remain high but not when they drop sharply, as they have done in the last two years. One of the biggest risks for any business is assuming that things will remain the same. The oil and gas sectors have been reminded that this is not true.

But we have no doubt BP will adapt. It will have to. And who knows, perhaps its positive view on renewables will force it back into a part of the energy sector in which it was once a leader.

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