European oil companies including BP PLC and Royal Dutch Shell PLC are building new wind and solar projects and striking deals to supply electricity to big corporate buyers like Amazon.com Inc. and Microsoft Corp., treading into the domain of traditional power companies.
The moves come as more businesses look to limit their carbon emissions, with companies buying a record amount of renewable power last year and on track to hit a fresh high this year, according to data from BloombergNEF.
Oil companies say securing long-term deals to supply electricity will provide a new source of income and underpin their expansion into wind and solar power as they seek to reduce their dependence on fossil fuels and prepare for a lower-carbon economy.
Power supply has historically been regional, with utilities generating and providing electricity to homes and businesses in an area, state or country. Some of these traditional power suppliers have been tapping into demand from businesses for green power for several years, and have decades of operational know-how.
Still, oil executives say their global reach and vast trading operations give them an edge as companies take a more international approach to sourcing power.
“We’re actively exposed to different forms of energy in a way that pure-play renewable companies don’t have,” said Dev Sanyal, BP’s head of gas and low-carbon energy. “We’re basically getting our wind from the Nordics, and we’re taking solar from Spain… We’re providing a blended offer.”
Corporate power-purchase agreements are an area of focus for BP’s solar-power joint venture Lightsource BP, which this year signed deals to supply Amazon, Verizon Communications Inc. and a unit of insurer Allianz SE.
Mr. Sanyal said there was growing demand from customers seeking to reduce their emissions and that these deals provided BP with a source of stable, low-risk cash flows and returns.
However, BP says returns in this business are 8%-10%, lower than what it gets from its traditional oil and gas business. Green power supply is still a fledgling business alongside BP’s giant hydrocarbon operations.
Exxon Mobil Corp. and Chevron Corp. haven’t entered this business, another example of the divergence in strategies between the U.S. and European majors. Those U.S. companies have sourced renewable energy for their own use.
In Europe, Shell and Total SE are also seeking deals to supply companies with renewable energy as they start to pivot away from oil in anticipation of falling demand and look to boost their credentials in lower-carbon energy.
On Thursday, France’s Total said it agreed to supply solar power to U.S. drugmaker Merck & Co. Earlier this year Shell agreed to supply Amazon, the world’s largest corporate buyer of renewable energy, with electricity from a wind farm in the Netherlands. Amazon plans to power its entire operations with renewable energy by 2025.
“There’s few companies that can offer the nature of solutions that we’re offering to a company like Amazon,” Shell Chief Executive Ben van Beurden told analysts earlier this year, noting the company could be a one-stop shop for electricity, aviation fuel and natural gas for trucks.
Corporate procurement is a small part of the overall renewable power market, but it’s growing fast. Companies bought a record 25 gigawatts of renewable energy globally last year, up 25% from the previous year, according to BNEF. That amount of renewable energy is equivalent to around four times California’s wind power-generation capacity at the end of last year, according to the U.S. Energy Information Administration.
New deals continue to be struck at a rapid pace, rising 75% in the first four months of the year versus the same period a year ago, the BNEF data showed.
“Energy providers have really recognized that large energy consumers that have significant buyer power have made their preference for zero carbon energy very clear, and they’re looking for ways to service this market,” said Miranda Ballentine, chief executive of the Renewable Energy Buyers Alliance, a group that represents corporate purchasers.
When companies sign power-purchase agreements, they typically agree to buy energy for 10 to 20 years, often directly from a renewables developer, or from a power trader whose portfolio includes electricity from low-carbon projects.
The deals give buyers certainty over future power costs, although there is a risk that electricity could become cheaper than expected.
“This is a very cost-competitive way for corporates to address their sustainability related targets,” said Frank Nicklaus, partner at Nomura Greentech Capital Advisors LLC, adding that the cost of renewable power has fallen and that using it could boost businesses’ reputations.
But oil majors face stiff competition. Large utilities like Spain’s Iberdrola SA and Italy’s Enel SpA are also trying to sign up big corporate customers.
Enel, the world’s largest renewables company by capacity outside of China, says more than half its expected renewable production between 2021 and 2023 is covered through long-term contracts with customers.
In March, Enel started building its first large-scale combined wind farm and battery storage site in Texas, to supply around 50% of the electricity needed for Kellogg Co. ’s North American manufacturing facilities.
Iberdrola—for years a domestic, fossil-fuel-focused group before expanding into renewables—is also seeking to capitalize on growing appetite for low-carbon energy and has signed supply deals with Apple Inc. and Heineken NV.
“Iberdrola started the race in renewables 20 years ago, now there are many other actors in the race and many potential suppliers,” said Eduardo Insunza Gaminde, its global director of corporate customers. While competition is rising, he said Iberdrola and other utilities would benefit from their experience in sourcing available land and grid connections.
“The expertise is different,” he said of oil companies. “Of course their global expertise and their deep pockets is something they have.”