BP Moves Beyond Solar
On May 19, 1997, John Browne, then the CEO of BP, gave his famous ‘Climate Change: the New Agenda’ speech at Stanford, outlining BP’s new approach to global warming. One part of that new agenda was a foray into new energy technologies, particularly solar. Now it looks like solar is about to join the rest of Browne’s climate change plan and get wiped off BP’s agenda.
Earlier this month, BP confirmed it will be closing down the operations of BP Solar, its solar energy unit, which has been operating since 1973. The reason BP offered is that solar energy isn’t profitable. Nevertheless, the company promised to continue to invest in clean energy, only it will now focus solely on wind energy and biofuels.
The news of BP’s move was leaked from an email written by Mike Petrucci, President and CEO of BP Solar to his staff. “The continuing global economic challenges have significantly impacted the solar industry, making it difficult to sustain long-term returns for the company,” he wrote. Even though it looks a bit surprising and counters a trend, led by Warren Buffett, Google and Total SA, of making large investments in solar, this exit was not unexpected. After all, BP has provided many indications in the last couple of years that solar is no longer its cup of tea.
In early 2009, BP Solar stopped most of its solar manufacturing, cutting about 140 jobs at an assembly plant in Frederick, MD, and another 480 at manufacturing and assembly plants in Madrid. These cuts, the company explained, were part of an effort to reduce costs and refocus its global manufacturing operations. The solar unit was losing money and BP CEO Tony Hayward didn’t have much faith in their future profitability, publicly questioning whether solar would ever become competitive with fossil fuels.
Last July, BP Solar announced plans to close its facility in Frederick, MD and lay off 80 employees. “We are going to exit our module-only sales through our distribution network. Looking at the market today… we think we can have a much stronger business going forward focusing on developing projects,” BP spokesman Pete Resler told Reuters at that time.
The reasons were obvious – growing competition from China, oversupply in the market, plummeting solar panel prices and reduction in government incentives throughout Europe. BP suddenly found itself involved in a commoditized business, where it had no real competitive advantage over other competitors, with no way to make money manufacturing solar panels.
Yet, exiting manufacturing and sales of solar panels wasn’t the end of the cuts. “Manufacturing is looking pretty dire for everyone, and BP was outpaced by faster moving pure-plays years ago,” Bloomberg New Energy Finance said in a note to clients. While its move to diversify from manufacturing into building plants was more successful, “BP had no obvious competitive advantage apart from access to finance.”
BP went a step beyond manufacturing cuts, getting rid of its solar business altogether. That means selling its stakes in the more than 158 megawatts of projects it’ has developed with local partners in countries including Italy, Spain, Germany, Britain and the US. The only projects that the company will keep are joint ventures with Tata Power in India and an Australian consortium that won $306.5 million in Australian government funding earlier this year to build the Moree solar farm.
Is BP correct that that the solar market is commoditized and “you cannot be a specialist anymore?” Is solar no longer profitable? On one hand, we all know what happened to companies that tried to specialize in this market like Solyndra. On the other hand, it was only a decade ago that BP had a vision of becoming a global leader in this market. Was that all for naught?
Some observers wonder if BP has made the right decision, given the number of investments we have seen lately in solar. BP’s move is an anomaly since most companies are increasing their investment in renewables. Paul Leming, an analyst with Ticonderoga Securities LLC analyst in New York, told Bloomberg News. “Two of the biggest oil companies have taken the opposite approaches. The move toward alternative energy continues to be a well-recognized megatrend.”
The fact that BP is moving in the opposite direction does not necessarily mean all the rest are right and BP is wrong. It only means that Buffett, Google and others identified specific opportunities and want to take advantage of them, while BP, which in general is a more conservative company, wants to reduce its exposure to a market it believes to be risky. It’s just a matter of perspective and actually it might be that everyone is right here.
In any case, there’s one thing we can learn from this story – even if BP promises to remain on track to meet its target of investing $8bn in alternative energy by 2015 (it already invested $7 billion), BP is an oil company and probably will stay this way for a long time. Its dreams of moving beyond petroleum are nothing but vain hopes. At best it’s moving beyond solar.