Renewable energy, while a small portion of energy supplies today, is emerging as one of the energy sources with potential to meet substantial needs over the next fifty years. While predictions of the role of renewable energy differ broadly, many suggest that renewable energy could be quite a significant player in the coming years. Royal Dutch/Shell Group’s latest scenarios indicate that renewable energy could supply 30% of global energy needs by 2050. The World Energy Council reports that the market for renewable energy is likely to be in the range of $234 to $625 billion by 2010 and $1,900 billion by 2020.
Public policy is certainly moving renewable energy along quickly. Several U.S. states including have renewables requirements, including Texas (3%) and California (20%). In 2002 the United Kingdom adopted a binding 20% goal for renewables by 2020, and six other countries have proposed or implemented mandates. In addition, the European Union has a 22% by 2010 goal, and six European and Middle Eastern countries have goals ranging from 3% to 100%. The European binding and non-binding goals are particularly troubling as ExxonMobil derives roughly one-quarter of its downstream revenue from European markets.
As a result of public policy as well as technological advances, renewable energy is growing at a rate in excess of 20% a year and has been doing so for several years. All of ExxonMobil’s major competitors have investments in renewable energy. Given that renewable energy could play a very substantial role in energy supplies, and the risks of ExxonMobil not being prepared for that, we would like to see more discussion of the company’s decision to continue avoiding renewable energy.
While one might assume that XOM would be able to buy a renewable energy company when it needs it, such an assumption merits examination. It may be expensive or impossible for XOM to buy market share in the renewables industry if the company waits too long. In the solar sector, ExxonMobil’s competitors (BP and Shell) and other large companies like Sharp and Kyocera dominate. BP and Shell are unlikely to sell their businesses to XOM, and Sharp and Kyocera would likely require a huge premium to do so.
The "solar only" companies that are left (e.g. Evergreen Solar), could be bought at a reasonable price but have small market share. In the wind sector, large, well-established companies also dominate. For instance, General Electric bought the wind energy assets of Enron soon after they became available. So XOM faces the unappealing prospect of buying a smaller company with low market share, or offering a huge premium to a company like Sharp or GE to give up its share in the industry.
Also, if the company waits too long, it may not have the market valuation to afford a major acquisition. The airline industry provides a good example- the major airlines ignored low-cost carriers like Southwest, assuming that if they ever became too successful, the big carriers could simply buy them out. It would have sounded absurd to suggest that the upstart would ever outweigh the established airlines. But now the market cap of Southwest exceeds the combined market caps of Delta, USAir, United, American, American West and the rest of the full-fare airlines.
The idea that ExxonMobil might buy into renewables when it can no longer avoid doing so is also complicated by the company’s emphasis on hiring senior management from within. Currently, ExxonMobil does not appear to be developing any institutional or personnel experience with renewable energy. If ExxonMobil were to buy a renewable energy asset, who would run it? It seems that the company’s choice would be between an outsider who is experienced in renewables but new to the company or an ExxonMobil executive who has long experience with the company but none with renewable energy. In either case, ExxonMobil would pay a price for its delay.