Scale will increasingly become an essential part of value creation in renewable energy. But getting scale right—and maximizing the advantages it brings—is a challenge. Players that aim to create value by building strong renewables businesses will need to think holistically, take a long-term approach to scale, and understand the financial impact of different scale levers in order to compete in an increasingly tough market.
Renewable energy is booming and will likely continue to do so. IRENA and IEA expect installed capacity to grow by a compound annual growth rate of 11% to 19% through 2030 to meet global demand for clean energy. (See Exhibit 1.) New players are entering to capture part of the growing profit pool. Indeed, industry spending on renewable energy already exceeds spending on new fossil fuel and nuclear power generation and will surpass investments in upstream oil and gas in the near future, according to market analysts.
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Winning in renewables is not easy. With an increasing level of competition, continuous cost improvements and the widespread use of auctions to award projects are adding to the pressure. To win tenders, players are increasingly submitting zero-subsidy bids, betting that technology advancements and future merchant market conditions will allow for healthy returns.
New entrants are facing difficult decisions about how to participate, including where to invest and what renewable technologies to back. But our research shows that wherever they choose to play in the renewable energy universe, scale is a key source of value. (See Exhibit 2.) BCG has developed a holistic methodology that quantifies the impact of various scale levers throughout the asset life cycle. We have found that, by applying the right levers, companies can cut the levelized cost of energy by as much as 20% and improve internal rates of return by up to 11 percentage points, boosting their relative competitiveness in auctions significantly. Additionally, creating an effective approach to scale can increase revenues and mitigate portfolio risks.
Up until now, renewables developers have achieved scale by expanding their portfolios and adding renewables technologies opportunistically, often in markets with low competition and generous subsidy schemes. Players generally rationalized the strategic logic for these moves after the fact, pointing to risk diversification, a better technology balance, backward integration, or market scale.
In today’s competitive landscape, however, companies must be more deliberate and structured in the way they pursue scale benefits. It is essential that they recognize that scale has several interconnected dimensions. The value and levers of scale effects differ significantly by technology, market maturity, business model, and the proximity of assets. The following emerging themes offer opportunities to create value from scale:
Building scale effectively isn’t simply a question of size. Renewables developers and operators can generate additional scale benefits from experience and synergies. We have found that these effects can be segmented into nine main levers. (See Exhibit 3.)
To tap into classical scale benefits, players certainly do use their size to obtain supplier discounts and rely on a high flow of projects to optimize workforce and resource utilization. What’s more, holding large portfolios enables companies to hedge risks more effectively and secure better terms from purchasers.
But companies can also use their strong brands to secure access to better sites. With experience, players can create more sophisticated bidding techniques and achieve greater operational savings than newer, smaller rivals. And they can create synergies from combining technologies. For example, some companies are exploring the possibility of floating solar panels on the reservoirs of hydroelectric dams. (For more information on the nine levers, see the slideshow “Mastering Scale in Renewables.”)
Many new entrants have limited capex budgets, however. And, in any case, they can’t hope to catch up with established companies, which are aggressively scaling up and becoming supersize players. (See Exhibit 4.) Instead, they will need to think carefully about how to use their investment firepower and create a long-term vision for building scale—one that applies across the organization and is driven from the top.
To build scale effectively, companies will need to make difficult decisions about their strategies and operating models. Altering both can help players to improve scale benefits, but there will also be downsides. They will often find themselves facing a tradeoff between short-term operating margins and long-term scale benefits. Players should ask themselves the following questions as they embark on their journey:
Renewable energy is a rapidly growing market with attractive opportunities for many players. But rising competition and the removal of subsidies in most regions mean that winning in renewables is not a given. New entrants will need to think holistically, act wisely, and master scale levers if they are to flourish.