Existing electricity infrastructure, which is not sufficient to meet the growing demand from the industry’s aging equipment scattered in remote locations, and strong drilling activity in the Permian Basin in West Texas and New Mexico are creating a unique opportunity for early stage VC-backed solar energy companies.
What we’re witnessing now is the first such window at the intersection of renewable and fossil fuel industries since the beginning for the shale revolution more than 10 years ago. New projects such as sand mines and gas plants create excessive peak demand on a limited capacity system, threatening the reliability of the West Texas grid, which was never set up to withstand the amount of power going through it. Increasingly challenging reliability and longer lead times to get power to their operations is further fueling demand for alternative energy resources like solar.
As technology advanced in the area of drilling over the last 10-15 years, so did the amount of energy that this equipment utilizes, and this part of the equation was never addressed until now. For example, the iconic four-horsepower pumpjack used to power vertical wells typically consumes 30 KW, a small fraction compared to that of the game-changer horizontal drilling rigs used across most shale basins that perform hydraulic fracturing, which today depend on electric submersible pumps that individually consume about 300 KW.
While drilling rigs, frac pumps, and other large items still run on high-priced diesel engines, once wells are set into long-term production, electricity is the largest operating cost. Most Permian operators focus on how to produce oil faster and efficiently, but historically have spent little time addressing power demand, which is where new technology start-ups such as FlexGen Power Systems, are finding a place to thrive.
Demand for Reliability
Today, only three utilities (Oncor Electric Delivery, AEP Texas and Texas-New Mexico Power) provide most of the electrical power in the Permian Basin, opening a window for industry disruption, primarily led by VC-backed start-ups. Oncor, the biggest electric utility in the Permian, has seen electricity demand grow 79% over the last 12 months, with as much as 400% growth in certain areas of the basin over the last two to three years, providing an opportunity for renewable energy providers to participate in this market.
This demand for reliability is an opportunity not only for solar power generators, but also for VC-backed technology efficiency companies. Large Permian-producing companies like Diamondback Energy and Noble Energy are building their own electrification projects to reduce costs, as the supply of electricity is not 100% reliable in the southern Delaware Basin.
Diamondback, for example, spent 40% of its capex budget on batteries and electricity. In turn, dozens of other energy companies are expected to allocate capital for electricity efficiencies.
Texas Is Big on Green Energy
Texas has been driving a clean-energy boom with the incorporation of wind and solar over the past several years, driven by pure supply and demand and not government-led renewable energy mandates.
Texas is not only the largest oil-producing state, it also dominates America’s wind energy production. According to DOE reports, wind power supplies about 15% of Texas electricity thanks to strong breezes in west Texas and the Panhandle region.
In addition, according to the Electric Reliability Council of Texas, the state is forecast to add more than 6 gigawatts of solar by 2021.
At the end of 2017, Texas had more than 22,000 MW of wind power, three times the capacity of Oklahoma (7,500 MW), the second highest in the nation. As reference, 1 MW can power about 200 homes during periods of peak demand.
Early Entrants
VC-firm Altira Group is one of the early investors in the region, participating in a $25 million Series A financing round by FlexGen Power Systems, a provider of energy storage units in the Permian, in August 2015.
In addition, increasingly, renewable energy and traditional oilfield services companies are collaborating to disrupt the industry. For example, FlexGen eventually signed a deal on March 2017 to work with Schlumberger to help sell the units, significantly boosting its market share.
Lower costs are another factor driving demand for renewables. Building a new solar farm in Texas currently costs approximately $32/MWh, about 15% less than a traditional high-efficiency gas plant. Solar farms can be built in six months, while gas-power plants can take years.
As for major oil companies, in 2018 ExxonMobil signed 12-year agreements with Dutch wind provider Orsted to buy 500 MW of wind and solar in the Permian Basin, which was the largest-ever renewable power contract signed by an oil company. The deal included 250 MW PPA of solar in the Permian from Orsted’s 350-MW Permian solar photovoltaic complex; and 250MW PPA from Orsted’s 300-MW Sage Draw wind farm in Texas.
Innovative companies like Dubai-based Enerwhere have already developed off-grid capabilities in remote regions in the Middle East and West Africa as an alternative to diesel-powered generators and installed infrastructure. Enerwhere says, its solar-diesel hybrid systems dramatically reduce fuel consumption and operating costs of diesel-fuelled mini-grids while providing better or same reliability.
Another major oil company incorporating solar activities into oil and gas operations is Total S.A. Total is built a solar park of more than 11 hectares in size next to its Zeeland Refinery in the port of Vlissingen in the Netherlands. At the plant, a total of 28,440 planned solar panels can deliver 12.5 MW hours of sustainable electricity, enough to supply half of the households in the adjacent municipality of Borsele, or 23% of the refinery’s energy needs. The park is expected to last 25 years.
Finally, BP has made a strong incursion into solar in the U.S. through its Lightsource subsidiary by purchasing 6 solar development assets from Orion Renewable Energy Group LLC. The 135MW DC portfolio consists of projects in the liquid PJM power pool, and specifically in the rapidly growing energy markets of Pennsylvania and Maryland.
Key Risks
Aside from government subsidies and other renewable energy incentives, the greatest risk is low crude oil and natural gas prices that would make renewables less competitive. Abundance of cheap natural gas is the biggest competitor against renewables in the U.S., particularly in areas like West Texas. For example, natural gas in the Permian Basin has become so abundant that producers are willing to pay buyers to take the gas off their wells; and this gas is used in gas-fired power stations that are cheaper than diesel.
The major thesis for investors is that this space is an opportunity for VC and PE-backed startups looking to deploy existing technologies into the oil & gas industry, where the most likely strategic investor being major oil companies.
In other words, VC and PE companies have a potential exit in sight with major oil companies acquiring early-to-mid stage growth companies as part of their expansion in the sector, following in the footsteps of BP Lightsource.
For private investors, the opportunity is primarily in timing. Providing seed capital to experienced management teams looking to capture an identified opportunity, such as FlexGen, or participating in energy-focused VC or PE funds deploying capital in the industry, along the path of Altira Group or RockPort Capital.
Eliecer Palacios is the head of North America Business Development & Principal Investments at LUKOIL Pan Americas, LLC. He is a seasoned investment professional with over 15 years of experience in origination and structuring of public and private transactions across in the natural resources sector.
