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Oil giant Total is betting on solar and energy storage in a big way. Image source: SunPower.
Tesla Motors (NASDAQ: TSLA) isn't the only company looking at energy holistically with its proposed acquisition of SolarCity (NASDAQ: SCTY). BYD, the Chinese battery and EV company, has built most of the capabilities Musk wants to have under one roof, and energy giant Total (NYSE: TOT) is doing the same. However, Total is looking at the future of energy a little differently from Elon Musk.
Over the last five years, Total has acquired stakes in solar giant SunPower (NASDAQ: SPWR)and battery integrators Stem and Sunverge, and has bought a battery company called Saft. Eventually, these companies could create a vertically integrated renewable energy giant of the future, replacing big oil.
Testing the waters
Total's strategy in renewable energy hasn't been to build or buy companies outright, something BP (NYSE: BP) failed at in solar energy.Chevron (NYSE: CVX)also decided renewables weren't worth the time or risk when it shut down or sold most of its domestic renewable energy group in 2014 and is reportedly prepping to sell $3 billion in geothermal assets in Asia this year. Instead, Total has taken stakes in companies it saw as leaders in the space. The theory is that these companies are more able to innovate within the rapidly changing market as independent companies, and Total could presumably buy them outright when the markets they serve are more established.
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The biggest bet was a 66% stake in SunPower in 2011, betting that efficiency would be a key competitive advantage in the future. Stem and Sunverge serve primarily commercial and residential customers, respectively, with energy storage solutions. And while they're building their own businesses, they also have partnerships with SunPower. But they're both energy storage technology companies and developers, not battery manufacturers.
Saft is a $1.1 billion battery company Total acquired earlier this year, completing the vertical loop between solar energy and batteries; it may be Total's biggest wholesale bet on a renewable future. But it comes after more than half a decade of experience in renewable energy, so it isn't done as a bet on an unknown market. I don't think anyone questions that energy storage will be big business going forward -- the questions are more about when, who, and how that will happen. Total is betting it can play a big role.
Will customers want vertical integration from solar cells all the way to electric vehicles? Tesla Motors thinks so. Image source: Tesla Motors.
Why big oil has an advantage
What Total brings to the table that most renewable energy companies lack is capital. SunPower has said in the past that it would likely have gone through bankruptcy without Total's help. Now, Total is buying projects SunPower develops around the world and opening new markets where oil connections can drive renewable purchases.
The battery market will need billions of dollars in capital spendingto build out both manufacturing capacity and battery installations. With Total cutting back on oil and gas developments from $23 billion-$24 billion 2015 to a sustainable level of $17 billion-$19 billion in 2017 and beyond it's still increasing investments in renewables. On top of the SunPower and Saft investments, management plans to spend $500 million a year on renewables, a figure that they've said will grow. Total could transition that money to building out battery infrastructure, build technology, and own renewable energy power plants.. That's capital competitors may not have to build out the same infrastructure.
Providing the fuel, not the car
What's different from Tesla's strategy is that Total is looking at itself as an energy provider, just like it is in oil. It's not interested in creating the cars that consume energy, which are even further down the value chain.
The auto industry and oil industry developed in tandem over the past decade, but they weren't integrated with each other, so if the same dynamic happens in renewables and EVs, Total might have a good strategy. History showed that the skills that made a good auto manufacturer didn't necessarily translate to drilling oil wells, and vice versa.
Musk is betting that skills required to develop solar cells will translate to electric vehicles and energy storage, but that may not be the case. Total's bets are on the energy side, and that's likely where it will stay. We'll see over the next few years which vertical integration strategy is the best one.
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Travis Hoium owns shares of SunPower and Total. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. The Motley Fool recommends Chevron and Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.