The Opportuneo Team
A major boost for electricity sector
Updated: Apr 29, 2019
The recent report (Oil giants’ electric Shock, The Sunday Times, 24 March 2019) that Shell is entering the electricity sector with the aim of becoming the ‘biggest power company in the world’ in early 2030 is a remarkable development. It is remarkable not least because the company embarked on this path once before, albeit tentatively.
Shell’s first long-term energy scenarios, published in the mid-1990, highlighted the fact that electricity had become the world’s major energy carrier; they also highlighted the major contribution that low carbon technologies would be making to the energy mix in the the 21stcentury. Even more remarkable is the fact that following the publication of these scenarios Shell decided to enter the low carbon sector as stated in The Shell Report 1998:
“The Group's new business Shell International Renewables, aims to be a major force in commercial renewable sources of energy, which we see as gaining a 5 to 10% share of the world energy markets by 2020.
In 1997 we committed US$ 500 million over five years on investments in renewable energy technologies, especially those that exploit solar power and biomass. We aim to achieve a 10% share of the photovoltaics market by 2005”.
Unfortunately this was not a concerted effort and Shell gradually exited the sector, focusing instead on its traditional fossil business. And Shell was not the only company to do this; BP, another of the ‘oil majors’, also invested in the new low-carbon technologies at around the same time only to cease activity a few years later.
So, what has changed over the last twenty years that now encourages Shell, BP and Total to enter a market where there are already major international players? The answer is that the context has changed dramatically with a ‘convergence’ of major developments in the political, economic, environment and technology arenas encouraging low carbon activities; this makes entry into the electricity market not only desirable but necessary if these companies are to survive in the coming decades.
This ‘convergence’ has led to the rapid deployment of wind, solar and, in some countries, biomass for electricity generation; this in turn has led to the emergence of a mature supply chain capability, a key component of any successful technology. Crucially, costs have fallen dramatically over the last few years making solar PV and wind technologies almost on a par with conventional fossil generation.
Challenges remain, not least the development of efficient battery systems at low cost to store the energy from what are intermittent sources in solar and wind. Also important is the move away from large centralised electricity systems towards smaller scale decentralised generation with active local communities’ involvement. When successful, such developments are ‘game’ changers for the industry and will accelerate the move away from fossil generation.
And there is more to encourage Shell and other oil companies into the electricity sector. Mobility is part of the Shell business DNA and there are signs that a potential transition is underway in this sector also. The electric car is at last entering the mainstream mass market with most car manufacturers developing hybrids and electric vehicles. It has had a long-standing interest in hydrogen which may emerge as a major fuel in the future alongside electricity.
So, will Shell be successful in making the transition it seeks? There are reasons why it could: it is strong financially and commercially; it is strong in gas, seen as a transition fuel in the electricity sector; it has well-established technical capability and it can be innovative in its products and services; it is present in many countries around the world; it is used to dealing with consumers, albeit in a different guise.
There are also reasons why it might fail: it remains a major gas company, and this may dilute its focus on growing its electricity interests; it is entering highly competitive markets with incumbents who have experience and strong relationships already established; shareholders may not be ready for the relatively low returns on investments in this sector; the company may need to develop a different culture if, as expected, it grows by acquisition; and, historically, it has not been successful in moving away from its core fossil-based business.
It is in consumer’s interests to see Shell succeed in this sector. It will be interesting to observe how one of the world’s great fossil companies goes about changing its personality in the next decade or two.
Chris Anastasi, March 2019