French oil and gas giant Total was the first of the big oil companies to enter the power industry ambitiously and today is leading the wave of oil investments in that market. The company’s management estimates that electricity will be the energy source of the 21st century and is investing heavily in the area. Thus, in recent years, Total has bought the large French producer of electricity from renewable sources Eren, the well-known French manufacturer of batteries and accumulators Saft, the Belgian electricity and gas supplier Lampiris and the French energy company Direct Énergie. It is a billion-dollar investment, and just over 1.7 billion was paid for the takeover of Direct Énergie alone.
And one of the world’s largest oil and gas companies, the British-Dutch Shell, has made several strategic decisions to win a significant share of the electricity market. This includes reducing the share of oil in Shell’s fossil fuel production from the current 50% to 25% and increasing the share of gas to 75%. Regarding the entry into the production and sale of electricity, Shell plans to establish this production only on renewable sources.
The company has built power plants in North America alone to have more than 10 GW, of which 1/3 is for renewables. Shell also invested in WPP Gemini in the Netherlands while entering the U.S. power market through MP2 Energy, while purchasing electricity produced from solar energy to charge electric cars and batteries. The U.K. bought First Utility, a gas distributor and energy service provider, which will now continue to supply 700,000 households with renewable energy under the name Shell Energy. Besides, customers will be offered ‘clean’ energy and a discount on the fast charging of electric cars and broadband internet and other solutions for smart homes. So Shell plans to become the largest energy company in the world by the mid-1930s.
Total and Shell are not the only major oil and gas producers entering the electricity market and changing it. Until 2017, the Danish energy company Ørsted was known as DONG Energy, but it sold its oil and gas exploration and production business and invested heavily in offshore wind farms. British oil giant B.P. has bought renewable energy company LightsourceRenewable Energy, renamed it Lightsource BP, and announced a 200 MW solar power plant in Australia last October. It will be the largest single power plant the company will fund in its history, sending a clear signal of ambitious plans to expand into the electricity market.
So why are all the big oil companies choosing to delve into the electrical energy business? Due to strong technical developments in recent years, there has been a decline in electricity costs from renewable sources and batteries, and innovations in power grid management are breaking down standard power supply models. Households and businesses can now access their resources such as solar power plants on the roofs of family houses, residential and commercial buildings, and battery energy storage and use solutions to respond to changes in energy consumption.
With such technical changes, today’s consumers’ expectations are also changing, and the transition to a low-carbon and circular economy is becoming faster. At the same time, energy transition worldwide, in large and small markets, is gaining in importance, driven by tighter regulation and increasing pressure from consumers and the media.
Traditional oil and gas companies recognize the need for adjustment and see electricity supply and distribution as an attractive and reasonable investment. Thus, they no longer see decarbonization as an idea for the distant future but as a concrete opportunity for new market positioning and earnings. Experts from the International Energy Agency (IEA) estimate that by 2040, the growth rate of global oil consumption compared to 2017 will be 15%, while at the same time, the rate of electricity consumption will be 62%, which shows that this part of the energy will have by far the fastest growth in the coming decades.
Entering the electricity market allows large oil companies to reduce their overall emissions by using renewable sources. At the same time, they are still firmly holding hands-on fossil fuels, which will play an important role in the world for many years to come.
The transition to a circular economy - a closed economic circle in which nothing is thrown away, value is created, and value creation maximized as part of a continuous cycle - also forces large international oil companies to rethink business models. Value chains can help them evade possible regulatory pressure sanctions and make their business more resilient to potential shocks.
The rate of return on capital has traditionally been lower in electricity than in oil and gas, and analysts question whether traditional oil companies will make the same profit from their new ‘clean’ energy business as previous ‘dirtier’ businesses. But Shell and other new entrants to the electricity market, such as Britain’s Centrica, see their future in providing energy services, from smart meters to batteries, which could ultimately bring them a higher rate of return on capital. Thus, Shell brings together everything in its portfolio, from storing energy in batteries and charging electric vehicles to producing fuel and renewable sources, to provide what it hopes will be a better offer for customers.
So far, the big oilmen have had an uncontrolled entry into the power industry because they have enough financial resources and relevant expertise, such as building production facilities offshore and on the high seas. Besides, large oil and gas companies generally have more efficient innovation processes and higher rates of digitization of work processes than traditional power companies. These advantages allow them to quickly and profitably adapt to the demands of a changing market. In contrast, according to the PwC Global Power & Utilities Survey, in 2018, 82% of power company directors said they were not yet ready for market transformation. This creates favorable conditions for ‘newcomers’ to enter the supply and distribution of electricity through the big door.
On the other hand, traditional power companies warn that oilmen in their field could face quite big challenges because doing business in electricity supply and distribution is not quite as simple as it seems. They work with a huge number of individual customers to whom they have to regularly issue accurately calculated invoices and take care of household and network installations and respond quickly to any call regarding technical problems, often in a large geographical area, which can be very demanding.
However, oilmen seem to have recognized the problem and are solving it now by buying power companies with experience in such business. But large international oil and gas companies are not the only ones to recognize the benefits of the electricity market’s potential. Thus, in the future, they will have to compete with new players from other areas of the economy who also have extensive experience in supply and distribution, but also with other service providers who want to combine energy solutions with existing products.
It is expected that already this year, companies from various areas of the economy will enter into new partnerships and together explore the opportunities and benefits of large strategic investments. The story of the market of communal and (electric) energy services is still developing, and some possible and soon dramatic complications are not excluded. This year will be extremely important in a period of rapid transformation for each market and the entire world economy. It is obvious that business models need to change and that companies need to adapt to this to ensure continued success in the future. In any case, as companies explore potential paths to strong positions in a redefined market, their investments are proving more important than ever.
As a result, it can be expected that in as little as five years, leading energy companies will look very different from what they looked like before and will look different from other companies they now see as their competitors. Companies from all areas of the economy, including energy, must now shape the response to global transformation and take advantage of the positive opportunities in neighboring markets. Because it can be expected that simultaneously with the entry and strengthening of large oil companies’ share in the power industry, traditional models of these services will lose in importance, and some new models will appear that will be able to take advantage of rapid market transformation.