Royal Dutch Shell is taking the clean energy transition seriously. So seriously, in fact, that Maarten Wetselaar, director of Shell’s integrated gas and new energies division, believes his company could become the largest power company in the world by the early 2030s amid a global shift to lower-carbon energy resources.
Why is that?
“It's mostly driven by the, we think, irreversible choice the world has made to decarbonize, to address climate change, and to go to [a] net-zero energy system,” he said in an interview last week on the sidelines of the Bloomberg New Energy Finance Summit in New York City. “And by far, the easiest form of energy consumption that can be carbon-free is electricity.”
The share of electricity in final energy consumption is currently around 22 percent, according to Shell’s internal analysis. But by 2070, electricity will exceed 50 percent of end-use energy consumption, rapidly making its way into transportation, home heating and cooking, and industrial processes.
“Most of our customers, private individuals [and] also companies, will in the coming decades only be using electricity,” said Wetselaar. “So if we're not in that business, we'll become marginalized.”
“So to an extent, it's about survival,” he said. “But it's also about, of course, playing a positive role in energy transition. We see the two as equally powerful.”
"The power of big companies"
As the world’s No. 2 oil explorer by market value, it may be difficult to see Shell’s efforts as genuine. Wetselaar acknowledged the tension between the oil company’s traditional and emerging lines of business, but argued that attitudes are changing.
Some people view Shell’s recent investments in cleantech as “greenwashing” and about trying to look good, he said. But with spending levels of up to $2 billion per year, “it would be an expensive way of trying to look good,” he added.
At the same time, a lot of people are excited about Shell’s growing new energies business. Consumers and governments in Europe especially are pressuring oil majors to move to greener energy resources.
“They realize that energy is a big task, and it needs big companies with big balance sheets to really go after it,” Wetselaar said. “You can't just subsidize your way into it, or do it through startups only. It needs also the power of big companies.”
“Increasingly, as the proof points build, and as we do more and more,” he said, “people will start to take us more seriously.”
A Shell-branded retail electric utility
One proof point: Shell renamed its U.K.-based energy supplier First Utility as Shell Energy Retail last week, under the broader Shell Energy brand, and started serving all of its British residential customers with 100 percent renewable electricity. Shell’s offering is certified by Renewable Energy Guarantees of Origin, which ensures that for every unit of electricity Shell Energy customers use, a unit of renewable electricity is put into the grid by renewable generators in the U.K.
Shell Energy Retail will also be rolling out a range of smart home technology offers throughout the year, starting with free Nest smart thermostats for customers who sign up for a three-year, fixed-price contract and discounts on home EV charging.
Shell is testing out the customer response to a well-known oil giant providing them with clean power. Shell is also exploring how to enhance the customer experience by connecting Shell Energy electricity customers to Shell’s loyalty system for its fuels network, where they’ll get a discount to fill up their gas tank at a Shell station.
“We're starting to create a Shell experience that's more holistic, so you can buy all your energy from us, and if you do that, you get advantages in both ways,” Wetselaar said. “Not many power providers can actually make that link.”
When asked if Shell plans to become a regional electric utility in the U.S. one day, Wetselaar said, “absolutely.” In deregulated states where it’s possible for power companies to compete, “we will be looking at trying to set that up.”
Last year, Shell invested an unknown sum in U.S. retail power supplier Inspire Energy, which already offers clean energy plans in deregulated states, which could be a hint of what’s to come for Shell. The oil major also purchased Texas-based MP2 last year and is expanding its power offerings to corporate and industrial customers.
Collecting proof points
Other recent clean energy investments made by Shell New Energies include the acquisition of the German home energy storage firm sonnen and the purchase of electric vehicle charging startup Greenlots. Shell made its foray into the clean mobility market in 2017 with the acquisition of Dutch EV charging provider NewMotion.
Also in 2017, Shell’s venture arm made an undisclosed investment in Singapore-based solar firm Sunseap Group. In January 2018, Shell New Energies purchased a major stake in U.S. solar development firm Silicon Ranch. At the end of last year, Shell acquired a 49 percent stake in Singapore-based Cleantech Solar, which is focused on building solar farms for corporate customers across South and Southeast Asia.
“These are companies that typically have difficulty with the security and reliability of the grid,” said Wetselaar. “So Cleantech Solar will build a solar farm to supply them with energy, and build storage or other solutions around it, to make sure the people have uninterrupted, clean energy at their disposal.”
Silicon Ranch offers a similar service in the U.S., “so we definitely believe in that business model,” he said.
While it’s still emerging, Wetselaar said he also sees an exciting opportunity in nature-based carbon credits, where Shell would create carbon sinks through nature (planting trees being the most basic option) to offset other polluting sectors. This is not a corporate responsibility project, said Wetselaar; it’s a legitimate business.
“We think the market for that will grow, and we want to be investing ahead of the market in order to generate those credits ourselves and sell them to customers,” he said.
The tricky transition from brown to green
While it may be true that involvement from big fossil-fuel companies is needed to accelerate the clean energy transition, they face a unique set of challenges in this space.
For one thing, greater levels of electrification threaten to weaken their core business, and oil majors investing in cleantech could be cannibalizing their own profits. Whether shareholders see this as a risk or as a new opportunity amid an undeniable shift within the industry is another related issue.
NRG shareholders didn’t see the value proposition when former CEO David Crane pushed the independent power producer into the clean energy business. Crane was ultimately fired over his stance.
Today, investor perception may be different.
“If we were to make a radical move tomorrow in this field, I think people would still find it quite difficult to piece it all together,” said Wetselaar. “But we're not, because we ourselves are building knowledge and competence.”
Shell is currently investing $1 billion to $2 billion per year on new energy solutions, which is a significant chunk of money. But it’s on a total investment program of more than $25 billion, which is by design. “As we build more understanding, the market share of power will grow in the portfolio,” Wetselaar said.
To those who say that Shell isn’t investing enough in clean energy today, Wetselaar pointed out that few other companies are currently investing in clean energy at the same level as Shell. Furthermore, these investments are typically more leveraged.
“If I build an oil platform of $10 billion, it will cost me $10 billion,” he said. “If I build a wind farm that costs $10 billion, it's typically 75 percent...financed by banks, and I'll typically have partners in it that fund half. So my $1 billion can actually give rise to a $10 billion wind farm. […] So there's a bigger multiplier to our investment there.”
Using metrics of success from the oil industry may not make sense in the power sector, he added. “I'm also not quite sure whether you can measure the materiality of a power business by capital employed,” Wetselaar said.
A big balance sheet in an important metric in the oil and gas industry, but in the power business — particularly the modern power business — success is defined more by revenue and by the number of assets customers purchase.
He pointed to sonnen as an example of this. Sonnen sells home-based energy optimization solutions built around a battery, along with software connecting and optimizing various aspects of the home. Because the customer purchases the product, sonnen’s balance sheet is effectively zero, but it maintains a growing business surrounding it.
That business is starting to become “quite significant, without investing that much in assets,” Wetselaar said.
Proving clean energy can produce returns
More and more of Shell’s investors are starting to see the earnings potential in new energy solutions.
Three to four years ago, investors were skeptical about the strategy and the return levels, said Wetselaar. That’s a question some investors are still asking — “Can you make a sufficiently healthy return, so that we can be satisfied in terms of dividends?”
“But, in general, the fact that we are making significant moves to get the energy transition going…and to make us a leader in some parts, is increasingly resonating well with even the large, mainstream investors,” he said.
That’s because fund managers are getting asked more frequently about how their investments are a force for good in the world. Shell’s task is to show that it can do good, while also delivering returns.
Wetselaar said that Shell’s experience in the fossil fuel industry could actually be an asset in the clean energy sector.
“I don't underestimate how difficult it will be to make this adaptation, not only physically (in terms of technology deployments), but also financially,” he said. “But we do difficult things. And we do them well.”
“Fuels marketing is a street fight,” he continued. But a look at Shell’s record shows that the company has "historically found ways to be successful in a difficult and very competitive businesses. And so, we're committed, and decided to try it here again.”
“Pockets of value”
Even if Shell is successful in building a strong clean power business, it’s still an open question as to how profitable that business will be. Oil companies are used to taking big risks and getting large rewards as a result. With clean energy technologies, the payoffs typically aren’t as impressive — but Wetselaar thinks that could change.
The “digital revolution” on the power grid has opened up new opportunities to optimize electrons and collect rent through the right software solutions, he said. There will be a lot more services offered to customers, rather than the straightforward provision of power, as the energy system evolves.
The power generation business in particular is known for having relatively low returns, Wetselaar said. But that could change too.
Subsidized solar and wind have attracted a lot of cheap capital. But as subsidies start to phase out, cheap money will begin to disappear, and as risk levels in the generation business rise, the returns are expected to be higher.
“So I do think we'll find serious pockets of value,” said Wetselaar. “But…it won't be easy; because if it were easy, then everybody would be doing it.”
Wrestling with how to scale
One of the biggest challenges Wetselaar sees in scaling up new energy solutions is that the existing power system isn’t equipped to accommodate new technologies and services.
“There are still a lot of big, old power plants and lines,” he said. “But if you imagine a zero-carbon power system, it's completely different in its architecture, in its rules and regulations, than it is today.”
Regulators, investors, technology providers and others will need to come together and enable a market design transition before the clean energy transition can become truly mainstream.
For Shell in particular, the challenge going forward is to allow for enough experimentation and entrepreneurialism, while also starting to standardize solutions in order to scale them up and roll them out worldwide, said Wetselaar.
As Shell continues on a new energies investment spree, “managing that tension is going to be critical,” he said.