Shell Makes A Significant Move In The UK-Energy Market

  • Mar 27, 2019 GMT
  • Team Kalkine
Shell Makes A Significant Move In The UK-Energy Market

Royal Dutch Shell, the world's No. 2 oil explorer by market value, went one step further in its aim to become the world's biggest power company. In an aggressive move in an already competitive UK retail market for energy, the company has started offering one of the cheapest tariffs available. Shell Energy, as part of its plan to rebrand its UK utility business, on Monday announced revised fixed rate power-supply tariff for UK customers. The company will charge customers about £970 a year, or about £81 pounds a month until July 2020. The new tariffs are cheaper than Bulb Energy, former cheapest UK power supplier, which offers a deal for £981 pounds a year, and is less expensive than Centrica-owned British Gas by 18%. 

The company plans to be the largest electricity company by the 2030s and is planning to spend approximately $2 billion a year on its new-energies division. The company's move suggests it is preparing for a fundamental shift in global energy supplies towards lower-carbon sources as it sees climate change as a bigger threat to its business than electricity's historically weak returns. According to Maarten Wetselaar, director of Shell's integrated gas and new-energies unit, the company aims to grow in a power sector and deliver 8 to 12 per cent annual returns.

However, investment of about $1 billion-$2 billion a year is only 5% of the total yearly capex and therefore has a lot of room to grow. According to Wetselaar, the group remains cautious about making significant spending changes and first, want to evaluate the results before scaling beyond its current commitments. The possibility that the company might buy other UK-based utilities, like SSE or Npower, which are both up for sale, can't be ruled out.

The UK power market has lately seen a large number of customers switch from the traditional big-six utilities for smaller and cheaper suppliers, while many companies have been driven out of business due to a surge in wholesale prices for power and gas. On March 11, Brilliant Energy became the 10th company in the past 12 months to cease trading. British Gas, which held a 19% share in the third quarter of 2018, also lost 742,000 customers in 2018. The latest move by Shell will bring yet more pressure on the established and upcoming companies.

Driven by new laws and regulations, along with environment-sensitive consumer choices, investors are pressuring companies to tweak their strategies in order to be prepared for change and protect their business from a shift to lower-carbon fuels. Paying heed to such shifts, Shell also announced that its existing 700,000 UK customers had been switched to power supplied entirely by renewable sources of energy. However, as companies are being pushed towards cleaner fuels, investors have questioned whether companies will be able to make the same kinds of revenues.

Shell is still in the initial stages of the electricity business. Though Mark Gainsborough remarked that new combinations of power products are profitable than those from a traditional utility, he declined to estimate when it'll achieve higher returns.

The group has made several small acquisitions including last year's takeover of UK power supplier First Utility, which gave it direct access to retail electricity consumers for the first time, and Sonnen, a German battery company. It has also announced it's bidding for Dutch utility Eneco, which offers apps and other technology to manage electricity consumption and supplies low-carbon power to industrial users and has also entered a bid to expand an offshore wind farm in the Netherlands.

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