Alex Boyd is president and CEO of PSC Consulting.
After decades of dominating the global energy sector, today, the oil and gas majors are facing an existential crisis. The energy transition is unstoppable, and companies with business models embedded in fossil fuels must change or die. Oil and gas interests have long anticipated this broad trend and are now adopting clean energy strategies.
This isn’t just greenwashing; French oil giant Total aims to reach 35 GW of gross renewable energy production capacity by 2025 and 100 GW by 2030. At the end of June last year, it already had an installed renewable capacity of close to 12 GW and is adding around 6 GW annually. U.K. headquartered oil major Shell began constructing Europe’s largest renewable hydrogen plant this year and is developing a strong hand in electrified transport. It has set a target to operate over 500,000 charge points by 2025.
While these investments are still relatively small compared to their traditional hydrocarbon exploration and production budgets, they are, nonetheless, instructive. So how should electric utilities respond?
The shifting sands of big oil’s energy market moves
Growing electricity demand and the need to replace oil and gas energy sources with renewables mean there remain plenty of opportunities for clean energy development. However, it is also evident that the engagement of oil and gas majors in the market will inevitably impact the incumbent players.
One example comes from limitations within the supply chain. There is an appreciable risk that this could make life challenging for smaller utilities that may find it hard to attract vendors. Faced with a choice between single developments and portfolios with a pipeline of multiple projects, OEMs will inevitably favor larger contracts. When there are potential supply chain restrictions, smaller players are likely to miss out. The robust balance sheets and investment plans of the oil and gas companies will likely lend themselves to multiple projects quite well.
Many utilities are classed as effective monopolies and operate on a regulated return basis. While this does support steady, long-term revenues, it can also limit opportunities to be creative and increase returns. Typically, regulators — such as the state public utility commissions found in the U.S. — only allow costs that are deemed reasonable and prudent to be charged to consumers. Under these circumstances, even larger utility companies may lose out if their regulated return business model stifles innovation by, for example, limiting investment in developing new market offerings.
Unregulated entities, which include oil and gas companies, have a much greater incentive to create real value and innovation, as well as find ways to be efficient, and they do not need to negotiate with regulators if they wish to make investments. After a lifetime of managing the journey from exploration to well-head, oil and gas companies are experts in flexibly responding to market conditions and opportunities, and their entry into the generation market plays to these strengths.
The transition is presenting completely new opportunities too. Oil and gas companies are investing in EV charging and will be sure to take advantage of their existing gas station assets. Growth in gas station EV charging assets could also be associated with a grab for the electricity supply chain by new players like oil and gas companies, vehicle manufacturers, and gas station owners. Peer-to-peer energy trading via aggregators and other novel business models are set to emerge, too. Utilities will be subject to competition from many directions.
Utilities can and must respond to the challenge
In response to the changing market landscape, utilities need to become nimble and respond with market initiatives of their own. For instance, utilities could focus on areas where they have a natural advantage, such as in transmission and distribution. That can allow them to capitalize on geographic diversity for renewables and interconnections between different markets.
It is true that the greater diversity of players will make it harder to argue that some energy market participants, like the municipally-owned utilities, are natural monopolies that need regulated returns. At the same time, it’s unlikely that oil and gas companies will want to share the same regulated energy services space.
It follows that we may see a hardening of the swim lanes that each plays in. Where they can co-exist in a non-regulated environment, greater competition and a more innovative environment will emerge. It might well be the case that sector learnings go both ways, and utilities take a page from the oil and gas playbook on new services and product offerings to evolve their market offering, too.
Who will win the race?
What is certain is that no single player or group will directly control the entire value chain. Under these circumstances, it would be reasonable to expect many different types of partnerships to evolve, often between companies that have yet to work together historically. We might expect to see new offerings from electricity retailers — like bundling car charging deals with automotive manufacturers, for example — to ensure market relevance.
Utilities and oil and gas firms could easily become tightly integrated partners, too. Not only do the utility branding and customer recognition add confidence and ready access to energy consumers, but the back-office structures would make a valuable addition. A cooperative and collaborative relationship between the renewables sector and fossil fuels must inevitably emerge at the heart of net zero transition plans. The renewable transition is still in its early days, and so utility businesses need to become more agile, think out-of-the-box, and be open to the opportunities that the energy transition brings.