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Powerful new players enter the utilities sector

Oil and gas companies are entering the utilities market—aiming to take advantage of rapid market transformation

In the last few years, an increasing number of International Oil Companies (IOCs) have entered the utilities sector—especially those with headquarters in Europe. Shell, for example, has taken a series of strategic decisions to grab a share of this market. The company has now installed more than 10GW of generating capacity in North America, of which one-third is from renewable resources. 

It has also invested in offshore wind near the Netherlands, acquired First Utility in the UK to supply gas and energy services to domestic consumers, and entered the US supply market through MP2 Energy, while also buying into US and Asian solar power generation through EV vehicle charging and battery technology. 

Shell isn’t the only oil and gas major moving into—and transforming—the utilities market. Denmark’s Orsted, until 2017 Dong Energy, divested its upstream oil and gas business and invested heavily in offshore wind. BP has invested in Lightsource Renewable Energy, now known as Lightsource BP, which in October 2019 announced funding for a 200MW solar installation in Australia. This will be the largest single plant to be financed by the company in its history and sends a clear signal about its ambitious plans to target growth opportunities in utilities. 

Customer expectations 

Why are companies such as Shell and BP, which have historically focused on the production, refining, and distribution of oil and gas products, taking such bold steps? Because the world is going through a rapid transformation that will continue in 2020 and beyond. 

Consumer expectations are changing and the transition to a low-carbon world with a circular economic model is gathering pace. Traditional oil and gas companies recognise the need to adapt and they see utilities as an attractive and sensible investment. Decarbonisation, for example, is no longer viewed by IOCs as a far-fetched idea. Around the world, in markets large and small, the energy transition is gaining momentum, fuelled by increasing regulation, rising consumer pressure and relentless media focus. 

Moving into the utilities market offers IOCs an opportunity to cut their overall carbon intensity by tapping into renewables. Doing so also enables IOCs to offset any downturn in demand for fossil-based chemicals by positioning themselves as key players in the market for clean molecules and electricity—while keeping a firm hand on fossil fuels that will continue to play a role in the world for many years. 

Circular economy 

The shift to a circular economy—a closed loop where nothing is wasted and value creation is maximised as part of a continuous cycle—is also driving IOCs to rethink their business models. The utilities market offers possibilities for these companies to explore circular value chains that can help them stay ahead of regulatory pressure and make their business activities more resistant against potential shocks further down the line. 

So far, IOCs have enjoyed a smooth entry into this sector because they have strong balance sheets and relevant technological expertise such as knowledge of offshore construction. In addition, oil and gas companies tend to have more effective innovation processes and higher rates of digitalisation than traditional utilities firms. 

These advantages empower IOCs to adapt to the demands of a changing market quickly and profitably. In contrast, according to the PwC Global Power & Utilities Survey, 82pc of utility executives say their company is not yet ready for the transformation of this market. This creates friendly conditions for newcomers. 

Crowded market 

However, IOCs are not the only companies that have identified potential in the utilities market. In the future, they will have to compete against new players with extensive retail experience, as well as other service providers who are seeking to combine energy solutions with existing products. 

In 2020 and beyond, we expect companies from across industries to enter fresh partnerships and explore major strategic investments together. The story of the utilities market is still unfolding. And, there are some dramatic plot twists ahead. 2020 will be a vitally important year during a period of urgent transformation for every market and economy on our planet. Business models must change. Companies must adapt to ensure continued success in the future. As businesses explore potential pathways to strong positions within redefined markets, investment is more important than ever. 

As a result, five years from now companies will look very different to their former selves and the organisations they see as their peers. Firms from across industries must now shape their response to global transformation and take bold steps to seize exciting opportunities in adjacent markets.  As IOCs continue to strengthen their presence in the utilities sector, traditional utilities models will lose relevance and fresh models with the power to take advantage of rapid market transformation will emerge. 

Jeroen van Hoof, Global Power & Utilities Leader, PwC

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