Utility Week

UTILITY WEEK | 19TH - 25TH JANUARY 2018 | 19 Finance & Investment Analysis F ollowing the privatisation of the elec- tricity supply industry in the early 1990s, it was widely expected that the biggest beasts of UK plc would invest heav- ily in the sector, and especially in electricity generation. In the event, for varying reasons, the so- called wall of investment from such behe- moths as Shell, BP, Hanson, ICI and BOC, then one of the world's leading oxygen play- ers, never materialised. Shortly before Christ- mas, however, Shell made a key move by buying First Utility, the leading disrupter in the UK energy supply market. In its arguably flawed report on the sec- tor, the Competition and Markets Author- ity (CMA) seemed to adopt First Utility as its poster boy. It extrapolated data from its pricing, along with that of Ovo Energy, to conclude that customers had been seriously overcharged by the big six. Currently, First Utility has around 825,000 customers, which represents a decent launch pad from which to grow the business. While the value of the deal has not been publicly disclosed, analysts assume the cost is not far short of £300 million. In reality, given that the combined market value of Shell's separately-quoted A and B stock currently exceeds £200 billion, such an outlay will barely register on Shell's cash flow. Furthermore, following its recent acqui- sition of NewMotion, Shell is now closely involved in the developing electric vehi- cle charging market, which may become increasingly aligned with consumer energy provision. Strategic thinking In the context of Shell's global oil and gas exploration and production operations, the acquisition of First Utility is small fry. There is little doubt that Shell's strategy is being gradually shied as its recognises that oil prices of over $100 per barrel, last seen in 2014, are unlikely to be sustainable – short of major conflicts. The strategic thinking behind the First Utility deal was set out by Mark Gainsbor- ough, Shell's executive vice president of New Energies. He pointed out that "the supply and demand of residential energy is rapidly changing, driven by new technologies that enable householders to better manage their energy use, and the need for a low-carbon energy system". As has been seen in other sectors, notably with the challenger banks, the emergence of online retailers and Purplebricks' innovation in the housing market, disruption of long- standing industry structures is currently a hot topic. Indeed, the outlook for the big six in the energy sector is far from certain. Aer all, the owner of the seventh-largest energy supplier will shortly be the most valuable company on the London Stock Exchange. Rapidly changing It will certainly be interesting to see what further initiatives Shell may take in the UK energy supply market, especially in terms of boosting its customer numbers over its rela- tively modest inheritance from First Utility. With the big six businesses, there are undoubtedly strains. Innogy's supply deal with SSE may not endure for long, espe- cially if the former decides to sell out and focus more on the rapidly changing German energy market. Much of the speculative focus following Shell's announcement has been directed at Centrica, whose shares were one of the FTSE- 100's worst performers in 2017 – down by over 40 per cent. Any buyer of Centrica would acquire a formidable customer base, especially in the retail gas market. And Shell has form with Centrica having previously bought – at a full price – its former sister company, BG. Of course, any such initiative has to rec- ognise that the UK energy supply market is currently under the cosh. Financial returns are poor, while the grief from politicians and the seemingly endless policy shis mean that any major market player needs a strong constitution. In particular, the government's pledge to impose retail price caps materially raises the risk factors, especially since final deci- sions about how these caps will actually apply are outstanding. Furthermore, the Labour party has proposed some radical views to address shortcomings within the energy sector, including – in some cases – renationalisation. Treasured brand It should be recognised, too, that the Shell initiative may have implications for the smaller supply companies – in effect, the disrupters. Ovo Energy has secured a decent market share, while Good Energy, currently capital- ised at £29 million, has expanded in recent years. By contrast, the quoted Flow Group, which has focused on boilers, has seen its share price collapse of late. There will probably be considerable dis- ruption in the market, a scenario that Shell readily recognises. Indeed, some energy sup- ply businesses may well be up for grabs both this year and in 2019. In the long term, Shell's First Utility acquisition may prove to have been soundly based as it moves to embrace new opportu- nities, including electric vehicle charging, rather than relying on recovering oil and gas prices. Nonetheless, its corporate PR team will need to ensure that its treasured brand is not tarnished by squabbling politicians, a hostile media, indecisive regulators or a plethora of dissatisfied customers. Nigel Hawkins, director, Nigel Hawkins Associates Shell joins the party Nigel Hawkins examines what Shell's acquisition of First Utility means for the company, and what effect the entrance of an oil major could have on the energy retail market. SHELL SHARE PRICE, ONE YEAR 2,600 2,400 2,200 2,000 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18

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