Oil’s domination of the global energy market is beginning to give way to a lower-carbon system © FT montage

The staid world of household energy supply might not seem the most obvious new field for companies steeped in the buccaneering spirit of oil and gas exploration.

Yet, recent moves by Royal Dutch Shell and Total into the consumer power market have sent an important signal about the long-term direction of Europe’s two largest energy groups.

Shell is close to completing its acquisition of First Utility, the UK electricity and gas supplier, which it agreed to buy last December in a deal that will pit it against larger power suppliers such as Centrica and SSE.

Total, meanwhile, is in the early stages of building a retail energy business in its domestic French market to challenge incumbents EDF and Engie.

Both companies say they are laying foundations for further expansion into the electricity supply chain, as a global energy market dominated for decades by oil begins to give way to a lower-carbon system, with bigger roles for gas and renewable power.

Maarten Wetselaar, head of Shell’s “new energy” strategy, predicts the proportion of worldwide energy consumption met by electricity would increase from less than 20 per cent today to about half in coming decades. Much of this will be at the expense of oil if, as widely expected, electric vehicles gradually replace petrol and diesel cars.

“Any piece of energy demand that can be electrified, needs to be electrified,” says Mr Wetselaar, if international carbon reduction targets are to be met.

Mr Wetselaar says that of the $1bn-$2bn that Shell had committed to spend on “new energy” each year until 2020 about 80 per cent would go into the power sector. The First Utility acquisition, thought to be worth about $200m, is one of several recent deals aimed at building an integrated power supply chain from generation to retail supply, which echoes the drilling rig-to-petrol pump model of the existing oil business.

Shell last month agreed to buy a 44 per cent stake in Silicon Ranch Corporation, a US solar company, for $217m, adding to a renewables portfolio which includes a 20 per cent stake in the large Borssele offshore wind project off the Dutch coast.

Electricity from these and other power generating assets can be sold through Shell’s energy trading business, which is already among the largest power traders in Europe and North America.

The missing link was a path to consumers until the First Utility deal, as well as last October’s acquisition of NewMotion, which operates one of Europe’s largest EV charging networks. Mr Wetselaar declines to comment on speculation that Shell’s next target could be the Dutch utility Eneco. But he says: “If we’re going to build a power business that is meaningful to Shell — a real fourth pillar alongside oil, gas and chemicals — we will need to do more of these deals.”

Total is pursuing a similar strategy. In addition to its newly formed retail business, the group last year paid €237.5m for a 23 per cent stake in Eren, the French renewables company, with an option to buy it outright. A further $2bn was spent in prior years buying battery developer Saft and SunPower, the US solar company.

BP, the third-largest European oil group, is taking a more cautious approach, having lost several billion dollars in early bets on green energy in the 2000s. However, it still has a large US wind business from those investments and in December signalled renewed appetite with a $200m deal to buy Lightsource, a UK-based solar developer. Eni of Italy and Statoil of Norway are also investing in solar and offshore wind, respectively.

ExxonMobil and Chevron, the US supermajors, have largely avoided following their European peers into green energy, drawing criticism from climate activists.

Oil companies face increasing scrutiny of the threats to their businesses from action to tackle climate change and air pollution. But Iain Reid, analyst at Macquarie, says many mainstream investors remain wary of diversification. “Are geologists and engineers in the oil industry the best people to pick winners in renewable energy?” he asks. “Some of these things will pay off. We just don’t know which ones yet.”

Mr Wetselaar insists Shell’s new businesses must make money like any other part of the group, with a target for an 8-12 per cent return on investment. The falling cost of wind and solar power, coupled with strengthening international commitments to decarbonisation, is turning renewables into a “normal, commercial, capitalist business rather than something driven by subsidies”, he says.

Power trading and retailing, meanwhile, need not be the low-margin business of old, Mr Wetselaar insists, in an electricity system made more complex by volatile wind and solar output and potential spikes in demand from EVs. “Suddenly the optimisation role is no longer a bureaucrat’s job of planning. It becomes a trader’s job. And that is something we’re very good at.”

For all Mr Wetselaar’s enthusiasm, the maximum $2bn a year of investment in “new energy” represent less than a tenth of Shell’s total capital expenditure, with the vast majority still going to fossil fuels. Moreover, Mr Wetselaar acknowledges that expansion in power and consumer energy is at least as focused on securing markets for gas as it is about renewables. First Utility, for example, gives access to retail gas customers in the UK and Germany. Total, meanwhile, is investing in gas-fired power stations in developing countries such as Myanmar to entrench demand.

Shell and Total have both invested heavily in gas, betting it will increase its share of the global energy mix on the basis that it is cleaner to burn than coal. They also believe oil will remain profitable for decades to come. But the increasing investment by European majors in renewable power represents a hedge against the possibility of a more rapid transition.

Whether generated by gas, wind or solar, Mr Wetselaar says Shell will be ready to meet rising demand for power. “Electrification . . . is going to be the story of the next decades,” he says. “We want to not just be part of it; we want to become a leader.”

Total’s battery bet

Total’s $1bn acquisition of French battery developer Saft in 2016 gave the oil and gas group access to some of the most advanced technology for storing energy.

Saft makes specialist long-life lithium-ion batteries for industries such as telecoms, medicine, aerospace and defence. Its products are installed in two-thirds of the world’s commercial aircraft and 200 satellites.

Patrick Pouyanné, Total’s chief executive, said that while Saft is a profitable business, its main value is insights and expertise in one of the fastest-growing areas of the energy industry.

“It’s very useful for Total to have a footprint in the battery business because it opens our eyes,” he said. “When we speak about the oil market of tomorrow and what will happen with cars and trucks, we have some knowledge.”

Mr Pouyanné said “the game is already done” for the first generation of electric vehicle batteries, where Chinese, South Korean and Japanese manufacturers dominate. But he sees opportunities in the next generation of batteries for grid-level electricity storage and for vehicles, including “solid-state” batteries that are potentially safer and more powerful.

EU policymakers are considering ways to develop a European battery industry but Mr Pouyanné said it would be hard to do without protectionism. “There is a debate about how we should build a gigafactory [a large battery plant] in Europe but in China there are already 30,” he said. “If you don’t have a technological advantage and you are in the middle of the pack, it is very difficult.”

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