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ERM becomes part of Shell’s global power play

Matthew Stevens Columnist: 23 August 2019

Shell Australia’s $617 million pitch for electricity trader and generator ERM Powerstands as the most tangible expression yet of the transition mission that the local outpost of the petroleum super major set for itself more than three years ago.

Back in June 2017, in a move that foreshadowed co-ordinated global ambitions in electricity only recently fully enunciated by the legendary mother ship, Shell Australia revealed its strategic hand by establishing an energy trading business in Melbourne.

While the trading desk’s opening focus was gas, Shell made it more than clear that this return to its long-distant energy trading roots would extend to electricity and it would be the local cornerstone of the global company’s plan to capture value from the rapidly changing energy diet of OECD economies.

Shell is preparing for the new age of electrification of mature economies and in March the company revealed plans to become the world’s biggest electricity company.

Speaking to the CERAWeek conference in Houston, the head of Shell’s gas and energy business, Maarten Wetselaar, foreshadowed the creation of a global electricity trading, generation and equipment business whose bulk would match the current oil and gas operations.

Shell’s new business will be constructed around renewable generation and the need for system firming generation that intermittent generation demands. Success will also swing around the capacity of the new energy business to remain nimble in the face of evolving technologies and customer demands.

Incumbents are “useless”

The Financial Times reported that Wetselaar assessed that established power suppliers were “useless”, because they were shackled to outdated business models.

“Many of them are at a disadvantage, because they have this enormous legacy position, with coal plants and nuclear plants, but also a very centralised philosophy,” he said. “We see the future customer group being much more decentralised, where people do have a battery in their basement, people do have solar panels on their roof, and they want us to help them optimise.”

Given all of that, with the perfect view offered by retrospect, there would be few Australian businesses better designed for Shell Australia’s future purposes than ERM. Having entered the Australian electricity sector through the generation game, ERM drove downstream into the retail space in 2008 with a singular prejudice for the commercial and industrial space. It is now rated Australia’s second biggest energy retailer by load.

But ERM will bring more than market penetration and two gas-fuelled firming power stations (one in Queensland, the other in Western Australia). ERM has involved itself increasingly in the new technologies that take retailers behind their meters and allow them to leverage increasingly discrete pools of generation and take full advantage of demand management.

This is the future that Wetselaar was talking about in March.

The Shell view is that Australia’s energy market as currently constructed is largely yesterday’s utility and collectively its contributors and customers are struggling to deal with the complications of a transition in full swing. The petroleum giant’s proposition is that this delivers real potential to newcomers, especially those that arrive armed with the intellectual and financial capital of a sponsor like Shell.

As pretty much everyone now appreciates, Australia sits on the cusp of a profound shift in how it generates its power needs. A system left vulnerable to renewables by the lack of network firming capacity is about to be swamped with ever greater renewable loads. It is estimated that there is around 36 gigawatts of renewable power in the approval and construction pipelines.

A firming roll

So, it would be a fair bet that Shell will push further into the firming generation game, either rolling out its own gas-fired power plants and storage options or offering off-take support for others prepared to fill the looming gaps.

It is a fair bet, too, that Shell will use the ERM platform to move beyond the C&I business and create a broader retailing business.

Back in June 2017, when The Australian Financial Review first revealed Shell Australia’s new energy plan, we observed:

“The potential for this gambit to recast its Australian business is said to be profound. From where I sit, it looks rather like one of the options here is that Shell could backward integrate itself into the Australian energy market, transforming itself from gas driller and freezer into a business that looks a lot more like Origin Energy.”

For good measure, we predicted that the famed Shell brand might end up being stamped on retail offerings of electricity and gas.

That, too, is going to happen. Given all runs to the $617 million plan, ERM will end up with the big yellow Shell.

ERM delivers Shell the platform it needs to enter the mainstream of the electricity game and to decide just how much like Origin it wants to look like.

Just to round out that thought, we once imagined that Shell’s admiration for Origin’s integrated energy model might stretch to a desire to own the business. The move on ERM makes that a fantasy unlikely to be fulfilled.

The Australian Competition and Consumer Commission made a pre-assessment of Shell’s move on ERM and decided that it liked the plan very much indeed, because it created present and future competitive tension for the three dominant integrated players, Origin, AGL and EnergyAustralia.

But, with ERM in tow, the ACCC would be unlikely now to countenance a Shell move on any of the incumbents.

Gas supply crisis eases

Now, while we are talking matters ACCC and energy markets, the Treasurer’s Office made belated release on Wednesday afternoon of the regulator’s most recent review of the east coast gas market.

The findings are, at once, reassuring and deeply disturbing.

The ACCC has reassured the government that the east coast market will be fully supplied through 2020 and hinted that this state of provision will endure beyond next year. In good part that is because investment in new production has been incented by sustained higher prices but only where that government has made that possible. In other words, only in Queensland and offshore Victoria.

But, despite that improved state of supply, the ACCC review has also highlighted the plight of manufacturers generally and of those in the southern states very specifically.

The report identified that supply and demand was delicately poised in the southern states and demonstrated that a foreshowed small surplus of supply in 2020 is largely the product of expectations of lower than expected demand from gas power generators.

Intermittent demand

To digress momentarily, it remains one of the greater ironies of the untrammelled roll out of renewable generation across Australia that it has forced operators to close the spigots on the gas-fired generation that was installed essentially to deal with intermittent demand.

This is the seventh ACCC gas market review and for a seventh time chairman Rod Sims has belled the cat on the need for Victoria and NSW to end the self-harm caused by official and unofficial bans on onshore gas drilling.

Nowhere is the accidental toll of this indulgence of green politics more damaging that in Victoria. Its wealth of Bass Strait gas and cheap, reliable brown coal generation made it a backstop for east coast demand while delivering the state’s home manufacturing base with baked-in cost advantage over interstate competitors.

But that advantage evaporated as soon as the state surrendered energy self-sufficiency.

By Sims’ estimation, Victoria’s need to import gas from the Cooper Basin or from further distant Queensland has resulted in a $4 a gigajoule swing in the competitiveness of the state’s manufacturing sector.

How does that work?

Well, Victoria’s competitors once relied on low-cost Bass Strait gas. They got the gas for the same price as Victorians but they then had to pay $2/gj to move it north. Now that worm has turned. Queensland gas is filling the supply breach and effectively setting the price for Victorian production. And that price reflects the cost of shipping gas from the northern pricing hub of Wallumbilla.

“Just generally, manufacturers will go out of business if pricing stays where it is,” Sims observed on Thursday. “Even if gas makes up as little as 5 per cent of their cost base, the doubling and tripling of prices effectively eats their margins. That is where the rubber hits the road.”


Matthew Stevens writes on business, specialising in mining, energy and opinion. Matthew is a senior business writer and columnist. Email Matthew at [email protected]


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