Nigel Hawkins, director, Nigel Hawkins Associates Energy retail, Finance and investment, Analysis, First Utility, Shell

Nigel Hawkins examines what Shell's acquisition of First Utility means for the companies, and what effect it could have on the market.

Following the privatisation of the electricity supply industry in the early 1990s, it was widely expected that the biggest beasts of UK plc would invest heavily in the sector, and especially in electricity generation.

In the event, for varying reasons, the so-called “wall of investment” from such behemoths as Shell, BP, Hanson, ICI and BOC, then one of the world’s leading oxygen players, never materialised.

Shortly before Christmas, however, Shell made a key move by buying First Utility, the leading disrupter within the UK energy supply market.

In its arguably flawed report on the sector, the Competition and Markets Authority (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.

Currently, First Utility has some 825,000 customers, which represents a decent launch pad from which to grow the business.

Whilst 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 acquisition of NewMotion, Shell is now closely involved in the developing electric vehicle charging market, which may become increasingly aligned with consumer energy provision.

Strategic thinking

Of course, in the context of Shell’s global oil and gas E and P operations, the acquisition of First Utility, due to complete shortly, is small fry.

There is little doubt that Shell’s strategy is being gradually shifted 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 Gainsborough, 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 on-line 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. After 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 relatively 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, especially 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 recognise that the UK energy supply market is currently under the cosh. Financial returns are poor, whilst the grief from politicians and the seemingly endless policy shifts 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 decisions 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 – re-nationalisation.

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, whilst Good Energy, currently capitalised 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 disruption in the market, a scenario that Shell readily recognises. Indeed, some energy supply 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 opportunities, 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.

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