Shell chief lifts lid on oil giant's $2bn-a-year energy transition

From floating wind to EVs, Shell is learning for a changing world, Mark Gainsborough tells Leigh Collins

Shell has been widely credited with leading Big Oil’s energy transition, spending $1bn-2bn a year globally on a bewildering array of green-energy investments — from offshore wind to off-grid solar, from electric-vehicle (EV) charging networks to clean hydrogen, and from battery-based virtual power plants to blockchain peer-to-peer energy trading.

On the surface, it seems like an unfocused scattershot approach — like throwing mud at different walls and seeing what sticks. So what is the overarching strategy of Shell’s New Energies division? And what will it mean for the renewables sector and the wider energy transition — and, ultimately, for the fight against climate change?

“The fundamental reason we created the New Energies business was a recognition that the world needs to transition to lower carbon energy,” the division’s boss, executive vice-president Mark Gainsborough, tells Recharge. “And if people want to buy low-carbon energy, we want to be in a position to supply it.”

"If people want to buy low-carbon energy, we want to be in a position to supply it."

Gainsborough, a 38-year Shell veteran who has headed up New Energies since it was established in 2016, explains that the oil giant’s energy transition is multi-faceted — involving green electrons and green molecules (hydrogen, biofuel and biogas); untested and proven business models; a global market-by-market approach; making money in the near term and being ready for the decarbonised, decentralised and digitalised energy world of the future.

“The mandate is to, over the next few years, develop a meaningfully scaled position in the power business… and to build positions in renewable power generation,” he says. “We’ve told our investors to expect to see us spending $1bn-2bn per annum in the power business over the next couple of years and if we see it going well, we’ll probably scale that up to $2bn-3bn per annum, which is not insignificant in the grand scheme of things.”

Renewables generation

Gainsborough explains that in terms of renewables generation, Shell will prioritise offshore wind — with a special focus on the floating segment — and solar, with onshore wind of lower importance, partly because the latter is “a pretty crowded market at the moment”.

“I think there are some markets where you really can't do onshore wind at any meaningful scale [due to population density and Nimbyism] and there's still plenty of opportunity in places like the US, which clearly is a big country, there's space for onshore wind [there]. Europe's pretty difficult for onshore wind. We think that offshore wind is the much better renewable resource for Northern Europe and, of course, Southern Europe is still a good market for solar PV.”

Currently, Shell is developing offshore wind projects off the US (the 2.5GW Atlantic Shores and the 1.6GW Mayflower), and in Dutch waters (the 732MW Blauwwind, formerly Borssele 3 &4 and 108MW NoordzeeWind), but Gainsborough says the company is looking to broaden its offshore wind activities to other markets, adding, “we’re looking at other projects in Europe and further afield”.

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“The other thing that we're quite excited about is that we think the potential for offshore wind will be much bigger once floating offshore wind technology has been fully commercialised, which is one of the reasons we acquired Eolfi last week, which is a floating wind developer.

“They'd been working at this for about a decade, and built up great competence and we felt that we could go faster in floating wind by working with Eolfi, so we've reached an agreement to acquire them and then, looking forward, to expanding our role in the offshore wind business through developing floating technology and getting them to deploy with us.”

Last year, Shell demonstrated its commitment to the floating wind sector by acquiring a majority stake in TetraSpar, Henrik Stiesdal’s low-cost floating wind substructure technology, which will be part of a demonstration project being built off Norway next year.

“The cost curve is definitely there [for floating wind] to get to be competitive, give it a few years,” says Gainsborough. “It's not only about being competitive because there's a lot of places where you simply can't do bottom-fixed [offshore wind]. If you're a country like Japan, you've got a very, very limited area for bottom-fixed. So really for those sorts of markets having floating technology is essential.

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“If you think about our conventional [oil & gas] business, conventional drilling rigs, [when] we started off we could only do shallow water. Then we developed floating technologies so that we can do deep water and the costs came down tremendously as we scaled up.”

So does he think Shell's experience with floating technology will help commercialise floating wind?

“Yeah, absolutely. A lot of our experience of operating oil and gas platforms in deep water will be directly relevant to developing floating technology for offshore wind.”

Power sector strategy

The overarching strategy of Shell New Energies’ power-sector investments, Gainsborough explains, is to seek out markets where Shell can generate or buy green power, trade and optimise that energy and then sell it to end-customers.

“So we’re kind of thinking about the power business in a similar way to how we think about the downstream oil business where you optimise across the whole of the chain,” he says.

“In our conventional oil business, we sell twice as much as we produce. So Shell has not really been production-led, we’re much more customer-led... At the moment, we buy far more renewable power than we produce ourselves… it’s very much a decision to make [power] versus buy [power] on a market-by-market basis.

“So we’re not really positioning ourselves as a renewables IPP [independent power producer], it’s much more [about] renewables as part of the supply mix for end-customer businesses that we’ll develop over time.”

Shell began its journey as a power supplier in late 2017, when it acquired First Utility, which provided electricity to 825,000 households in the UK. It has since rebranded that business as Shell Energy, supplying only renewable energy to its customers, and is adding a further 200,000 customers by acquiring rival UK supplier Hudson Energy.

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“When we bought First Utility in the UK, that wasn’t really about trying a new business model, that was actually about operationally running a power business that supplies power to end customers and that we believe we can grow successfully over time,” Gainsborough explains, adding that Shell is now in the process of acquiring Australia’s second biggest electricity supplier to businesses and industry, ERM Power.

But Shell also recognises that the power sector is changing fast, due to the increase of distributed energy generation and the push towards decarbonisation and digitalisation, prompting the company to buy German home energy storage company Sonnen and UK virtual power plant business Limejump, and take stakes in innovative companies such as EV charging start-ups Greenlots and NewMotion, pioneering US peer-to-peer venture LO3 Energy and microgrids/energy management business GI Energy.

The idea of these acquisitions — which Gainsborough concedes has “a degree of controlled experimentation” — is about acquiring knowledge and expertise.

“For example, we recently took a stake in Corvus, which is a company that puts batteries into ships because we’re a major supplier of energy to the shipping industry — we want to learn how that’s going to work in the future… it gives us a window onto that activity,” he explains.

"If we want to do bigger things in the future, it’s better to have experience under our belt."

“I think it is advantageous to play in those spaces in the early stage, but you don’t want to commit too much investment to those really early-stage things. The bulk of our investment has to go into more proven business models where we can generate returns for our shareholders.

“[But] if we want to do bigger things in the future, it’s better to have got some experience under our belt than going in and starting entirely from scratch in five years’ time.”

Gainsborough explains that New Energies will be in acquisition mode for several more years at least, with more than 100 people in Shell’s research and development unit “scanning” the energy market for investment opportunities. Gainsborough himself says about two thirds of his time is spent looking into new business opportunities, with the other third managing New Energies’ existing activities.

“We have a sort of scanning activity that looks at everything on the grounds that we need to understand what's coming down the pipe, which technologies are going to be impactful,” he says. “We want to have a view on what's the technology cost curve going to be on batteries or hydrogen or solar PV. But we're not really into developing new battery technologies. It's much more about understanding the technology.”

Clean energy vs fossil fuel investments

With Shell New Energies still focused on acquisition and learning, it may be many years before the unit becomes profitable.

“What we've said to investors is that on the power business, we're going to give more financial disclosure starting from 2021. We do have parts of the business that are already profitable. But we've also signalled to our investors that we expect power as a business to be a free cashflow sink for quite a few years as we invest to scale up the business. So we will be a cashflow positive business certainly by the mid 2020s, but in terms of being free cashflow positive, that probably comes in the second half of the next decade.”

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Having an investor seeking to spend billions of dollars each year on clean energy is clearly good news for the renewables industry and could help to speed up the energy transition. But critics point out that Shell is still investing a far greater proportion of its annual capital expenditure (capex) on oil & gas exploration and production.

Norwegian consultancy Rystad Energy recently reported that Shell is planning to increase its oil & gas output by 37.6% between 2018 and 2030 — which seems at odds with its stated commitment to the Paris Agreement. Shell says its average annual capital expenditure between 2021-25 of $30bn — of which less than a tenth will be spent by its New Energies division.

“The reality is oil & gas is still going to be around for a long time to come and, you know, [Shell has] declining resources where continued reinvestment is required.”

While he believes that EVs will be “a huge growth area in the long run”, he adds: “A lot of people are not going to switch to an EV over next 10, 20 years. So you’ve still got to be able to supply internal combustion engines.

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“I think it's easy if you come from a developed world perspective, you don't see the full picture. You have to remember that the developing world still has massive demand to grow in all parts of the energy system. And, you know, meeting that growth in demand is going to be a real challenge.

“I don’t think we see [New Energies] as a replacement for oil & gas for many decades.”

Gainsborough says that if the energy transition happens faster than Shell currently expects, the company will still be in a position to respond and thrive.

“I think Shell has a lot of flexibility in its portfolio,” he explains. “We have a lot of exposure to gas rather than oil, and I think that peak demand for gas comes a lot later than it will do for oil. We have a growing petrochemicals business as well, which is very resilient to the energy transition.

“Now, of course, we're all determined to try to make the transition as fast as possible, but it looks like there are limits to [that], it has to go at the pace that countries are prepared to go.

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“And, I think we're well positioned if the transition goes faster than currently expected there's nothing to stop us reallocating capital into the power business and into other parts of New Energies. If it goes slower than expected, then we'll probably go a bit slower in our investments.

“I think, philosophically, that's always been how we're positioned, we need to go at the right pace in line with society's desire to decarbonise and move to a different energy system. If that demand from society isn't there, then there'll be fewer profitable opportunities for us to pursue. And in the end, we're a commercial enterprise and we have to deliver a world-class investment case.

“But equally, we don't want to get left behind — if the energy transition goes much faster than we need to be prepared to shift what we do faster.”

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