Center for Energy, Development, and the Global Environment (Edge)

Can an oil & gas company compete with utilities in clean power investments?

Posted on by EDGE

Paige Swoffordby Paige Swofford, MEM/MBA’18

This article was written in response to a seminar given by Gareth Burns, Vice President and Managing Director of Statoil Energy Ventures, in an EDGE Seminar on Oct. 11, 2017 at Duke University’s Fuqua School of Business. This article voices one student’s perspective and does not necessarily represent the views of either Duke University or the seminar speaker.

 

In an EDGE Seminar presentation to students last month, Gareth Burns, VP & Managing Director of Statoil Energy Ventures (SEV), explained the strategy behind an oil and gas company’s new venture capital foray into renewable energy. Launched in 2016 with $200 million, SEV is an initiative under the Norwegian multinational oil and gas company Statoil, with the express mandate of investing in smart grid and clean energy technology ventures. Statoil’s engineering capabilities have allowed them to move into construction and operation of offshore wind, and investments in renewable technology can support this arm of the New Energy Solutions business. Having a seat on the boards of startup energy companies gives Statoil an understanding of how energy markets are changing and affecting their downstream buyers of natural gas. By testing and exploring new markets and understanding how existing landscapes are shifting, they will theoretically be better prepared to respond.

Reflecting on SEV’s approach and the types of companies in which they are investing, I struggle to see how these investments will be a big enough rudder to help steer a large oil and gas company to be successful in a “long-term sustainable energy future,” as they describe in the Energy Perspectives report. For startup companies, I recognize the crucial benefit that patient corporate VC funds can bring to emerging energy companies. However, as Statoil makes investments and reaps their “strategic returns,” what comes next? How will they compete with electric utility companies making similar investments, looking to partner with or acquire new entrants and disrupt themselves? Once SEV gains the strategic insights, they will face the challenge that they are not as well positioned as incumbent electricity market players, such as electric utilities, to act on that information in a meaningful way. They are not prepared to quickly enter the electricity market, which is already experiencing rapid change. Even if SEV can translate their insights into actions, utilities and other players who are making similar (and in some cases, the same) investments will beat them to the market.

Just as Statoil is developing their vision for how they will evolve their strategy for a low-carbon future, electric utilities are grappling with how they will stay relevant and profitable in a changing technological and regulatory landscape. SEV has a goal to invest $200 million over 4-7 years. By contrast, over $2.9 billion in investments have been made by North American and European utilities in distributed energy companies since 2010, with $1 billion of investments made in 2016. E&Y Global Power and Utilities Transactions tracks investment trends, reporting that “the trend toward investment in disruptive technologies is also gathering pace. Both utilities and non-traditional investors are shifting their focus to areas like distributed energy and battery storage.” Utilities are making acquisitions, establishing partnerships, and investing through VC funds in areas similar to Statoil Energy Ventures: renewable energy, storage, demand response, software capabilities, distributed generation, and other emerging technologies. These investments represent competition for the same pool of strategic returns, and it is present for two of SEV’s investments: ChargePoint and Convergent Energy.

Utilities are poised to capture value more quickly

Exelon’s corporate VC arm, Constellation Technology Ventures (CTV), is also an investor in ChargePoint, a firm focused on electric vehicle charging station infrastructure and software. Like Statoil, CTV looks for what they call “two-way benefits”: Exelon provides funding, advice, and connections within Exelon to the companies it invests in. In return, Exelon gains insight into new technologies that could be integrated into Exelon’s portfolio. Michael Smith, the VP of Exelon Generation Innovation and Strategy Development, said that the investments create “options on future outcomes…When the world changes, at least we’re prepared.” Regarding their investment in ChargePoint, Smith has stated that “by investing in ChargePoint, we are able to leverage customer relationships, explore new financing mechanisms and jointly develop a strategy to meaningfully engage with the utility sector.”

However, unlike Statoil, Exelon can benefit from the relationship with ChargePoint right away, since they are actively engaged in the electricity markets. They hope to first understand and then act upon the trends of electric vehicles and charging infrastructure, which could directly benefit their current businesses. For Statoil, the adoption of electric vehicles could significantly reduce demand for oil, but they are not currently in the business of providing electricity. Moving from supplying cars with carbon-based fuels to supplying the electricity to charge vehicles will require a more dramatic change to the company’s strategy than a small strategic investment.

SEV’s second investment company, Convergent Energy, is a technology-agnostic energy storage developer. Convergent also received funding from GXP Investments, a non-regulated affiliate of Great Plains Energy Inc., which is the holding company for Kansas City Power & Light. The comments from Constellation’s leadership are closely echoed in GXPI’s explanation for their investment in Convergent. Dennis Odell, a Senior Director at GXPI, said, “We see our investment in Convergent as an opportunity to participate in this developing industry, as well as to help utilities and their customers better understand how energy storage can work for them.”

Utilities like Great Plains are eager to understand how energy storage might disrupt their operating models, and they want to learn how to use storage to their advantage to improve system operations. Other utilities are also making investments in energy storage, including CTV’s investment in Stem and ENGIE’s majority stake acquisition of Green Charge Networks. Arguably, Statoil could use battery storage to improve reliability and reduce emissions at remote drilling sites, but storage is not inherently disruptive to the oil and gas industry outside of battery use in electric vehicles. Utilities face more threat of potential disruption from grid-scale and behind-the-meter batteries that could change the way customers consume (and pay for) electricity, and they are actively making investments today to gain understanding as soon as possible.

Transferable knowledge = another advantage for utilities

Exelon, Great Plains, and other electric utilities, have inherent knowledge of the electricity system (operations, markets, regulation), the scale to act on new information and partnerships in a financially meaningful way, and the established relationships with end-consumers to access the market quickly. Aside from engineering capabilities and skillful management of large and complex projects, what are the core capabilities or advantages that Statoil has built in the oil and gas sector that are translatable to the electricity sector? Once they gain strategic insight through their investment target companies, I am not optimistic that they will be able to act on the knowledge quickly enough to make a meaningful impact on Statoil’s overall financial performance and strategic vision for the future.

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