Shell launches electric dreams with bid for Australian energy utility ERM

Global oil giant Royal Dutch Shell has made good on its promise to become a major player in the electricity industry, launching a bid for Australian generator and retailer ERM Power, in a move that has major implications for the energy sector in Australia.

The bid for ERM, which was founded and is more than one-quarter owned by coal entrepreneur and technology investor Trevor St Baker, is the biggest move so far from Shell, which earlier this year outlined its strategy to become the biggest generator of electricity in the world, and take on the big three incumbents in Australia.

Shell has previously bought German battery storage company Sonnen, and has launched its own utilities in Europe and the US. It sees electrification , including transport, as “by far the easiest way to decarbonise energy usage,” and it has already begun rolling out electric vehicle fast chargers at some of its petrol stations, including in Singapore.

The ERM board, including St Baker, has decided that the cash offer, pitched at a 43% premium to the last trade at $2.465 a share, and which values the company’s equity at around $617 million, is too good to refuse and is urging all shareholders to accept.

“Our strategy across electricity supply and demand aligns well with Shell’s global electrification and energy solutions ambitions,” CEO Jon Stretch said in a statement.

ERM trades around 32TWh of electricity a year, accounting for around 15 per cent of the total Australian market. It is the second biggest retailer to corporate customers. It owns a couple of gas generators (which fits with Shell’s gas supply assets) and has contracts for numerous other generators, including renewables.

The head of Shell Australia, Zoe Yujnovich, said the acquisition aligns with Shell’s global ambition to expand its integrated power business, and builds on Shell Energy Australia’s existing gas marketing and trading capability.

“ERM will become our core power and energy solutions platform and this acquisition is a significant stepforward in growing Shell’s integrated power business in Australia. Upon implementation, we look forward to welcoming ERM’s staff and customers to Shell.”

The company confirmed that this purchase was part of its goal to become the largest electricity company in the world by the 2030s.

“The strategy is a response to an expected shift in the world’s energy system to much greater use of electricity, up from about 20 per cent today to about 50 per cent or more by 2060 – driven by the transition to lower-carbon energy and increased access to electricity in developing countries,” it says.

“Shell’s strategy relies on alternative energy solutions, retailing and trading. As such Shell sees strategic value in all parts of ERM Power’s business.”

The move by Shell, with its enormous balance sheet, has huge implications for the big three Australian utilities – AGL, Origin Energy and EnergyAustralia – who are already losing share to smaller retailers and the impact of solar PV, and facing falls in earnings from their electricity businesses.

Now, as these utilities try to figure out how to recast their businesses and their legacy thermal assets into a rapidly changing energy market, and the shift to distributed energy including solar, rooftop and EVs, they will also have to contend with one of the world’s richest companies starting out with a solid platform and a clean slate.

Another interesting part of this transaction is the $160 million or so it frees up for St Baker, who is trying to convince the federal government to give him money to extend the life of the Vales Point coal generator he half owns, and is looking at pumped hydro in South Australia and has his new technology investments, including fast charging company Tritium. He now has more cash to spend.

ERM on Thursday also announced it had recorded a net profit of $26 million for the last financial year, including an 11 per cent increase in the amount of electricity sold, a significant feat given the rest of the market is static or going backwards.

RenewEconomy sought to join the analysts call and presentation from ERM, as it is able to do with most other companies, but was kicked off several times and then denied access, so we won’t be able to bring you further insights from that presentation.