OPINION: The Western Australian government’s love affair with Western Power is unlikely to be dimmed by local events any time soon, but a new force has been unleashed in the international marketplace as global oil companies morph into global electricity companies.
The Western Australian government’s love affair with Western Power is unlikely to be dimmed by local events any time soon, but a new force has been unleashed in the international marketplace as global oil companies morph into global electricity companies.
A hint of what’s ahead came last month in Britain when Royal Dutch Shell launched Shell Energy, with a cut-price offer of electricity generated from renewable sources to households.
It will be a long time before Shell Energy opens its doors to WA households (though that’s not the point) because there’s not a lot new about an oil company producing electricity as a by-product of oil refining – it’s what BP already does at its Kwinana refinery, selling surplus power to Synergy.
The issue is that the world is heading towards an electrified future and big oil companies can smell the change, which is why they’ve started to make the shift to become big electricity companies.
For now, Western Power is safe from the competitive threat posed by oil companies trying to snatch a bigger share of WA’s electricity market. But as the switch from oil to electricity gathers pace it will become much harder for a government to remain in the business of producing and trading electricity.
What’s happening is a predictable, albeit slow-moving shift away from the energy sources of the 19th and 20th centuries, and oil companies know they have to move to where the market is going.
Locally, the only current threat to Western Power is a proposition from opposition leader Mike Nahan that the state-owned power utility be sold.
Two years ago, the sale plan was a factor in Dr Nahan’s predecessor, Colin Barnett, losing a state election because the Labor Party under Mark McGowan successfully argued that Western Power was a strategically important part of the state’s economy.
Government ownership of a power company once made sense in a state as broad as WA, with remote regions lacking the market to attract a private investor; and that might still be the case in some parts of WA.
But the world is changing rapidly, and producing electricity today is not solely the function of burning coal or gas in one part of the state and then transmitting it over long distances.
Renewables, which are becoming increasingly competitive, can also be easier to install in regions than close to urban centres, while rooftop solar has become so popular in cities it is threatening the stability of the grid system on which big state-owned power companies are based.
The power grid in the eastern states is described as being on life support because of the disruption caused to a system that has its roots in century-old technology being placed under increasing pressure by multiple new sources of power, which have created reliability and security issues.
Chasing increased renewable-energy targets, which is a theme in the upcoming federal election, will add further pressure to old electricity networks in every state.
Love it or hate it, ‘big oil’ can sense the winds of change blowing through the world’s electricity industry and the shift from fossil fuels to other forms of power, whether for transport, industrial or household consumers.
Just imagine the amount of extra electricity that would be required if 50 per cent of the cars in Australia made the switch from petrol and diesel to batteries, which is one of the policies being promoted ahead of the election.
How that policy might play out is uncertain, but what is certain is that the current leaders in the oil industry will be the leaders in the new world of electric cars because they have the infrastructure in place to service an electric world, especially if the target of 10-minute charging time becomes a reality.
Equally importantly, they have the financial firepower to barge their way to the top.
Shell’s UK power deal is already ruffling feathers because not only is it from renewable sources such as solar and wind, it’s the cheapest household power in Britain.
Home charging of electric cars is another concept already being threatened by ‘big oil’. And, while it can already be done, the advent of rapid charging will change the way people fill their cars.
That’s why Shell, the same company selling renewable electricity directly to British households, has recently acquired an American company called Greenlots, which sells electricity-charging stations in the US.
Shell is not alone, and while it is not yet a threat to state-owned power utilities, the same can’t be said for what’s happening in France where Total, a Paris-based oil leader, last year acquired electricity supplier Direct Energie.
The target of the new Total energy arm is EDF (Electricite de France), the state-controlled electricity business with 80 per cent of the French retail electricity market.
Philippe Sauquet, head of Total’s gas, renewables and power division, told London’s Financial Times newspaper last week that EDF’s market share would be “more and more” eroded and “we’re ideally placed to benefit”.
The transformation of ‘big oil’ into ‘big electricity’ might annoy the purists of the renewable energy world, but what the oil companies have is both the financial strength and existential incentive to drive into the electricity sector before someone else steals their market.
For the WA government and its close connections to Western Power, the changing world of electricity production, distribution and marketing represents a significant challenge.
The government can hang on to the business and use its legislative powers to limit competition, though that will have a considerable cost for the government and households as oil companies use their corporate muscle to dominate private electricity production, which is changing from being a boring and predictable business into a complex system requiring careful management.
Shell, the current leader in the reinvention of ‘big oil’, has a stated aim of becoming the world’s biggest power company by 2030, a target that will also be seen as a challenge to every other big oil company.
The urgency behind the drive by oil companies into electricity can be explained by a recent forecast from Vitol, the world’s biggest independent energy trading company. Vitol said peak demand for oil would occur within the next 15 years, which meant it would also make the switch to trading in cleaner fuels and electricity.
In other words, if Vitol is correct, oil ceases to be a growth industry by 2033 (or sooner) whereas electricity is enjoying spectacular growth.
In time, governments that own an electricity business will find themselves in direct competition with some of the world’s biggest companies – the oil giants of today, which are becoming tomorrow’s electricity giants.
That will be an uncomfortable place to be.
