By Bryony Collins, Bloomberg New Energy Finance editorial team. This article first appeared on the Bloomberg Terminal and is available to BNEF clients on the web.
Royal Dutch Shell Plc sees the emergence of companies “with viable, commercial business models” for improving energy access in developing countries, an area that until recently was the realm of grant funding and foundations.
Brian Davis, vice president for energy solutions within Shell New Energies, told BNEF in an interview that the decline in the cost of technologies such as solar and batteries is giving customers in places like India, East Africa and Nigeria a more cost-effective alternative to kerosene for lighting and diesel for back-up generation.
The oil exploration company is allocating $1-2 billion per year until 2020 in its New Energies arm, which looks to support “scalable, commercial business models” in new fuels and the power sector. This includes an Energy Access division focusing on emerging markets.
In that area, Shell wants to invest in the “productive use of energy” – such as rooftop solar or microgrids, which can power commercial property and therefore bring about a recurring cycle of wealth and prosperity, said Davis.
Despite the focus on creating positive social impact, the division is nevertheless motivated by returns and the opportunity to add value. The team have recently chosen to invest in SolarNow in Uganda, a distributor of solar home systems, and Husk Power Systems, which develops microgrids using solar, biomass gasification and batteries. These companies have the “potential to scale”, and Shell’s aim is to “guide their strategy” in order to help them to do so, said Davis.
Q: Why is Shell investing in companies working to improve electricity access – how will this complement your oil business?
A: Our New Energies business has been running for about 18 months, and its focus is on low-carbon energy for mobility and power. It’s one of the 7 strategic themes within Shell as we position the company to succeed through the energy transition, as the world moves towards cleaner, low-carbon energy.
Within New Energies, there are two business domains. One is new fuels — low-carbon fuels for transportation. And the other is energy, and principally power.
We’re creating a business for Shell in power, and there are two aspects to the power business. One is in developed and developing markets, as an integrated player in the power value chain, and the other piece is providing power for the 1 to 2 billion people who don’t have access to energy, or have unreliable access today.
Q: You recently announced investments in three early-stage solar access companies – SolarNow, SteamaCo and Husk Power Systems – which in total raised $30 million from Shell and other investors. How do you decide which areas of energy access to invest in?
A: We’ve been focusing on the productive use of energy – can we come up with an affordable, reliable electricity source that can power businesses and help people create wealth and prosperity?
[We are not so much interested in] the solar lantern, but larger rooftop solar home systems that could bring energy to a small commercial property, and then through to microgrids that serve a whole village or community.
[The companies we have invested in are] Husk Power Systems, which develops mini-grids, SolarNow a solar home system distributor, and SteamaCo, which is effectively a smart meter company [with a product] that’s low-cost, robust and works in rural environments.
Q: Do you intend to stay invested in these companies for a long time?
A: We have a seat on the board of each of them, and our rationale for investing is that they are using a proven technology, with an interesting business model and good management.
They are commercial and have the potential to scale. So we invested, saying how can we help these companies grow and be successful? We do that by sitting on their board and helping guide their strategy.
It’s too early to say how long we might stay invested in them and what the future might look like. Our intention is to help them grow over time.
Q: Will electricity access in remote, developing regions of the world be provided mainly by small-scale, distributed energy products rather than centralized fossil-fuel power plants?
A: More and more in the markets where there isn’t existing grid access, you’ll see the role of distributed energy as important. If there is no existing infrastructure, and the community is remote, the cost of building transmission lines to connect them to the grid is quite high, relative to the volume.
A much more affordable solution is a mini-grid that meets a customer’s need. There is a high mobile phone penetration in the developing world, because it’s easier to put up a cell tower and broadcast than install wires. And there’s some analogy there to distributed energy too. That makes sense for large distances and relatively sparse populations.
There is also a case for microgrids in urban environments, as cities grow fast and there isn’t time to put the infrastructure in place. In Nigerian cities for example, there are a number of examples where licenses are granted to roll out microgrids.
Distributed energy will be complemented in large, urban environments by a grid, and centralized generation that will balance and complement distributed energy.
Q: How will the role of Shell New Energies develop?
A: The overall division of New Energies is one of our strategic themes – it’s a future opportunity and we’re allocating serious potential to that business – $1-2 billion a year until 2020. It’s a commercial endeavor, building on our existing strengths and looking to get a return and add value, in the space of low-carbon energy. So it will increasingly grow in importance to the company. As technologies become more affordable and pervasive, the market grows.
In terms of the Energy Access division… in the past this sector has been largely funded by grant money or foundation aid, because you were trying to sell a product to customers that was more expensive than they could afford to pay.
On that same trend of the technology coming down in cost, we now see now an emergence of companies with viable, commercial business models.
Many companies in the ecosystem will be required to succeed. It’s not something that one company will do alone, and partnering/collaborating will be key.
Q: Which regions or technologies are you particularly interested in?
A: We’re focusing on Africa and Asia, including key markets such as India, East Africa and Nigeria. Those markets have significant numbers of people without electricity access, and are also where people have the ability to pay but don’t have access to the right products. People are paying for kerosene for lighting, or for diesel for back-up generation, but it’s actually more expensive than needed if you’ve got an alternative product.
We are technology-agnostic, it’s more about the commercial viability and whether it is replicable and scalable.
Q: Does your investment in these electric access companies help offset some of the volatility and risk associated with the commodity cycle linked to other parts of your business?
A: Shell is an integrated energy company with multiple strategic themes. Each of those themes have a role within the company, giving it breadth, diversity and resilience. We are particularly focused on the tremendous opportunity in electricity and power, and we’re trying to figure out how we build a profitable and replicable business in the power value chain, including for energy access customers.
That will bring a different profit, revenue and exposure to other parts of the business.
Clients can read more about investment to improve energy supply in emerging markets in BNEF’s 1Q 2018 Frontier Power Market Outlook.