Centrica is talking to the government about how to finance a conversion of Britain’s biggest gas storage site to hydrogen, as its new chief executive faces pressure to prove the company will profit from the transition to cleaner energy.
Chris O’Shea also sees an opportunity in trading the electricity generated by wind farms on behalf of their owners as he tries to revive the fortunes of the more than 200-year-old company best known as the owner of British Gas.
British Gas was one of the jewels of former British prime minister Margaret Thatcher’s 1980s privatisation programme, but Centrica has floundered strategically in recent years. It has lost more than 80 per cent of its market value and 3m customers in the past decade.
It was the worst performing European utility in 2020 and was booted from the FTSE 100. Meanwhile peers such as Denmark’s Orsted and Spain’s Iberdrola, now known as “new energy majors” because of their hefty investments in renewables, are becoming the new stock market favourites.
In a rare interview ahead of its annual results this week, O’Shea admitted he would not have designed Centrica’s business model “if I’d had a blank sheet of paper”. He insisted, however, the company still had “unique opportunities” to participate in the energy transition as the UK and Ireland strive to stop contributing to climate change by 2050.
British Gas was among the early investors in offshore wind 20 years ago, but Centrica has since sold its wind farms along with big, central fossil fuel plants to focus on customer-facing businesses including energy supply and “smart” home devices such as a thermostat that can be controlled via an app. Its oil and gas joint venture is also on the block.
But those markets have faced challenges, including a boom in smaller, cheaper energy suppliers and a government cap on household bills. Or they have disappointed; in 2019 Centrica abandoned a £1bn revenue target for its smart homes business.
O’Shea, who took the top job at Centrica last year, said the group already has 12 gigawatts of energy assets under management, helping the owners of the assets optimise their returns on the electricity they generate. He sees this as a real “growth area” as investors pour money into the likes of offshore wind — something Centrica itself is unlikely to re-enter any time soon as returns are lower than its cost of capital.
“If you have got a financial investor who wants to build a wind farm for example, they may not want to have a trading business to optimise the plant, we provide that service to them,” the 47-year-old said.
“I’d love if we were something like Orsted but we are not,” said O’Shea.
The company, which has 7m energy customers, has also been in preliminary discussions with the government on finance models that could allow it to upgrade its Rough gas storage site off the Yorkshire coast, the largest facility of its kind in Britain.
The nearly four-decades-old facility was closed to new supplies of natural gas in 2017 following failures in its ageing wells, but O’Shea believes it could be refurbished to house low carbon hydrogen, one of the key “green” technologies backed by Prime Minister Boris Johnson. The Centrica boss estimates the cost at about £650m but said it would likely need a “regulated model” to encourage the group to invest.
Centrica has agreements with manufacturers such as Volkswagen and Ford to fit electric vehicle chargers. It also has an 8,000-strong workforce of engineers, the largest in the sector, that O’Shea said could be deployed to help households convert from natural gas to low carbon heating systems and improve the energy efficiency of properties.
He will argue that Centrica can tackle the energy transition at a capital markets day later this year as he faces heat from a number of top shareholders.
“For that company to survive, they need to think more about the [energy] transition,” one top 30 shareholder told the Financial Times.
Another said: “We have been pushing them quite hard about being part of the energy solution.”
O’Shea was born in Fife in Scotland and studied finance and accounting at Glasgow University. He was Centrica’s chief financial officer for just over a year before taking the top job from Iain Conn, whose tenure was marred by profit warnings and sweeping job losses.
O’Shea’s start has not been uneventful, however. He was forced last year to suspend Centrica’s dividend as commodity prices slumped during the pandemic’s first wave and businesses struggled to pay their bills.
He ordered a further 5,000 jobs cuts, half from management and corporate roles, to resolve Centrica’s “overly-complicated” structure. An effort to tackle its 80 different employment contracts has led to a bitter ongoing dispute with the GMB union.
“This is definitely a turnround story,” said O’Shea, admitting “2021 could still be quite a tough year for us”, although analysts at Barclays believe there is scope for a “significant” share price recovery this year.
O’Shea insists he is trying to end Centrica’s spiral of decline to “make sure this business cannot only survive but actually grow in the future”.
“I don’t think we have managed this business in the way that it should’ve been managed if I’m being really blunt,” he says.
Investors, he said, are “tired of grand strategic gestures which take lots of money”. Centrica previously spent £1m a week on management consultants amounting to a £200m bill over four years.
“I found our results announcements not quite impenetrable but really quite difficult. I didn’t really learn much from them, they were really verbose,” he said.
“We’ll just strip out the unnecessary rubbish, whether it’s in the organisation structure . . . how many committees we’ve got, how many managers we’ve got or how we communicate with people.”
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