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Analysts: Shell will need to hike M&A to become largest global power company

Royal Dutch Shell PLC will need to step up its merger and acquisition activity in the electricity space to achieve its goal of becoming the world's largest power company by 2035, according to a Bernstein report.

The Anglo-Dutch major will need to produce 214 TWh of power in 2035 and will need to own and/or purchase 61 GW of capacity, the March 29 report said. Shell now manages 10 GW of power in the U.S. with just one-third of that total generated by renewable energy, according to the research report. To reach the 61 GW, Shell would need to add 3 GW of clean capacity per year through 2035.

Having recently set short-term emissions reduction targets for the first time, starting in 2020, Shell plans to invest $1 billion to $2 billion annually in new energy technologies. While Shell's electricity expansion could be supported within this budget, Shell will want to hike its clean energy capacity faster and organic growth alone will not be enough to allow the major to position itself as the biggest power company.

"[S]hell won't easily become the No #1 clean power provider with just an organic strategy," Bernstein wrote.

Shell's present business is focused 65% on oil production and refining, 25% on natural gas and 10% on chemicals and other operations. The company is looking to change the composition of its portfolio to 30% each for oil, gas and electricity while retaining a 10% share in chemicals.

"Shell wants electricity to be the fourth pillar of their business, alongside oil, gas and chemicals. In much the same way they dominate the value chain in oil and gas, they want to do the same in electricity," Bernstein said.

Responding to investor pressure to slash emissions, Shell has been expanding its reach beyond the oil patch in the last few years, buying European electric vehicle charging station company The New Motion BV, purchasing a stake in German battery firm sonnen GmbH and indicating it would rebrand residential power supplier First Utility Ltd. as Shell Energy Retail Ltd. Shell also indicated it switched all of First Utility's 700,000 customers to 100% renewable electricity to build out its low carbon emission business.

Currently, the largest clean energy generator in Europe is French utility Electricité de France SA, which boasts 93 GW of nuclear and hydropower capacity. EDF Group subsidiary EDF Renewables North America, along with Shell subsidiary Shell New Energies US LLC, operates joint venture Atlantic Shores Offshore Wind LLC.

With 43 GW of wind, solar, hydro, geothermal and biomass generation, Enel SpA is another one of Europe's top clean energy providers. With an annual addition of 3 GW, Enel's clean capacity could reach 90 GW by 2035.