The energy and utility landscape is changing rapidly and radically as a consequence of the recession, state mandates for renewable energy, demand response and energy efficiency and greenhouse gas emissions reduction. As regulators try to implement the climate change and clean energy aspirations of politicians the opportunities presented are attracting new players bringing new technology.
There is probably more fundamental change in the energy and utility industry today as a result of technology and regulatory drivers than any time since Thomas Edison was on the scene.
Increased Energy Cleantech Deal Flow is a Signpost for Build-Up
According to a new report on cleantech M&A deal flow for 2010 by Peachtree Green Advisors there were 206 transactions totaling $10.2 billion in reported deal value for the first eight months of the year. This compares to 183 transactions for the same period in 2009, but the total value of the transactions grew 73% year over year from the miserable $5.9 billion in 2009. Both new capital and debt are growing in the deal flow reported indicating confidence in the market and a willingness to invest—both good indicators of growth.
Solar and wind energy projects were big players in the deal flow driven up 92% and 99% respectively by the state renewable portfolio goals investor owned utilities must meet and some hope for a National RES standard which, so far, the wind industry lobbyists have been unable to get approved in Congress since it keeps getting entangled in the controversy over cap and trade legislation. Energy efficiency transactions were up 138% as demand response and net metering regulations create a market especially among commercial and industrial customers through customer aggregation and constant energy management.
The smart grid driven rush taking place in the energy and utilities sector caused by Federal stimulus money for smart meter installation is creating a market among ‘stimulated’ utilities for the smart meters and the software, sensors, gadgets and applications to cash in on upside from all that smart grid potential. Living into the smart grid promise is proving tougher than first thought but that has not yet slowed the pace of cleantech investment. ABB spent a whopping $1 billion for Ventyx fearing it was falling behind competitors in the space and that transaction along sent the Peachtree Green Advisors year over year growth in software category up 1,124% or $1179M versus $96M last year.
Is Cleantech Ignoring the Energy Boom and Bust Cycle?
The energy and utility industry has always been a classic boom and bust market. There are great regional fundamentals about fuels, demand, weather and other factors that shape the supply and demand balances. There is the fragmented nature of the electric transmission and bulk power grids across North America and Europe that optimists from Sam Insull to Enron to today’s high tech smart grid players are trying to game.
The information technology sector has its own boom and bust cycles but they are driven by Moore’s Law-like changes in generations of technology not market fundamentals of their customers. Tech often creates and or tries to control the timing of the cycles by the staging of new product releases. The rush today in the cleantech segment focused on smart grid is caused by the need to monetize the investment in useful products to fit them into end-to-end solutions to be useful to customers. Scale is driven by market share growth of end-to-end solutions.
In smart grid markets the government is turning the tech business cycles upside down creating an artificially stimulated market demand for smart meters before the rest of the end-to-end solutions are developed to make them useful. The Bakersfield Effect is a response to customers feeling the cumulative impact of costs going up before they see the benefits of the new technology installed.
But achieving the promise of smart grid requires a lot more than installing smart meters and the two biggest hurdles are among the most difficult business, regulatory and political problems the energy and utility industry has ever faced:
- Building the interstate transmission to get all this renewable energy from its remote windy or sunny production points to the urban markets where it is needed.
- Dynamic Pricing of electricity based upon real-time market conditions that subject customers to the price volatility sufficient to encourage energy efficiency, demand response needed to optimize the performance of the grid.
There is a reasonable probability—maybe 50/50—that without progress on these two critical success factors the entire smart grid science experiment might fail.
What if Smart Grid Fails?
What is missing in the mix for many of these new cleantech players seeking to scale their growth in the energy and utility sector is an understanding of energy fundamentals. The focus today is short-term driven by transactions, deal flow, trading, and stimulus money or subsidies. Many of these players will discover over time that this artificial market demand is a ruthless and unsustainable business and short-term can often be short-sighted when you bet on the wrong technology.
It used to be that energy market consultants were the wise men of this business category providing a long term view of market fundamentals of supply and demand, a detailed analysis of the cash flow at risk in choosing power generation technologies or transmission line, and the ability through simulation modeling to play ‘what if’ across alternative scenarios. But the rush to cash in on smart grid is redefining energy consulting around business process, systems integration, IT selection and implementation and its integration with enterprise software solutions. Yes, we need all of that to optimize the performance of the grid and make use of the insight provided by the tsunami of data generated from smart grid technology.
But optimization analysis is NOT a substitute for fundamental energy market and portfolio risk analysis in making strategic decisions.
The classic boom and bust cycle has four stages:
We are in the early stages of build-up as weak demand begins to turn into tighter reserve margins, slowly rising prices and more congestion on the grid. Given the long lead time historically required to build power generation projects like coal plants or nuclear plants for baseload power there would be a substantial pipeline of project in the planning and permitting queue. But the prohibition on building new nuclear plants and the bias against coal fired generation has emptied the queue and today most new power supply additions are wind energy and solar power projects.
That we are building more clean renewable energy is good, but it may not be sufficient to met the energy demand for a recovering economy and almost certainly not enough for a boom market. A return to even average historic electricity load growth of 1% to 2% per year in the decade ahead may create energy shortages. Natural gas is the default fuel and default technology for filling the gap. It may not be the least cost, best fit choice for every market but it may be the option of last resort.
The biggest players emerging in the smart grid driven markets lack a core competency in energy fundamentals and don’t have a qualified stable of energy market and risk consultants who earn their living analyzing transaction options and looking for the sweet spots in the markets that are the least cost, best fit technology, fuels and portfolio options for the long term.
So if you want smart meters and the gadgets that use the data they produce there are plenty of vendors who will sell you their solutions, but they won’t be able to help you when the market turns. And if you wait for the recovery stage of the energy & utility business cycle it will be too late.