Navigant Research Blog

Discreetly, Cleantech Policy Advances

— July 2, 2012

The Supreme Court (SCOTUS) and its role in the everyday lives of the America people has been on full display as the justices declined to hear the appeals case challenging the authority of the Federal Energy Regulatory Commission (FERC).  (Oh, and there was something about healthcare.)

What’s really on stage in the former case is the contrast between Congressional policymaking and the distinct authority of the FERC.  The Commission is driving innovation through relatively discreet policymaking that is developing new markets for the cleantech space, despite roadblocks and partisan wrangling in the U.S. Congress.

The strategic wielding of policy instruments, whether regulations, taxes, or subsidies, can encourage markets, and for cleantech technologies from solar to advanced batteries can change their value proposition dramatically.  The German feed-in-tariffs (FITs) – which were recently cut – developed one of the most robust markets for solar photovoltaics (PV) in the world; their success is likely to help PV reach grid parity in the next several years.  Conversely, subsidies in japan are just starting to kick off.

What’s unique about the United States’ approach is the long demonstrated preference for business-based market advances, rather than mandate-based advances (e.g., the European Union’s renewable energy directives).  The FERC’s role, and perhaps more accurately, that of chairman Jon Wellinghoff (as Forbes has rightly pointed out) is to open markets to competition and provide market parameters that reward technological innovation.  As a result, select segments of the power industry in the United States are undergoing dramatic changes through mechanisms like real-time pricing and pay-for-performance compensation.  While subsidies and government support aren’t completely absent in the U.S., these more discreet policy changes are enlivening the cleantech industry in more subtle ways.

Here is a highlight of recent developments that have resulted from the FERC’s regulatory authority:

  • The Electric Reliability Council of Texas (ERCOT) set a new wind power generation record, as wind supplied 17.64% of the system’s load.  (See FERC Order 888.)
  • Advanced batteries such lithium-ion chemistries are being deployed to provide frequency regulation services through lucrative business models – this AES Energy Storage project at Laurel Mountain Wind Farm is one of the largest installations in the U.S.  (See FERC Order 755.)
  • Energy efficiency is now counted as a viable generation resource and compensated as such through demand response programs.  Viridity Energy and others have spearheaded viable business models based on saving consumers energy.

The global cleantech industry is one still dependent on policy direction; but discretion is often the best policy.


Elster Acquisition Signals Smart Grid Upside

— July 2, 2012

After weeks of speculation, German meter manufacturer Elster has been acquired by Melrose, a British buyout firm focused on engineering companies.  The deal, valued at $2.3 billion, signals that there is upside for smart grid hardware makers poised to capitalize on the global rise in new deployments.

The acquisition’s value raised some eyebrows because it was thought to be a high premium.  But this is not necessarily the case.  Melrose is paying a multiple of about 10 times estimated 2012 earnings.  By comparison, last year Toshiba paid roughly 10.7 times earnings (according to Credit Suisse estimates) for meter maker Landis+Gyr.  So, eyebrows should be lowering.

Why did Melrose strike now?  Because the market is heating up with potential rivals circling, according to Melrose CFO Geoff Martin: “There’s evidence that a number of global corporates are interested in this area, so we went fast,” Melrose told Bloomberg News.

Indeed, a market with a warming trend made it the right time for Elster’s majority owner, CVC Partners (itself an investment holding company like Melrose), to sell.  CVC Partners bought Elster in 2005 from German utility giant E.ON at an estimated price of $1.5 billion.  That’s a nice return on investment after 7 years.

Here is what Melrose gets in the deal for Elster:

  • A solid manufacturing business that’s a market leader in gas meters, and a meaningful player in electric meters
  • A company with a strong position in smart grid technology
  • A company active in markets with long-term upside drivers, such as the growing demand for energy, efficiency, and an increasing emphasis on gas

In particular, Elster is poised to do well in Europe, where roughly 49% of its business originates, and where it, along with several competitors, is part of a recent order for 1 million smart meters from Spanish utility giant Iberdrola.  Iberdrola plans to deploy 20 million of those meters between now and 2018.

In addition, the move to smart meters in Europe is expected to ramp up as utilities across the continent upgrade hardware as one means of meeting mandated targets of 20% reductions in energy consumption.  Elster management, though, may have second thoughts about this deal.  Those who remain after the planned exits of Elster CEO Simon Beresford-Wylie and CFO Rainer Beaujean must wonder what life will be like under the control of yet another holding company that will sell the enterprise in a few years.  Keep in mind Melrose’s corporate slogan: “Buy, Improve, Sell.”

For Elster’s customers, as well, the deal spells uncertainty.  Will Melrose make investments and provide direction that still keeps customers happy?  How committed will the new owners be to Elster’s current strategies, products, and markets?  This all remains to be seen.

In the larger context, the deal brings into focus other possible acquisition targets among meter manufacturers, such as Sensus and Itron.  Privately held Sensus, which is based in Raleigh, N.C., has been rumored to be on the block for months.  Itron, based in Liberty Lake, Wash., is publicly traded with a current market cap of about $1.6 billion.  There are no rumors of any deal for Itron, but that doesn’t mean one won’t materialize.  An acquisition for either company in the next 6 to 18 months wouldn’t surprise me at all.


Verizon and Hughes Shake Up the EV Telematics Market

— June 29, 2012

At almost every level of the nascent electric vehicle market, companies are hoping to be able to use the data from EV consumers to build better systems for the customer experience and the smart grid connection.  There’s a large amount of work being done by telematics providers, OEMs, and suppliers to reduce range anxiety and understand the vehicle use data.  What’s surprising, as I learned at the Telematics Detroit 2012 conference on telematics for electric vehicles, is that there is little specialization occurring to enable these telematics programs to take advantage of these unique customers.  It feels like an opportunity is either not being revealed or being missed entirely.

This doesn’t come as a surprise.  When I did the research for the EV Telematics report last year, I found that there was very little specialization at that time as well.  The few key areas of specialization were (and still are) identifying EV charging equipment locations, enabling trip planning, and offering the ability to reserve charging stations.  The focus of the telematics industry when it comes to EVs is reducing range anxiety.  In my opinion, that should be the cost of entry, not the end goal.

The big news in Detroit was the announcement of Verizon’s acquisition of Hughes Telematics for $612 million.  Most of the smaller telematics companies are not happy about Verizon’s vertical extension into their market.  And who can blame them?  One conference-goer groused, “Verizon stops advertising for an afternoon and can afford to buy one the largest telematics firms with revenue that bests us on a good year.”  I pointed out last year after this same event that “there are too many in this segment to be sustainable. This industry looks ripe for consolidation as it grows.”

The smaller telematics companies may not be happy, but the arrival of big service providers should fuel growing innovation in the EV telematics space.  Verizon has been rapidly building its machine-to-machine (M2M) capabilities, with purchases of nPhase and of cloud computing providers.  With Hughes, Verizon now has a very complete package it can offer automakers, and it has created a forum to identify new telematics services and needs that capitalize on the 4G LTE platform.

Hughes has already established programs with electric vehicles with more on the way.  Verizon is also no stranger to the electric vehicle market and is now partnering with Via Motors to implement PHEV vans into their fleet.  What does all this mean for the EV market?  Well, my hope is that the combination of Verizon’s innovation and the strength of Hughes in telematics and M2M will light a fire under the slow-to-blossom EV telematics opportunity.  The combination of a small market (only about 31,800 plug-in vehicles are on the road as of June 1) with buyers who are interested in technology and have a proven willingness to be first adopters, positions these drivers as prime targets for beta testers for new telematics features.  Bring on the innovation.


Despite EU Revisions, Energy Efficiency Will Thrive

— June 29, 2012

The status of one of the European Union’s keystone energy efficiency laws, the Energy Efficiency Directive, has been in flux over the last few months, as my colleague Eric Woods discussed in a recent blog.  The Energy Efficiency Directive, launched a year ago, gave legal teeth to the EU’s 20-20-20 targets, by obliging energy retailers to reduce their sales by 1.5% per year, among other measures.

That provision has been under revision over the last few months through amendments proposed by the European Council.  Most of the proposed amendments have focused on exempting certain customers or sectors on the basis that existing energy efficiency rules, such as the EU Emissions Trading Scheme, are already in place.  The effect has been an erosion of the original 20% energy reduction goal.

On one hand, this could be viewed as a considerable setback that will reduce the potential for energy efficiency activity in Europe.  To some extent, it will – as Eric wrote, the law is likely to result in an energy reduction by 2020 of only 17%.  And future amendments are by no means out of the question – in fact, the Energy Efficiency Directive itself was a replacement for erstwhile policies such as the Energy Services Directive, which encompassed similar but less aggressive energy efficiency goals.

On the other hand, the amount of energy efficiency investment over the next decade is expected to grow steadily.  As described in our recently published report, “Energy Efficiency Retrofits for Commercial and Public Buildings,” the market for energy efficiency retrofits, including energy services, HVAC and lighting system upgrades, and a range of other services, will grow from $35 billion today to over $55 billion by 2020.


Energy Efficiency Retrofit Revenue, Western Europe, 2011-2020

(Source: Pike Research)

Regulation plays an important role in driving investment in energy efficiency in Europe, and the Energy Efficiency Directive is one of many policy instruments at both the EU and national levels that are promoting energy efficiency improvements in buildings.  However, the market is also further bolstered by necessary building renovations, which virtually always yield more efficient building performance, as well as voluntary efforts by public and private organizations to reduce their energy consumption through efficiency.

Moreover, as standards such as the ISO 50001 energy management standard become more commonplace, the industry as a whole will shift its focus from building efficient new buildings to making existing buildings more efficient, leading to growing opportunity for the energy efficiency business.  So despite the dilution of the Energy Efficiency Directive, there is good reason to expect an expanding market for energy efficiency services in Europe.


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