Navigant Research Blog

Will One Company Conquer the Distributed Energy Space?

— November 25, 2015

I have often suggested that I don’t see any single company ever dominating the distributed energy space with networking platforms such as microgrids. My recent Leaderboard report, which ranks microgrid developers/integrators that offer their own distributed energy resource (DER) controls platform, underscores this point. All 15 companies that were ranked were, at the very least, contenders, with only three emerging as leaders according to the report’s criteria.

Some disagree. After this report was released, General Electric (GE) made a major announcement that raised some eyebrows, launching a new company called Current, an aggregation of existing business units currently valued at $1 billion. Jan Vrins, global energy practice leader here at Navigant, suggested in a recent blog that this move positions GE in a role of the network orchestrator, a business model that may prove to be the most profitable over the long term.

Current is designed to bundle previously disparate business lines offering LED lights, solar PV, energy storage, and electric vehicles into a single startup located within the walls of GE. Many in the industry are curious as to how this will play out, among them yours truly.

Whether talking about microgrids or virtual power plants (VPPs), the other significant development in the DER space is the approval of the merger between GE and Alstom Grid. Why? While GE’s broad suite of products relevant to the microgrid space is impressive, its control platform was not its strongest suit. By incorporating Alstom Grid’s controls, which are repurposed from its platforms used by numerous wholesale grid operators throughout the world, it now has a platform aimed at the VPP portion of the distributed energy value stream, migrating value from distribution level resources up to wholesale operations.

I see GE recent moves aligning more with VPPs—a network orchestrator business model—than microgrids. This is in spite of its major presence in New York, the hotbed for retooling utility business models to allow utilities a greater role with DER aggregation and optimization via community resilience microgrids. Since France, Germany, and Denmark in Europe are the current hotspots for VPPs, the GE-Alstom Grid merger is looking like a potential winner.

Yet there is plenty of competition. Navigant Research’s recently published report, our ninth edition of the Microgrid Deployment Tracker, for the first time tallies up identified microgrid capacity by vendor. Using that metric, ABB comes out on top. The bulk of these projects are remote microgrids in places such as Australia, islands off the coast of Spain, and in Alaska. The same update shows, nonetheless, if one tallies up total projects, it is Schneider Electric that rises to the top. Coincidentally, Schneider Electric ranked first in terms of the Leaderboard report, largely due to its partnership strategy on the controls questions, with firms as diverse as ETAP, Green Energy Corporation, and DONG Energy among its co-innovators.

One also has to admire the breadth of solutions being offered by Siemens. By offering a complete end-to-end solution for microgrids, including financing, and integrating this approach with the vision of smart city infrastructure, Siemens is echoing the idea that microgrids become a complete infrastructure package. The worlds of microgrids and VPPs come closer and closer together over time.

So, the bottom line? I don’t see any one company dominating the microgrid/VPP space anytime soon. GE’s recent moves will go a long way in strengthening its role in the DER space, but it has plenty of competition. Left unanswered at this point in time is whether the network orchestrator role will indeed unlock the revenue streams to allow large technology players to innovate in the increasingly crowded distributed energy market. It looks like GE wants to find out.


M&A Activity in the Wind Market Picks Up

— October 23, 2015

2015 has seen a notable uptick in merger and acquisition (M&A) activity in the wind energy industry, which mirrors activity in broader global markets in general. Thomson Reuters reported a 36% increase in M&A activity and values reaching $3.5 trillion for 2015 (both globally and across all industries), the biggest yearly total since records of this data were kept in the 1980s. The largest news in the wind energy industry is General Electric’s (GE’s) takeover of Alstom’s power generation business. Additionally, Germany’s wind turbine vendor Nordex will take over Spanish turbine vendor Acciona’s wind assets for €785 million ($880 million).

To say this is fully a trend, however, may be an overstatement for the wind energy industry. The merger of the GE and Alstom wind businesses was a happy byproduct of the much larger acquisition by GE of Alstom’s power generation business. The GE-Alstom joint venture should ultimately be good for the offshore market by introducing another major conglomerate-backed offshore vendor to counterbalance Siemens’ approximately 60% market share of operational offshore wind capacity, followed by MHI-Vestas with around 14%.

The Nordex-Acciona deal is more strategic. According to Navigant Research’s report World Wind Energy Market Update 2015, Nordex installed 1,489 MW globally in 2014 and Acciona installed 345 MW. Nordex will improve its access to large markets like Brazil and the broader Latin American market, as well as its footing in the United States and Canada, where both companies have maintained a small footprint. Acciona will get a share and partnership with a company known for good technology and forward-looking R&D efforts that will allow Acciona to reduce its costs. The changing pace of  technology in the wind business has been relentless, and the associated R&D commitments—while significant—are not likely a major priority for Acciona, as its core business is focused on construction activities.

Signs of the Future?

Does this suggest that other M&A are on the way? Perhaps. There could be more deals, but the wind industry (excluding China) is mature, so there are few M&A opportunities, and other acquisitions would have to be large. The ownership structures of other players are also somewhat protected. Germany’s Enercon is protected from takeover since a controlling interest in its shares were transferred to the Alloys Wobben Foundation, a trust formed specifically by its founder to protect Enercon from acquisition. Suzlon has a large controlling interest by its founding family. Gamesa has a major shareholder position by Iberdrola, which has a strategic interest in maintaining turbine supply agreements with the company. Germany’s Senvion, on the other hand, is likely to be sold by Centerbridge Partners (a hedge fund) at some point in the next 5 years. Private equity is not likely to have an appetite for the risk and expenditure required to stay competitive in the offshore market.

Consolidation among the Chinese vendors is likely given the slowing growth of the Chinese economy and the losses and lack of confidence in its stock market. A slowing of China’s annual wind market build cycle is inevitable. Wind projects built in China before adequate grid connection is ensured may be similar to the country’s overbuilding of ghost cities—unoccupied housing complexes built before enough consumer demand was in place. Last year, 23.3 GW of wind was installed in China with almost all of that capacity coming from 22 Chinese wind turbine vendors. M&A activity and one or more outright exits are inevitable among Chinese vendors, as there are too many occupying the market—even if build rates do continue to grow.


Wind Power Implications of the GE and Alstom Deal

— September 10, 2015

European regulators signed off on the massive $13.4 billion deal between General Electric (GE) and France-based Alstom this week. The principal driver of the deal is GE’s acquisition of Alstom’s power generation business. While the wind power aspect is small with regards to the broader deal, it represents one of the more significant shake-ups in the wind sector in quite some time.

GE will fully acquire Alstom’s onshore wind business, taking over the latter’s wind turbine assets. These currently consist of three turbine models, the ECO 100, 110, and 122, all of which are rated at 3 MW (and one 2.7 MW variant of the ECO 122). Tall hub heights at 119 meters and 139 meters are available for the ECO 122 turbine using hybrid concrete and steel designs. The turbines use doubly-fed induction generator (DFIG) high-speed geared drivetrains, the most common drivetrain design globally. This type of drivetrain is also used by most of GE’s turbines, which is likely to open up some supply chain efficiencies post-acquisition.

Alstom’s offshore wind business will not be fully acquired by GE. Instead, a 50/50 offshore joint venture (JV) will be created between Alstom and GE. Alstom’s primary asset in this area is its 6 MW direct drive Haliade wind turbine. This is the turbine of choice for close to 1,500 MW of awarded French offshore wind tenders, which provides a promising pipeline. The Haliade is also the turbine of choice for Deepwater Wind’s 30 MW Block Island wind project, the first offshore wind plant in the United States, currently under construction off Rhode Island.

Perspective on Scale

It is important to put the scale of the two wind businesses into perspective. In 2014, GE installed 4,624 MW of wind capacity while Alstom installed 286 MW, according to Navigant Research’s World Wind Energy Market Update 2015 report. This put their annual global market shares at 3rd and 24th, respectively, which means that GE is not acquiring an enormous new wind business. Its wind division and supply chain are already optimized for GE’s own wind business, which is focused on the U.S. market, followed by Canada and Brazil. What the acquisition will give GE is a small market share increase in Europe, where so far it has had limited success, mostly in Germany.

Brazil is one market where GE and Alstom have notable overlap. Based on Navigant Research’s figures for wind turbines installed during 2014 in Brazil, GE secured 22.2% market share while Alstom secured 13.5%. This is likely to be the first market where supply chain consolidations and efficiencies are enacted and the combined venture becomes a market leader. One clear benefit to GE’s wind business is that the more market share the company can pick up outside of the United States, the better it can cushion the impacts of the tendency for the U.S. market to face on and off again wind policies, resulting in booms and busts.

Offshore Potential

GE is not active in offshore wind and has stated it is because of offshore wind’s high cost, risk, and reliance on subsidies. Expect that tune to change since entering into the JV is an implicit acceptance of and de facto entry into offshore wind.

Part of what has been behind GE’s reservations about offshore is a reluctance to compete in a capital-intensive sector, where it would face stiff competition exacerbated by brand loyalty to European companies such as Siemens and Vestas. The fact that Alstom’s offshore turbines are part of this new JV should continue to give those turbines an edge in France and, more broadly, in Europe.


Honeywell Steps into Smart Grid Fray with Elster Acquisition

— July 29, 2015

Honeywell’s purchase of smart meter maker Elster is a sign that the smart metering business still has some attractive runway for companies willing to endure the somewhat lengthy procurement process of utilities. The $5.1 billion deal gives Honeywell a solid global competitor for the next wave of smart grid investments.

The Deal

Honeywell is purchasing Elster from its current owner, Melrose Industries, a British investment firm that specializes in buying manufacturing businesses, turning them around, and selling them for a profit. In this case, Melrose did that after paying approximately $2.3 billion for Elster in 2012, suggesting a profit of nearly $3 billion. Melrose said it generated a 33% internal rate of return in the 3 years since acquiring Elster.

Here is what Honeywell is getting by purchasing Elster: a global manufacturer of gas, electricity, and water meters; communications equipment; and software solutions, including data analytics. It is also taking on about 6,800 employees of Elster, which is based in Mainz-Kastel, Germany. The company has operations in 39 countries, including the United States, the United Kingdom, and Slovakia. Honeywell is also taking on about $1.4 billion in pension liabilities.

Fits with Plans

While this move raises some eyebrows for its premium price, the acquisition fits with Honeywell’s stated plans last year that it would target some $10 billion to buy companies over the next 5 years. And while the smart meter business has slowed, particularly in the United States since federal stimulus money dried up, Elster has been active, picking up business in France as part of ERDF’s deployment of 35 million meters, and scoring a deal with CFE in Mexico earlier this year for about 300,000 meters. In addition, earlier this year, Elster launched an enhanced gird software platform called Connexo that integrates utility workflows, business processes, and grid data from multiple devices and vendors into a unified solution. According to Honeywell, Elster is attractive for several reasons: its high- and low-temperature burner products and residential heating components complement Honeywell’s existing business within its Environmental Combustion and Controls group; Elster’s presence in high-growth regions aligns with Honeywell’s strategy; and the existing Elster customer base presents an opportunity to cross-sell legacy products.

For Elster and its employees, the deal makes sense. Honeywell already has some synergies in the gas sector, and is no stranger to the way the utility industry operates. Elster’s electricity and water businesses give Honeywell a broader set of technologies it can leverage as those sectors grow in ways different from gas. Nonetheless, Honeywell will be facing some experienced meter manufacturers. Companies like Landis+Gyr, Itron, and General Electric are formidable global players, not to mention lesser known Chinese manufacturers, such as Holley Metering, that want to move beyond their domestic markets.  By acquiring Elster, Honeywell has the vehicle to be competitive now, and with skill can stay among the leaders as the market evolves.


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