Navigant Research Blog

Ecova Buy Builds GDF Suez’s Demand-Side Business

— June 6, 2014

On May 30, French energy giant GDF Suez acquired energy management company Ecova for $335 million through its energy services unit, Cofely. Founded in 1995 as WWP Energy Solutions, Ecova started out as a utility bill management company that helped customers better understand their energy bills.  Over time, the company expanded into adjacent businesses such as energy procurement, waste management, and telecom.

As demand for energy management and sustainability tools grew in the late 2000s, the company acquired other specialist firms, such as Ecos Consulting, The Loyalton Group, and Prenova, a building energy management systems (BEMS) company.  This organic growth enabled Ecova to get an early lead in terms of acquiring Fortune 500 customers focused on energy management, such as Shell and Starwood Hotels.

GDF Suez, though perhaps known best as a power supplier with operations primarily in France, Belgium, and the Netherlands, has diversified its portfolio over time and, through its suite of subsidiaries, is now a major energy services provider.  Of its €17 billion ($23.2 billion) in total annual revenue, 6% – or €1.0 billion, is in energy services, including facility construction, operations & maintenance, and energy efficiency retrofit services.  The company is also more international today than in the past, with 25% of its revenue coming from outside Europe.

Blurred Lines

The Ecova acquisition propels GDF Suez forward in its pursuit of broad energy efficiency services.  In addition, Ecova’s intelligent, software-based platform complements Cofely’s more traditional approach to energy efficiency via HVAC, lighting, and building automation system (BAS) retrofits, allowing it to provide enterprise-level energy management for GDF Suez’s global customers.

From a geographical point of view, the acquisition provides GDF Suez a platform for engaging a broader set of energy service customers in North America while accomplishing largely the same for Ecova, as it aims to expand beyond North America.  It also brings GDF Suez in closer competition with French rivals such as Schneider Electric, which acquired a close Ecova competitor, Summit Energy, in 2011.

By bringing more intelligent building capabilities in-house, GDF Suez is positioning itself as a broad energy services provider for buildings, and this acquisition symbolizes the continuing blurring of the lines between the energy and buildings industries.

 

How the GE-Alstom Combination Could Save the Offshore Wind Power Industry

— May 8, 2014

GE’s proposal to acquire French power engineering group Alstom’s power generation business for $13 billion is not a done deal – the French government has said it is conducting a review of the purchase, and Germany’s Siemens has provided a counterbid while it conducts due diligence.  This proposal will, if completed, have major implications for all forms of generation – including wind power.

In truth, the prospective deal raises more questions than it answers regarding how the wind energy businesses of the two companies will merge.  First is how to square GE’s hesitant approach to offshore wind with Alstom’s serious and capable pursuit of the market.  If that happens, this deal could provide a much needed boost to the promising, but struggling, offshore wind sector.

Nothing Further

Alstom has chosen direct-drive turbines for its next-generation offshore turbine, the 6 MW Haliade.  The first prototype was installed in French waters in 2012 and a second in 2013.  The same units are destined for a Rhode Island, Connecticut offshore wind farm.  Alstom also won the right to be the exclusive turbine supplier to the consortium led by EDF Energies that secured three offshore projects with a combined capacity of 1,428 MW in the first French offshore wind tender expected to be commissioned by 2018.

Beyond that, the future for both Alstom and GE offshore is unclear.  At the annual European wind conference in March, GE’s vice president for renewables Anne McEntee said the company was focused on the onshore wind market and questioned if offshore wind makes economic sense due to its high cost and vulnerability to policy volatility.  GE knows from experience.  It installed a 3.6 MW turbine offshore in Ireland in 2003, and since then has been largely quiet on offshore.  GE’s re-entry into offshore seemed imminent in 2009 when it acquired Sweden’s ScanWind, which offered a 4.1 MW direct-drive offshore turbine.  GE installed one in Sweden in 2011, but there’s been no further news.

Bigger Is Better

The future is likely one with fewer but stronger wind turbine vendors than exist today.  In offshore, consolidation is the strategy of choice, with Vestas forming a joint venture with Mitsubishi and Areva forming a joint venture with Gamesa.  If GE plans to use the Alstom acquisition to re-enter the offshore wind market, that furthers the consolidation trend and will help GE in terms of offshore turbine technology and market entry.  Alstom’s offshore turbine is larger and arguably more advanced and robust than GE’s 4.1 MW unit.  Also, GE’s financial strength is exactly what the offshore sector needs right now to increase the confidence of offshore wind investors and, in turn, help find solutions to bring down the cost of offshore wind for the entire industry.

Alstom’s onshore turbines are likely to be phased out as a brand, but the technology will be rolled into GE’s fleet and will augment GE’s 2.5 MW turbine offering with 2.7 MW and 3.0 MW units. Alstom turbines spin in 15 countries, and the company has a nacelle facility in Texas.  Alstom also has a strong presence in Brazil, where it delivered 238 MW in 2013.  Yet, GE took top market share in that country for the first time in 2013.  The merger would result in one less competitor for the limited market and cement GE as the most formidable competitor.

 

In Mergers, Security Risks Arise

— May 6, 2014

While my colleagues analyze a couple of recent big acquisitions – GE’s announced acquisition of much of Alstom and Exelon’s announced acquisition of PEPCO – I’m going to examine mergers and acquisitions (M&As) from a cyber security perspective.  This is one of those rare cases where security has a longer timeline than other disciplines.  Usually we get the call just after the disaster.

An M&A, almost by definition, introduces a great amount of variance into what was once a stable environment.  Two corporate cultures must merge.  Two sets of business processes must merge, frequently with substantial overlap in areas such as back-office processes.  Two sets of operational processes must merge.  Two IT architectures must merge, or at least be made to coexist.

Each of these sub-mergers introduces variation and uncertainty that can create prime targets for cyber attackers.  Sophisticated attackers are aware that stable, day-to-day operations are likely to be best protected.  Exceptional situations, such as system mergers or transitions, can present attack windows where normal protections are not present.

They’re Watching

A key attack point lies in the transition from old to new processes or systems.  Many M&A transactions are justified in part by the reduced operating expenses of the combined entity.  Redundant administrative functions can be eliminated, separate IT systems can be merged, control of operating networks such as SCADA can be centralized to a single control center.  During these mergers, security is often lax because the transitional situation will only endure for a short time period.  There is a temptation to overlook security and gamble that system conversions or migrations will be completed before anyone notices.  But attackers start taking notes when the acquisition is first announced.  When the M&A involves publicly traded companies, the transaction may take months to finalize – and all of this time can be used to plan an attack during the transition period.

Meanwhile, employees unfamiliar with new business processes can be susceptible to social engineering attacks, wherein the attacker may pose as someone performing the transition activities and ask for passwords or other sensitive information in the name of speeding up the conversion.  As with many other social engineering attacks, this one often works because the scenario is plausible.

Watch the Exes

There are many steps to mitigate these risks.  Here are three of the most important:

  1. Build security into all transitions – business processes, IT, control systems, everything.  Think about what kind of protections will disappear when old processes or systems are decommissioned and plan for how those protections will remain present during the transition.
  2. Conduct a thorough employee awareness program to ensure that all employees of both companies understand what transitions are taking place and what their roles are in protecting the resulting merged entity during the transition.  It is especially important to notify employees that no one will call them and ask for passwords or other sensitive data.
  3. Have a backup plan in case something goes wrong during the transition to ensure that the business can continue to operate.  Like most business continuity planning, this is often an arduous but critical activity.

Usually transitions associated with M&As do not all happen at once.  Enterprise IT systems and operations control systems sometimes are not merged until years after the transaction.  Unfortunately, one of the first transaction activities is to terminate the employment of administrative employees made unnecessary by the M&A.  Even in this case, there should be sufficient protection against hostile activities by disgruntled employees.

 

With Pepco Deal, Exelon Moves to Calmer Waters

— May 2, 2014

As a former Exelon employee, I don’t find the announcement of Exelon acquiring Pepco a surprising development.  A wave of consolidation has hit the utility industry since the recession began in 2008, with larger companies with stronger balance sheets looking to take over vulnerable entities.  Pepco may not have been in obvious peril, but it has recently earned less than its allowed return on investment, making the Washington, D.C.-based investor-owned utility a likely target for acquisition.

Exelon has agreed to buy Pepco for $6.8 billion, creating the largest utility in the Northeast. After the merger, Exelon’s utilities will serve 10 million customers and have a combined rate base of $26 billion, putting it close to Duke Energy as the largest utility customer base in the country.  

Steady as She Goes

Exelon’s stock and earnings have taken a beating the past couple of years, due to the exposure of its nuclear and coal plants to flattening electricity prices brought about by weak economic growth and strong shale gas expansion.  When it acquired Constellation for $7.9 billion in 2012, Exelon was counting on the competitive generation and supply segments as the growth leaders of the business, while the regulated utilities were just the hull of the ship keeping it afloat.  The opposite occurred, however, as low energy and capacity prices sank the baseload generation business to the point where Exelon is considering retiring several nuclear plants and made the retail supply business, which thrives on volatility, a strategy in limbo.  Texas-based Energy Future Holdings Corp. (EFH) recently declared bankruptcy due to similar failed bets.  Price spikes this past winter and future capacity price increases in New York and New England may present a glimmer of hope (Exelon’s stock is up over 30% this year), but those factors involve plenty of risk and a long-term horizon, as well.

So, now the pendulum swings back to the safer, regulated side of the business.  Acquiring Pepco makes geographic sense, as it expands Exelon’s reach down the I-95 corridor from Philadelphia to Baltimore to Washington, D.C.  There will certainly be opportunities for overhead and personnel savings to be found among the various headquarter locations, as well.  Already an expert in the PJM wholesale energy marketplace on the Eastern Seaboard, Exelon has a long familiarity with the region’s public utility commissions.  There really is not much downside for Exelon, aside from valuing the business appropriately.

This is not a sexy deal in terms of being a beachfront for new business models or technology breakthroughs.  It is simply a back-to-basics, balance sheet-stuffing, risk-reducing measure to steady the helm in current market conditions.  If the opposite of a polar vortex occurs this summer, maybe the merchant business will come roaring back to the fore.

 

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