Navigant Research Blog

Energy Systems Group Acquires Chevron’s Federal ESCO Unit

— April 8, 2014

On April 1, Energy Systems Group (ESG), a major U.S. energy service company (ESCO) based in Newburgh, Indiana and a subsidiary of utility holding company Vectren Corp., announced that it had acquired the federal sector energy services unit of Chevron Energy Solutions, a subsidiary of Chevron USA. The unit, which consists of 48 employees, will not only expand ESG’s projects and footprint but, more importantly, will also allow ESG to play in the U.S. federal government’s indefinite-delivery, indefinite-quantity (IDIQ) ESCO market.

That market was created in February 2009 when the U.S. Department of Energy (DOE) awarded 16 ESCOs with DOE energy savings performance contracts (ESPCs).  These 16 contracts allow the selected ESCOs to provide federal agencies with up to $5 billion of performance contracts each.  The program effectively prequalified the 16 ESCOs to perform energy efficiency services for many of the federal government’s largest facilities.

Narrowing the Competitive Field

Although ESG had been an active player in the federal ESCO market through other avenues prior to the acquisition, such as utility energy services contracts (UESCs – a twist on the traditional ESPC in which federal agencies procure performance contracts through their local utilities), the acquisition allows it to narrow the competitive field for large contracts offered only to ESCOs.  Given that the federal market represents one of the most promising segments in the challenging ESCO market, as Navigant Research wrote in its report, The U.S. Energy Service Company Market, the acquisition positions ESG to benefit from the full scale of the federal ESCO market. “The federal sector is one of our primary targets for growth in the coming years,” said Greg Collins, President of ESG, when I spoke with him.  “This acquisition strengthens our position in delivering on a wider range of federal opportunities.”

Note that other ESCOs have entered the federal market through acquisition.  For example, in 2007, SAIC (now Leidos) acquired BENHAM Companies to gain access to a broader swath of federal building customers (though, this was before the establishment of the IDIQ market).

The federal sector has been a key focus for ESCOs in the United States over the last few years.  While the municipalities, universities, schools, and hospitals (MUSH) market remains a challenge due to the winding down of stimulus funding for municipal performance contracts and concerns about municipal debt, ESCOs have patiently awaited the boost to the market that was initiated by the Better Buildings Initiative, the $2 billion federal performance contracting program announced by President Obama in December 2011.

So far, the program has fallen short of its goal of achieving the $2 billion in contracts by the end of 2013. However, initial signs in 2014 are promising.  Many of the ESCOs I work with are reporting a strong flow of federal requests for proposals (RFPs) and, in the first quarter of 2014, over $230 million of federal IDIQ ESPCs had been awarded. By contrast, in all of 2013, only $362 million was awarded.  In addition, the CEO of Ameresco, George Sakellaris, announced in his company’s 2013 fourth quarter earnings call in early March that federal government ESCO activity was high.  Therefore, 2014 is looking strong for the ESCO market and ESG will be in a much better position to address it in the wake of this acquisition.

 

With A123 Buy, NEC Reveals Its Storage Strategy

— March 27, 2014

NEC has made a major play for a global energy storage system (ESS) business, specifically targeting the Chinese market and information technology (IT) and telecom sectors by acquiring A123 Energy Solutions to create a new company, NEC Energy Solutions.

NEC is no stranger to the grid storage market.  The company is using batteries from Automotive Energy Supply Corp. (AESC), similar to those installed in the Nissan LEAF, for both utility-scale storage (2 MW will be commissioned in Italy by Enel Distribuzione shortly) and the residential storage market.  It has also developed a residential system targeting the Japanese market with a 5.5 kWh home ESS.

There are three pieces to this transaction that will change the storage market going forward.  First, NEC is slated to establish a partnership with A123 Systems’ parent company Wanxiang to target the Chinese storage market.  Having a local partner will set NEC apart from other lithium ion (Li-ion) cell and system vendors targeting China.  Second, the acquisition includes A123 Energy Solutions’ ALM product line, a 12V Li-ion uninterruptible power supply (UPS) product housed in the same form factor as a traditional lead-acid battery.  This, coupled with NEC’s success and relationships in telecom and IT, will put the new company in a strong position to target the UPS market.

Finally, although A123 Energy Solutions has focused on the utility side of the meter using A123 Systems cells, NEC has experience on the customer side and also has its own Li-ion chemistry that’s manufactured in volume by AESC.

Storage Combinations

Navigant Research’s Advanced Batteries for Utility-Scale Energy Storage report forecasts that the market will reach $17 billion in 2023, with Li-ion taking a $7.8 billion share.  This estimate is strictly for the sale of ESSs to customers on the utility side of the meter, not on the customer side.  By definition, it excludes telcos, data centers, and other forms of commercial, industrial, and residential storage.  Navigant Research believes that the telecom market for Li-ion hit an inflection point last year, reaching $100 million in annual revenue, and is poised to grow quickly.  Regardless, NEC Energy Storage will have stiff competition in nearly all of these markets from major Li-ion cell manufacturers such as LG Chem and Samsung SDI.

What can we look forward to from NEC Energy Solutions?  A123 Energy Solutions will bring software, controls, and integration expertise, three facilities in the United States and China, a portfolio of existing installed storage assets, and any new orders to the table, whereas NEC’s strength lies with data, analytics, IT, and the cloud.  In fact, NEC’s original concept for the storage market revolved around the energy cloud.  It makes sense that NEC Energy Solutions would combine the two areas of expertise to deliver new product lines and cultivate new business models.

As a 114-year old company with 270 subsidiaries in its corporate umbrella and total annual sales in the last fiscal year of $30 billion, NEC has the resources and business relationships to use the A123 Energy Solutions acquisition as the platform for building a global business.

 

EnerNOC Drives Demand Response in Europe

— February 25, 2014

EnerNOC, one of the largest demand response (DR) integrators and service providers in the world, made two big acquisitions last week that deepen its strategy for expansion into new markets.  The first was the acquisition of Entelios, the main DR integrator in the nascent DR market in Germany.  The second was the purchase of Activation Energy, the leading provider of DR software and services in Ireland.  Although financial terms were not disclosed, EnerNOC CEO Tim Healy stated on the company’s most recent earnings call that the company spent $30 million on business development-related activities.  With these additions, EnerNOC establishes itself as the main player in these respective country markets, thereby dramatically altering the competitive landscape for DR in Europe.

The European market for DR lags far behind the United States in terms of capacity and revenue.  The main reason is a regulatory landscape that lacks the scope and diversity of the market in the United States, where independent system operators (ISOs) have created robust DR markets.  However, the need for new resources to help manage the grid are just as pressing as countries like Germany continue to add renewable energy and the intermittency created by solar and wind creates more demand for balancing resources.  As a result, there remains significant untapped potential, which EnerNOC and other players in Europe are working to unlock.

Barriers Broken

However, the European electricity grid contrasts dramatically with that of the United States, making it difficult to export some practices and technologies across the pond.  Whereas much of the DR market in the United States is focused on reducing summer peaks created by air conditioning demand, one of the drivers for demand response in Europe – particularly the large markets in Northern Europe, where air conditioning capacity is limited – is winter peaks due to high heating demand.  And, long-term projects such as the European supergrid would further open up a diversity of opportunities for flexible assets to provide benefits to the electricity system overall.  These differences make it all the more critical for a player like EnerNOC to enter the market via acquisition of players that have sifted through the technological and regulatory barriers to create viable DR markets, rather than trying to build a business from scratch.

EnerNOC already maintained a presence in the European DR sector, primarily in the United Kingdom, Europe’s most advanced DR market.  Other firms, such as London-based KiWi Power, are already active in that market, whereas other country markets are still in the more tumultuous early stages, allowing outside players such as EnerNOC to enter.  As DR becomes a higher-demand grid service in Europe, we expect to see the competitive landscape heat up with further merger and acquisition activity.

 

With Nest Buy, Google Reaches Deeper into Homes

— January 14, 2014

Google’s $3.2 billion acquisition of Nest Labs, maker of smart thermostats and smoke alarms (which I’ve written about previously), is an obvious move by the search giant to reach further into the home with Internet-connected gadgets that tie users to Google services beyond search and other online activities.  It is an Internet of Things (IoT) play, with safety (smoke alarm-carbon monoxide detector) and home energy management (thermostat) as the starting points.  (For a deeper dive into this market, see Navigant Research’s report, Home Energy Management).  And while this deal seems like a great match, there are risks and issues that need to be resolved.

The positives for both companies are clear.  The big cash infusion should give Nest the needed money to pay for expanded marketing efforts, move strategically into new markets outside North America, and hire talented engineers to continue developing disruptive products.  For Google, the company gets a big win on product design.  Nest devices have great design features, which are a testament to the capabilities of founders Tony Fadell and Matt Rogers, both of whom worked at Apple before starting Nest (and who will presumably become quite wealthy thanks to the deal with Google).  Nest has quickly established itself as the standard among connected thermostats, with distribution online, among retailers, and through some utilities.

Price and Privacy

One of the issues with Nest devices, however, is price, especially among mainstream consumers.  The Nest thermostat sells for $249, much more than typical thermostats, and the Protect smoke alarm retails for $129, again higher than prevailing products.  The Nest devices offer more than standard products, but getting past early adopters on price will now become a Google challenge.

Beyond price, installations don’t always go smoothly, and can require the buyer to hire a professional installer, which can add $200 or more to the purchase cost.  Also, a Nest thermostat software update in December 2013 caused some of the devices to go dark when it mattered most, as temperatures plummeted in the Northeast (as noted by my friend and former PC Magazine editor-in-chief Michael Miller).

There are also concerns about how Google will handle the user data supplied via Nest devices.  On January 9, France’s data protection watchdog, known as CNIL,  fined Google the maximum €150,000 ($205,000) for ignoring a three-month requirement to comply with local law regarding the tracking and storing of user information.  Similarly, Google’s previous foray into home energy management did not go so well.  The Google PowerMeter project, a free energy-monitoring tool, shut down in September 2011.  Nest brings real traction to Google in the HEM space, but could increase consumers’ wariness over privacy concerns.

I spoke with Matt Rogers last week while at CES, and he was clearly excited about Nest’s future.  Now, it’s clear why: He knew that future funding was not going to be a problem.  It helps to be acquired by the world’s second most valuable brand, but Google-Nest still faces some serious challenges, which rivals like Honeywell, among others, will be looking to exploit.

 

Blog Articles

Most Recent

By Date

Tags

Clean Transportation, Electric Vehicles, Energy Management, Energy Storage, Policy & Regulation, Renewable Energy, Smart Energy Practice, Smart Grid Practice, Smart Transportation Practice, Utility Innovations

By Author


{"userID":"","pageName":"Mergers & Acquisitions","path":"\/tag\/mergers-acquisitions","date":"4\/16\/2014"}