Navigant Research Blog

EnerNOC Loses Its Crown as the Last of the Pure-Play Public Demand Response Companies

— June 23, 2017

And then there were none. All the pure-play energy efficiency and demand response (DR) public companies have now been gobbled up by large industry players. First, Comverge went private in 2011 and was recently acquired by Itron. Then Opower was bought by Oracle in 2016. Now EnerNOC has been acquired by Enel Green Power North America (EGP-NA) for $300 million. It was no secret that this was going to happen, as EnerNOC had essentially put itself on the auction block earlier this year. The only suspense was who the buyer would be. I don’t know anyone that had EGP-NA in their betting pool. I saw EnerNOC’s CEO Tim Healy at the Edison Electric Institute’s annual conference in Boston last week, and he did a great job keeping his poker face on.

The likely scenarios seemed to include either being taken private by a private equity company, like what happened with Comverge, or being bought by a large vendor like General Electric (GE) or Schneider Electric. It was not probable that a US utility would be in the mix. But European utilities like ENGIE have been active in getting footholds in the US distributed energy resources (DER) market with more customer-facing solutions. EGP-NA had been one of the quieter ones. By adding the EnerNOC deal to its recent acquisition of energy storage software/project developer Demand Energy, EGP-NA has pushed itself toward the forefront of this market.

A Lot of Opportunity

EGP-NA has no existing DR infrastructure, so there should not be a lot of overlap in terms of personnel or resources. The move should help EnerNOC expand more quickly in the European markets. The press release on the deal quoted Healy as saying, “we look forward to accelerating the growth of our core businesses and to delivering ever more value to our customers as we lead the transition to a more sustainable, distributed energy future.” So it seems like there is a lot of opportunity for EnerNOC to pursue, but it will likely face integration risks as the deal gets consummated.

I am glad that it appears that EnerNOC’s main business and position in the DR industry will continue. I was worried that a private equity firm might pick it apart and sell the pieces. I look forward to seeing the company expand DR further around the globe.

On the downside, I won’t have any more exciting transactions to write about. I guess we’ll have to wait and see if all of these recent deals pan out in a few years or if the next wave of news will be the large players selling the smaller DER players after unsuccessful integration attempts.

 

Wärtsilä Acquires Greensmith: Genset Manufacturers Expand Their Role in the Energy Cloud

— May 19, 2017

This week, Wärtsilä announced its acquisition of Greensmith, highlighting a significant trend: generator set (genset) manufacturers are acquiring systems integration and controls capabilities. As this trend continues, the companies are embedding themselves ever deeper into the distributed energy paradigm outlined in Navigant’s Energy Cloud.

Hybrid/Storage Plays

Wärtsilä of Finland is a major global producer of larger reciprocating engines for power generation and marine uses. Yet, genset manufacturers in a variety of segments have been building relationships with storage and controls companies. This strategy can be considered both defensive and offensive in the fast changing genset industry, as explained below. Some specific moves since 2015 are shown in the following figure.

Generator Manufacturers with Publicly Announced Hybrid/Storage Plays

(Sources: Navigant Research, Company Press Releases)

In addition to Cummins, Caterpillar, Wärtsilä, and Doosan, other generator manufacturers, including General Electric (GE) and Aggreko, have announced storage offerings developed either internally or by undisclosed vendors. Most of the above companies also offer solar PV solutions in conjunction with their installations, whether through partners, through distributors, or directly.

There is clear appeal in genset/storage/PV hybrid systems. PV provides clean daytime power at cheapening costs, while gensets provide flexible baseload on demand for nighttime hours and fluctuations in demand. Solar production forecasting, as in the cloud monitoring systems developed by CSIRO, can adjust the operation of gensets to improve integration and save fuel costs (often a significant few percentage points). Storage then provides multiple benefits: in addition to smoothing out PV production, batteries can optimize genset operation, allowing for fuel savings, smoother operation, and sometimes even elimination of redundant gensets.

Defense and Offense

With the latter fact in mind, this acquisition/partnering strategy can be thought of as playing defense—acquiring a backfill revenue source for what may be a declining need for number of systems on any given project. Consider the example presented by Wärtsilä here. Of the six gensets in the “spinning reserve by engine vs storage comparison,” two have become redundant with the addition of battery storage, since the storage provides the spinning reserve formerly afforded by the gensets. If vendors see lower genset sales in cases like these, they may jump at the chance to backfill with sales of controls, storage, or PV.

Apart from its defensive aspects, this strategy also has significant offensive upside. As power production becomes ever more decentralized, genset manufacturers with solid distributed energy resources (DER) strategies will be well positioned to capture market share. There exist major opportunities in microgrids and virtual power plants—indeed, all across the Energy Cloud. As the core technology providers of thousands of legacy microgrids, genset vendors are both driven and well suited to serve a major role in the future of electricity.

 

Not Interested When Telcos Acquire Tech Companies? You Should Be

— April 12, 2017

A recent post on my LinkedIn news feed demonstrates how an emerging trend in the technology industry will affect the pace of utilities’ digital transformation. Crucially, it had little to do with utilities: it was the acquisition of data startup Statiq by Telefonica. Statiq’s specialty is the analysis of geo-locational and other consumer data to assist with online marketing. Telefonica has 300 million customers worldwide and is rapidly building up its advertising business.

On first reading, it seems to have very little impact on the industry: “telco giant buys advertising data business” doesn’t sound like the kind of headline that will grab the attention of many utility CEOs. However, “a network operator—as part of its digitization strategy—has acquired a data and analytics business to help it develop products and services beyond its core supply-based business model” sounds a lot closer to home.

Historically, the growth curve of analytics companies would follow a similar path: each company starts with a great idea to tackle a gap in the market, gains initial funding, grows a significant client base, then gets acquired by a tech giant. IBM, SAP, and Oracle have all made analytics-focused acquisitions over the past decade, and the trend shows little sign of abating. But one tech company buying another tech company should have little impact on end users. The technology remains commercially available and, one would hope, being part of a larger organization means that there will be sufficient development resources to improve the product.

Utilities Are Steadily Becoming Tech Companies

However, there has been a significant shift in the types of companies investing in technology startups. Rather than tech giants swallowing up successful startups, utilities are getting in on the act. As we’ve said many times before, utilities are becoming technology companies. My colleague Alexandre Metz has analyzed different utilities’ digitization strategies, and both equity investments in and outright acquisitions of technology companies by utilities are becoming commonplace.

There will be significant implications for the industry should this trend continue: there are finite resources in terms of the number of successful startups, robust technologies, and excellent staff—particularly in the field of data and analytics. As a result, some technology-focused utilities will emerge with significant competitive strength. They will either sell these technologies to other utilities or, if it is to their advantage, keep the technologies for themselves. Does anyone expect Telefonica to share the market insights its Statiq acquisition will bring with its competitors?

Risks Abound When Utilities’ Digitization Strategies Involve Mergers and Acquisitions

So why refer to a telco-based acquisition at all? Telefonica brings into focus the fact that utilities are not the only companies undergoing a digital transformation. The competition for limited investment opportunities is heating up, and it will not be restricted to the utility industry. Utilities will have to compete against tech vendors and other industries to acquire at least some technology companies.

The main challenge for utilities is that they are not used to rapid change, and acquisitions have largely been restricted to other utility companies. There are significant risks involved in technology company acquisitions, to which most utilities have no previous exposure. Thus, technology acquisition will not be for every utility. However, those utilities that want to acquire technology companies must recognize the risks involved, understand how the target acquisition supports their corporate strategy, and ensure they have the requisite skills to succeed. Utilities must choose trusted advisors who understand their overall corporate strategy; have deep knowledge of target markets, companies, and technologies; can help identify important targets; have experience in technology-specific due diligence; and can support the successful integration of the acquisitions within their corporate structure.

 

Wind Turbine Blade Strategy: Building In-House or Out?

— January 26, 2017

Wind and SolarThe continuing cascade of merger and acquisition (M&A) activity in the wind sector has primarily centered on a few high profile wind turbine OEMs, but it has also been accompanied by a few blade manufacturer acquisitions. Wind turbine OEMs are continually revaluating whether to build blades in-house, outsource them, or juggle a careful blend of the two sourcing strategies. There has been a trend over the past few years toward more outsourcing arrangements. However, two recent acquisitions of independent blade manufacturers are raising the question of whether the trend toward more outsourcing is slowing.

The largest of the deals was in October, when US industrial conglomerate GE inked a $1.65 billion contract to acquire LM Wind Power, the world’s largest independent wind blade manufacturer. LM’s annual blade manufacturing capacity is estimated by Navigant at around 6,300 MW. A much smaller deal announced in November saw German turbine OEM Senvion acquiring European blade design and manufacturing company Euros for an undisclosed cash sum.

Reversing Course?

So is the era of blade outsourcing reversing? In short, no. Instead, it is a continued validation of the “make and buy” sourcing that balances both in-house manufacturing with outsourcing. Over the past few years, wind turbine companies have increasingly gone down this path because it brings the advantages of both sourcing options instead of being wedded to the limitations of one. Having in-house capacity guarantees supply and ensures that increasingly sophisticated blades are designed and manufactured strictly to the wind turbine OEM’s needs. Outsourcing can give turbine vendors more flexibility in using globally located independent manufacturers while avoiding the need to build new factories to serve all global markets.

GE bringing blade production in-house does not refute or reverse the trend toward outsourcing. Rather, it rebalances GE’s previous 100% outsourcing to an OEM that can make and buy. It still plans to source from the independent vendors—although inevitably at lower rates now that it can satisfy in-house needs from LM under its ownership. Senvion already chose a route of make & buy, and the Euros acquisition just brings more expertise in-house at a time when sophisticated large blade rotors are so important to turbine design.

Furthermore, there has been well-reasoned speculation that GE’s LM acquisition may have been a preemptive defensive move to prevent Siemens—which has been on its own M&A spree —from acquiring LM. Siemens has and still produces all blades 100% in-house, but the company’s acquisition of Gamesa, which makes and buys, may have ignited a new interest in acquiring more blade production capabilities and options. Having more options and controlling interests in more companies would provide more solutions to the complicated blade sourcing strategy of the larger merged company as Siemens/Gamesa turbine designs and technologies are increasingly harmonized.

A Significant Market

Blades are costly and increasingly strategically important parts of the wind turbine supply chain. Blade costs are typically around 22%-24% of the overall cost of the wind turbine, or between $90,000 to $140,000 per blade, depending on size, materials, and other particulars, according Navigant’s recent Wind Turbine Blade Technology & Supply Chain Assessment report. The global wind blade market is significant, with between $6.6 billion and $7.7 billion in revenue expected annually from 2016 to 2025.

Going forward, there likely will still be some shake-ups among turbine OEMs and blade and other subcomponent suppliers, and some strategic moves may be made to in-source previous outsourcing. In general, however, wind turbine OEMs are expected to continue on a trajectory of blending in-house production with cost-effective flexible outsourcing.

 

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