NewEnergyNews: TODAY’S STUDY: New Energy Deal-Making


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    Monday, April 08, 2019

    TODAY’S STUDY: New Energy Deal-Making

    The M&A Way into Distributed Energy

    Jan Zenneck, Maximilian Bader, Thomas Baker, and Holger Rubel, March 2019 (Boston Consulting Group)


    Distributed energy resources (DER) companies have emerged as a real force in the power industry. Recent advances in battery storage, smart-home technology, and energy management devices, as well as a growing thirst for green energy among customers and policymakers, are making DER an attractive alternative to traditional grid distribution and meter-based systems.

    The M&A Way

    To take advantage of the opportunity that DER holds—the market is growing by double digits annually—incumbents would be wise to pursue acquisitions of DER companies. Although expanding, the DER segment is still immature and fragmented, populated by numerous small startups. Established utilities have a wide variety of potential partners with which to enter the market quickly.

    First-Mover Advantages

    Power companies that strike first to increase scale, expand DER R&D, and develop new skill sets in DER applications can rapidly realize a competitive edge. By bringing the latest technology and a lean cost structure to the DER market, incumbents could gain first-mover advantages and become dominant in a segment that promises to become as palatable to consumers as the traditional power segment is today.

    Only a couple of years ago, the incumbents that dominated the global power market could afford to be casual onlookers as the distributed energy resources (DER) segment began to emerge. The impact of DER companies—which provide localized power, usually from renewable energy sources, and which sell equipment for behind-the-meter energy storage and usage management—was limited, and it appeared that it would take some time before they would be able to offer customers an acceptable alternative to the traditional grid distribution and meterbased systems.

    But that wait-and-see period for large power companies has ended—perhaps sooner than anyone expected. Rapid technological advances in battery storage, smarthome technology, and energy management devices are making DER much more attractive in terms of cost and convenience for various types of customer applications, including reducing carbon emissions. Because of this, power companies must drastically change their strategic calculus. Simply put, traditional utilities can no longer rely on incremental internal expansion to tap into the DER market. Instead, they must take more immediate action—namely, pursuing M&A deals with DER companies that have complementary offerings and can expand utilities’ coverage areas and broaden their scale, enabling them to aggressively grab market share.

    Why M&A Now

    A combination of factors explains why traditional power companies must pursue M&A with urgency. One is that the growth of the DER market has been significant and sustained; incumbents can’t afford to forego this potential source of revenue when the industry is on the cusp of change. The DER market has expanded annually by double digits, with the greatest gains coming from sales of power storage equipment, photovoltaic (PV) systems, and systems that manage energy and the response to demand. For instance, in California, about 10% of residences already use solar power, and beginning in 2020, every new residential construction must include a PV system. In Australia, rooftop PV equipment generates sufficient power to satisfy up to 48% of the country’s electricity demand at midday. Recent policy moves point to continuing growth of the DER segment. The European Union has adopted new energy savings policies that call for an annual reduction in national energy sales of 1.5%. In addition, more than 100 global companies have announced plans to shift to using 100% renewable energy in the short term.

    M&A is imperative not only because of market growth but also because the DER segment is still immature and fragmented. Revenue assessments of the top five players in five categories—OEMs, energy service companies (ESCOs), utilities, integrators, and software providers—show that their DER sales represent only 25% of the total DER market. (See Exhibit 1.)

    Indeed, except for the companies that manufacture DER systems or components (primarily a concentrated group of multinationals, including Johnson Controls and Honeywell), DER players tend to be regional companies with revenues that span the gamut. Save for a few rare cases, even the DER companies with the highest revenues would not be considered flush. For instance, traditional utilities’ annual DER revenues range from $200 million to $2 billion, while DER integrators, which offer equipment and energy services, may take in $100 million to $1 billion. (See “Finding the Sweet Spot in Distributed Energy,” BCG article, May 2017.)

    click to enlarge

    This growing but fragmented market represents a huge opportunity for utilities that are ready to take bold steps. With few DER market leaders so far, power companies that strike quickly to increase scale, expand DER R&D, and develop new skill sets in DER applications can rapidly realize a competitive edge. By bringing the latest technology and a lean cost structure to the wide-open DER market, power companies could gain first-mover advantages and become dominant in a segment that promises to soon become as palatable to consumers as the traditional power segment is today. Moreover, since the core business of utilities is being challenged by DER, power companies cannot sit idly by and let DER players of any size encroach on their shrinking markets. Indeed, private-equity companies are already beginning to invest in small DER ventures, creating a cushion of support for startups that could heighten the threat to utilities.

    This is where M&A comes in. Although some utilities can build scale organically by internally developing and marketing DER technologies, for most power companies, acquiring DER players that already have a market footprint is the only option that makes sense. The DER landscape is expanding and evolving too rapidly for homemade solutions that take a long time to implement and that improve market share slowly, if at all.

    Scale considerations aside, most traditional power companies lack the capabilities that would enable them to use operating models based on the distribution of renewable resources and the management of onsite energy and storage. Consequently, M&A becomes the principal channel to productively acquire the skills and market share to become a leader in DER.

    An M&A Blueprint…Scale…Capabilities…Innovation…

    Avoiding the Pitfalls of M&A

    Given the rapid expansion of and interest in the DER market, it wouldn’t be surprising to see some power companies rush headlong into this segment to get a foothold before their rivals do. On the face of it, such an approach—girded by a series of acquisitions—makes a lot of sense. But that good market judgment could be compromised by a lack of strategic discipline in designing an M&A campaign.

    One comprehensive consideration should propel any M&A effort: the company’s overall DER strategy and how M&A will help realize it. Remember, M&A is not a goal, but the means to an end. And since the number of potential acquisition targets may be limited, developing a clear decision tree is necessary to assess which partners offer the most attractive and relevant returns. That decision tree should grow out of the answers to the following questions:

    • Can a specific deal’s broad prospective gains—such as expanding product and service offerings, market reach, the customer base, branding efforts, skill sets, and the talent base—be achieved by organic growth? What is achieved by securing those gains sooner through an M&A transaction or a partnership?

    • How does a deal create short- and long-term value? Note that neither revenue enhancement nor cost reduction necessarily constitutes a sufficient reason to acquire another company. Those outcomes may impact the company’s income statement, but they won’t enhance the company’s market position or its reputation as a leader in a dynamic power segment.

    • Does a deal help the company improve its capability to understand its customer base and give new customers what they want? Increasingly important in the DER segment is knowing customers’ energy profiles and customizing solutions to meet their needs.

    • Will an acquisition “move the needle” for the company, putting it in an advantageous position as a differentiated player? It’s important to be aware that just putting a toe in the water of the DER market, as many large utilities and even oil and gas companies are doing, is unlikely to deliver sustainable success in the competitive DER segment.

    • If a deal involves the acquisition of a startup, is an integration plan in place to retain the best of the company’s talent and innovative spirit after the merger is completed?

    The Path Ahead

    Becoming a leader in the DER market is well worth the effort for traditional utilities. The new approaches and solutions are poised not only to change how power is generated and distributed but also to transform the relationship between power companies and their customers. Established companies are fortunate in that M&A offers them a clear channel for quickly taking a privileged position in this soon-tobe lucrative market.

    But if M&A gives traditional utilities a potential leg up, it does the same for other types of companies, too—specifically, oil majors, midsize ESCOs, IT conglomerates, and even private-equity investors. This, in turn, makes having a cogent plan—with an M&A centerpiece—more crucial than ever if utilities are to successfully deal with the full measure of the DER disruption. Simply put, the combination of an opportunity and a strategic tool to take advantage of it should be a weapon that’s too powerful for smart, established power companies to ignore.


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