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Why Mergers and Acquisitions Will Define the Distributed Energy Boom
Utilities are eager to expand their cleantech portfolios, and new companies are offering a bounty of investment opportunities.
Katherine Tweed
December 07, 2017
Why Mergers and Acquisitions Will Define the Distributed Energy Boom
We’re in the middle of a boom in utility mergers and acquisitions. The biggest power companies in the world are scrambling to buy up new startups in order to stay at the forefront of the distributed energy transition -- and they’re spending billions of dollars in the process.
Total annual investments in distributed energy companies by European and North American utilities more than tripled between 2010 and 2016, according to data compiled by GTM Research.
In total, utilities invested $2.9 billion in 130 individual distributed energy companies since 2009 -- $1 billion of which was invested in 2016 alone. The trend has continued this year, with nearly half of global industry deals involving renewable energy during the second quarter, according to a report from Ernst & Young.
Those numbers are only a preview of what’s to come.
“I think the appetite for acquiring startups will really increase over the next few years,” predicted Matthias Dill, the managing director of Germany-based Statkraft Ventures, a venture capital fund backed by Norwegian energy firm Statkraft. "We see three fundamental trends driving M&A activity in the energy sector: Incumbents embracing distributed energy, startups becoming relevant players in the energy sector, and players from other sectors entering the energy sector. The exciting part is that all of this is happening at the same time.”
Incumbent utilities are now grappling with the reality of distributed energy. Consequently, operations are already changing in significant ways – and utilities are doing everything they can to future-proof themselves.
The shakeup is evident in Europe, where E.ON and RWE both split up their fossil fuel and renewable assets last year. RWE created Innogy to focus on renewable energy, electric vehicles and retail markets. And E.ON established Uniper, in order to separate its upstream fossil fuel operations. Both are seeking out partnerships and acquisition targets to grow their renewables businesses.
And there is much more money waiting to be spent. According to the International Energy Agency’s latest forecast, renewable energy investments will amount to $7 trillion by 2040. Trillions more will be invested in energy efficiency and demand-side management.
The trend holds true for midsized European power companies as well. U.K.-based Drax Group acquired the electricity provider Opus Energy last year for £340 million ($453 million). The Netherlands-based Eneco invested in two German companies -- virtual power plant developer Next Kraftwerke and renewable energy provider LichtBlick -- and acquired the Dutch smart thermostat company Quby.
Dill said startups like Quby are especially appealing to incumbent power utilities because they bring in new business possibilities and, once acquired, no longer present an acute threat.
Statkraft Ventures invested in one such startup in 2015. Munich-based Tado was developing intelligent climate control platforms, and Dill’s team saw an opportunity to market the product through utilities.
“When they started out, they weren’t really an energy firm. They were already successful, but mainly an e-commerce and consumer electronics firm,” said Dill. “We invested two years ago, and today their major customers are the utility sector. Now they enable incumbent utilities to offer new products to their customers and have a better customer relationship.”
A diverse and growing pool of cleantech startups like Tado is entering the scene and presenting new possibilities for mergers and acquisitions. More companies than ever are working in the energy space, and many got their start outside of the energy sector.
Technology maturation and customer preferences are drivers of the trend. Wind and solar costs rival conventional fossil fuels; customers want renewables and greater control of their energy use; and the business models are becoming more sophisticated.
“Today, the heavy lifting in developing technologies like solar, wind andstorageis done, but this generates a new set of questions,” explained Dill. “Startups are in a perfect position to address these new issues, which are often centered around data-management and customer experience, and they can be addressed in a very capital-efficient way.”
Tado has become so attractive to utilities that it receives a steady stream of offers to acquire the company.
“We get inbound inquires every two months,” said Tado founder and managing director Christian Deilmann, “but Tado is not up for sale. We are just getting started.”
Since Statkraft invested in Tado, the company has grown “tenfold” in customers and revenue, added Deilmann.
Other nontraditional players are eyeing cleantech startups too. Last year, the California-based cloud-computing giant Oracle bought Opower, a utility software company, for $532 million. Years earlier, Google was at the forefront of this trend when it bought smart-device maker Nest for $3.2 billion in 2014.
Energy-focused investment firms like Statkraft Ventures are catalyzing this market by searching for promising startups that can meet the changing needs of utilities. “It’s about finding startups that, from whatever background, can have a big impact on the energy sector,” said Dill.
As a venture arm of the Norwegian energy company Statkraft, Statkraft Ventures has an intimate understanding of large utilities.
“It’s very useful to have a shareholder that understand the specifics of the energy sector, because [it is] not always straightforward,” said Deilmann.
With such strong demand for clean technologies over the coming decades, the recent M&A activity is only the beginning.
“We and our peer VCs are building a pipeline of targets that will be bought soon,” said Dill. “It’s a nice point in time.”
Expect the biggest energy companies to be on the hunt for acquisition opportunities.
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