Utility investment at the grid edge

Utility investment in disruptive technologies is on the increase as they transition to energy service companies.
Published: Thu 01 Sep 2016

A review of venture capital support for smart grid companies over past years doesn’t reveal any high level trends, beyond that it remains buoyant and that there is perhaps an increasing number of investors becoming involved.

But there is one trend that has become very clear. That is, the increasing number of utility investors and investments in these companies, particularly those with disruptive grid edge technologies.

An analysis of this trend since 2013 by Indigo Advisory Group finds that utility investments are typically being made as part of dedicated investment arms in conjunction with other investors. Stakes are typically of 10% to 30%. The average utility joint investment round is US$19 million.

Utility investment in grid edge technologies

The most popular submarket for the utility investments is distributed energy resources, accounting for just over one-third. O&M technology and software and analytics account for a little over 15% each, and energy efficiency, energy storage, the connected home and electric vehicles all have received between 5% and 10% of the investments.

The most active utility investor is E.ON Venture Partners, with 15 investments listed to its name on its website (although not all of them are named). Others in the top 5 utility investors are in order Exelon and Edison International in the US and Engie and Iberdrola in Europe.

Notably many of the startups are US companies and six are identified as having two or more utility investors. Energy software developer AutoGrid leads the pack with five utility investors – E.ON, Southern Company, Xcel Energy, Oncor and National Grid. [Engerati-Enabling Energy Industry Transformation through Big Data, Analytics and the IoT]

Bidgely, which offers disaggregation software for home energy management, and Stem, which provides energy storage systems, both have three utility investors – both having RWE and Exelon and Bidgely also having E.ON and Stem having Iberdrola. [Engerati-ComEd To Pilot HomeBeat Energy Monitoring and Storage An Attractive Investment Proposition]

Then there are two utility investors for each of Spruce (Duke Energy, Edison International), Greensmith (American Electric Power, E.ON) and Proterra (Edison International, Exelon). Spruce, which was founded in 2015 with the merger of Clean Power Finance and Kilowatt Financial, provides finance to homeowners for solar systems and efficiency improvements. [Engerati-Community Energy Trading-A Potential Challenge for Utilities] Greensmith is an energy storage provider. [Engerati-“Energy Storage Is There”] Proterra has developed an electric bus platform.

For both utilities and companies, there are obvious benefits from these investments. They give the utilities a voice in and ready access to new technologies they can make available to customers, while the companies can gain access to the utility expertise and to large new customer bases and markets.

Susana Quintana Plaza, E.ON senior VP, Technology & Innovation, sums this up well: “Combining the innovative ideas and energy of start-up companies with the scale and market of experience of E.ON, is a powerful partnership for driving the world of energy into the future.”

As does in its mission on its website, Exelon’s venture arm Constellation Technology Ventures “engages with technology companies that have the potential to complement or disrupt Exelon’s core businesses…” and “adds value … by actively working to deploy the company’s products to Exelon’s customers…”

As utilities look to differentiate in a competitive and service oriented energy system, where customer retention and new revenue opportunities will be crucial to driving their business, more such investments are expected.

"It is becoming clear for utilities that bringing in external innovation with high potential into their companies will serve them well for the future," comments Indigo Advisory Group's David Groarke.

The utility investment panorama

Not only are innovative technologies attracting utility interest but overall utility deal activity is strong at present.

According to EY in its quarterly ‘Power transactions and trends’ reports, global deal value reached record levels over US$70 billion in each of the latter two quarters of 2015. While the figures for the first two quarters of this year are down on these (US$44.4 billion in Q1, US$43.5 billion in Q2), they are nevertheless still respectively 50% and 105% up on the same periods in 2015. At the same time deal volume is also up by one-third over the last year.

The largest share of this activity is the result of M&As in the Americas, with many deals due to continued US consolidation and convergence. There have also been more deals featuring Chinese buyers and financial investors, particularly from Canada and Asia.

In the remainder of the world, activity is driven primarily by renewables. Europe has also seen a growing number of Asian investors and Chinese deals have contributed much of the regional deal values in Asia Pacific and in Africa. [see e.g. Engerati-China ups the ante in Nigerian power infrastructure] For example, in Q1 Beijing Energy Investment Holding’s acquisition of Beijing Jingneng Coal and Electricity Asset Management was the biggest deal. In Q2 the acquisition by China Three Gorges Corporation of an 80% stake in Germany’s WindMW was Europe’s biggest deal.

“Ongoing sector and global volatility continue to be at the forefront of investors’ minds,” commented Matt Rennie, EY Global Power & Utilities Transactions leader on the release of the latest figures. “We saw this play out in the form of buyers seeking safe bets in renewables, where demand continues to rise in developed and emerging markets, and regulated transmission and distribution assets that offer stable, long-term returns.”

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