Investor-owned utilities, historically possessing the lowest cost of capital among public companies, are fully harnessing energy management software to seek out capex savings on expensive transmission and distribution upgrades.
The convergence of severe weather such as recent hurricanes and lower cost renewable energy flooding the utility market has directly spurred a more active M&A market for target companies providing demand response, or peak power load-reducing software, among other technologies, said industry executives, advisors and investors.
Companies as far-flung as global oil producer Royal Dutch Shell [LON:RDSA], software provider Oracle [NYSE:ORCL] to traditional power producers Engie [EPA:ENGI] and Enel[BIT:ENEL] have bought in to the global shift to grid resiliency by taking active stakes in peak power-shaving software.
Such strategics have acquired a dozen energy software companies this year, according to Mergermarket’s deals database. Deal momentum gained pace within the last three years for nascent grid-technology companies in many cases barely out of growth capital mode.
Sector advisors say after Itron [NASDAQ:ITRI] became the last remaining public company in the smart grid market, a new slate of up to 60 energy software start-ups are in queue for acquisition in the next two years.
According to Mergermarket’s database, 13 grid technology deals were announced for the year to date with aggregate deal value of USD 1.349bn, compared to 11 deals announced during 2016 with USD 1.24bn of aggregate deal value.
As utilities prepare for the future, the conversation has been remarkably similar among the ranks of large-cap investor-owned utilities, rural utilities and cooperatives across the globe, said Hans Kobler, CEO and managing ppartner of Energy Impact Partners, a venture capital firm whose industrial partners include 15 investor-owned utilities.
“Utilities generally seek to increase revenue, get closer to the customer and harden their operations as they prepare for the digital, decentralized, decarbonized future,” said Kobler, whose firm has made strategic investments in grid-tech companies including AutoGrid Systems, Enchanted Rock, Greenlots and OpusOne Solutions.
Strategic buyers have set their business development teams on software targets which are competing for utility contracts in the grid. Such targets are able to track and analyze power consumption and divert primary baseload power generators from turning on during the day with supplemental power from renewable sources such as wind, solar and battery storage.
Matthew Rennie, global head of EY’s Power and Utilities Transaction Advisory Group, said in the regulated utility context, a “hobby arbitrage” in peak load reduction has formed over recent years, leading way to growth stage capital flowing into energy software start-ups such as AutoGrid, Demand Energy Networks and Enbala Power Networks, among others.
Utilities have been increasingly focused on mitigating up to 50% of transmission capex costs on network upgrades from systems put to the test only 1% of the time, such as during peak power use over the summer. Rennie said energy software providers have saved utilities on multi-billion-dollar transmission upgrades in New York City, California and elsewhere.
Key customers too have been buying into cost savings from demand response. According to a Smart Electric Power Alliance survey of 104 utilities, 5.7m residential and commercial customers were enrolled in demand response programs as of 31 December, representing 10.7 GW of 13.6 GW of enrolled power capacity.
Capex reduction at historically low-growth regulated utilities is the “holy grail” of demand response, Rennie said. These software systems divert power from more expensive baseload power sources. such as gas or coal plants at peak intervals of the day ,and source power from distributed energy or battery storage renewable power, creating a cleaner and more cost-effective grid, he said.
Superstorm resiliency
And short of being acquired by a power provider, contracts with one big utility can spark acquisition interest from the upstream energy and industrials market.
After Superstorm Sandy ravaged New York City in October 2012 and peak power escalated through lengthier summers, utility Consolidated Edison [NYSE:ED] turned to demand response software providers, energy efficiency and smart meter companies to submit proposals in a 2016 power auction solicitation called the Brooklyn-Queens Demand Management procurement.
While the BQDM auction was successful at procuring 22 megawatts of demand response resources into the outer boroughs of New York, the auction saved Con Edison on a USD 1.2bn sub-station upgrade for transmission and distribution throughout its metropolitan territory.
Matt Ketschke, senior vice president of Customer Energy Solutions for Con Edison, said the New York utility interacted with primarily mature grid-tech companies on BQDM, some of which have been acquired or received strategic investments, to meet the needs of the utility’s distribution sub-station upgrades.
Among the BQDM companies Con Edison interacted with, Ketschke pointed out OPowerwhich was sold by VC investor New Enterprise Associates in May 2016 to software giant Oracle [NYSE:ORCL], in a USD 551.5m transaction, to create the latter’s Oracle Utilities platform.
Among deals tracked by Mergermarket, two public companies, EnerNOC and Silver Spring Networks[NYSE:SSNI], were acquired this year by Enel and Itron in USD 300m and USD 826m transactions, respectively.
Expanding Power PE Universe
Pavel Molchanov, senior vice president and equity research analyst at Raymond James[NYSE:RJF], said three years ago there were six US-listed public companies in the grid technology sector, while this year the public universe is down to one remaining company, Itron.
With fewer public companies in the space, a growing private equity universe has gravitated toward rolling up energy software technologies, said Bud Vos, CEO of energy management business Enbala. He said the demand response market has expanded over the last few years with new utility suite products such as Virtual Power Plant software-as-a-service.
CPower Energy Management, a portfolio company of HIG Capital, is one such active PE buyer staking out the utility end-market, says Glenn Bogarde, senior vice president of sales and marketing for CPower.
CPower has pursued at least one acquisition per year, Bogarde said. Most recently it acquired energy measurement and verification company eCap Networks in July and Johnson Controls’ [NYSE:JCI] demand response business in May 2016.
Looking at a century-old utility’s footprint and saying, “we need to be more agile with our output” of dispatchable power, Bogarde said utilities are strengthening their customer territory with energy software, distributed energy resources such as solar and wind power, micro-grids and energy storage. That broader adoption of tools has also increased the buyer and investor universe for energy software.
Public strategic interest
Among the strategic category, Shell’s US business Shell Energy North America in June acquired MP2 Energy, The Woodlands, Texas-based provider of C&I demand response solutions. In January, Ormat Technologies [NYSE:ORA] acquired Viridity Energy from VC investors AltEnergy, Braemer Energy Ventures and Intel Capital for USD 35m.
Global power producers and utilities building up their energy services offerings such as Engie and Enel have added depth to the strategic buyer universe, said Luke Semple, a director of Harris Williams, which advised Itron’s May acquisition of demand response specialist Comverge for USD 100m.
Sector advisors called Southern’s [NYSE:SO] February 2016 acquisition of PowerSecure International for USD 415m and Oracle’s acquisition of OPower for USD 551m two “banner deals” that book-ended the recent uptick in energy software M&A activity.
PowerSecure and Southern were contracted by the US Army Corps of Engineers on 20 October to work with the Puerto Rico Electric Power Authority to repair the island’s power grid after Hurricane Maria decimated its infrastructure.
Southern did not return multiple requests for comment for this piece.
Next targets
Sector advisors said Itron is expected to be the next significant target. Its global footprint was recently solidified through its September acquisition of infrastructure networking specialist Silver Spring Networks and May acquisition of demand response business Comverge to create a multi-billion-dollar smart grid company likely to appeal to a global power producer, they added.
After Itron, another 60 smaller growth-stage companies are expected to become acquisition targets in the next two years to feed growing industrials, technologies and power producers’ interest in demand response.
This news service has covered a dozen or more potential energy software targets, including AutoGrid, Enbala, Bractlet, Growing Energy Labs (Geli), KiWi Power and Tendril Networks.
Enbala and Tantalus Systems, both Vancouver, British Columbia-based smart grid integrators, have raised close to USD 50m apiece in growth capital. Enbala was formed in 2003 while Tantalus was formed in 1998.
Enbala’s Vos says he expects the consolidation to start in 2018, and his firm expects to be part of the consolidation as well, though he said a sale of the company would be a couple of years away.
Tantalus Systems CEO Peter Londa said the smart grid company made its first acquisition this year to expand its product portfolio to include demand management. The Burnaby, British Columbia-based company, backed by Redpoint Ventures, is evaluating several additional opportunities to accelerate growth through the next two years, though Londa declined to comment on M&A plans for the company.
Tantalus in August acquired demand response company Energate Systems, whose utility customers include OGE Energy [NYSE:OGE] and PG&E [NYSE:PGE].
Londa said smart grid companies that can deliver integrated solutions with data analytics, such as advanced metering infrastructure (AMI), comprehensive load management and networked street lighting, will continue to be attractive strategic M&A targets.