Why ’Asymmetry’ Is Central To Understand Renewable Energy M&A

Renewable power needs a fridge. That may sound a bit funny, but the reason is that it currently shares similarities with the pre-refrigeration food industry. Namely the issue of storage.

Before fridges became common household items about 100 years ago, food consumption was mainly here-and-now. You bought your meat, vegetables, dairy products, etc. and used them within a week or two. That was how it had to be, because it was difficult to store food.

Today, renewable energy faces the same issue. It is difficult – if not downright impossible – to store the electricity generated from the likes of solar panels and wind turbine generators. It must be used when it is there. A problem compounded by sun and wind paying no heed to when we actually need said electricity.

This is one of the central asymmetries created by renewable energy. In its wake, mismatches/misalignments and new business opportunities appear, as it fundamentally changes how energy is created, distributed and consumed. One consequence is that energy storage will likely emerge as one of the biggest industries of the 21st century.

Partly due to the market penetration of renewables increasing at a brisk pace, Bloomberg’s New Energy Finance’s Global Energy Storage Forecast, 2016-24, predicts renewable energy to reach 29% grid penetration in Germany by 2024. For California, the figure will be 39% countries are aiming for 100% renewable. The goal for states and countries alike is for all energy to be renewable by no later than 2050.

As I will describe in more detail below, the asymmetries also incentivise M&A activity.

Asymmetric democracy

Asymmetry in relation to renewable energy begins with a move from centralised, top-down energy production towards a distributed production model. Renewable energy sources like solar panels and wind turbine generators can turn consumers (for example households) into producers, and distributers (utilities and power companies) into vendors and buyers.

“Renewables and software are in tandem changing the relationship between energy consumers and producers on a fundamental level. Consumers were previously passive receivers of power, but now they can be active energy producers. Companies who do not adapt to this changing relationship within the coming few years will find themselves left behind,” Michael Ware, BDO UK Corporate Finance Partner and renewable energy finance leader, says.

For example, up to half your current energy bill, when using energy at peak times, goes to cover the cost of network and transmission costs. Industrial users can quite easily lower their share of that percentage thanks to a combination of renewable energy, software and storage technologies. They make it possible to use and store electricity when it is cheapest – either by producing it, or using/storing it when it is cheapest – often at night. Critically this means the clever industrial user can, by not using power at peak times, avoid these fixed charges and their less switched on competitors who have not invested in storage are left to pick up the tab.

In the long run, the grid pricing structure probably needs to change. At the moment, power companies will be left between a rock and hard place: either they pass the grid and transmission costs onto their remaining customers and thereby increase their bills or they pay the extra expenditure themselves. 

In other words, energy companies need to re-examine their business models, or face a situation similar to what telco companies went through when WhatsApp and Skype bit huge chunks out of their revenue.

It has led some companies to large-scale investment and M&A involving renewable energy projects and companies. Much of it aimed at adapting to a democratic, bottom-up production model. A quick side note: large renewable energy projects seem to be of particular interest to utilities and power companies. This may be because they offer the best opportunity for remaining in control of production.

Asymmetric production

Big power plants that use fossil fuels are able to adjust their output to match demand in a linear, easily predictable way. For renewables, this is not an option unless generation is combined with storage.

“Wave and tidal power are relatively stable ways of producing energy. The same can be said for generating energy from waste materials. However, wind and sun energy production is definitely asymmetrical,” Michael Ware says.

When the sun shines or wind blows, we have a lot of power. Overcast and calm weather means lower production. Neither pays any attention to actual consumption. In other words, sometimes there is massive surplus of non-durable product and no buyers. In extreme cases, this has led to situations where utilities had to pay their customers to use electricity.

At the same time, utilities are challenged to precisely predict levels of wind and sun. Getting it wrong can be a costly affair as backup electricity comes from fossil fuel power plants that are expensive to start.

Seeking solutions to the situation, companies have been turning to/acquiring AI-driven start-ups and companies. The solutions include systems that offer better weather prediction, optimises placement of production equipment and other forms of production efficiencies.

Storage holds the key

The asymmetries described above can seem unsolvable. However, the solution is relatively straight-forward, albeit difficult to achieve: storing the energy from renewable energy sources and releasing it when it is needed.

This is why systems like Elon Musk’s Powerwall batteries have been getting a lot of hype – including from me.

“Storage is at the core of renewables reaching their full potential. With more than 100 years of history, batteries are a well-known, obvious choice. The only parallel to the recent improvements to their performance is the speed of cost reductions in the price of solar panels. That said, batteries are far from the only technology in play,” Michael Ware says. 

Flywheels, hydrogen, heat changing materials, compressed air and even storing energy by driving old locomotives up and down hills are other examples. Not to mention hydrogen fuel cells, which Michael Ware sees as having huge potential.

M&A and funding figures illustrate the importance of storage in the evolving, new energy mix. Battery storage companies raised $563 million in the first nine months of 2017, compared to $209 million the year before. Much of the cash coming from VC funds, who are likely looking to sell their shares down the line. M&A figures are also of interest, especially due to the size of deals that we are starting to see. The best example might be Total’s acquisition of Saft for $1.1 billion.  

Mix and match for the win

While each renewable energy and energy storage technology has its champions, but there is likely no single winner to whom the future belongs. Instead, a multitude of complimentary sources will work together.

Everything from tidal, over waste to solar, wind and likely also fossil fuels will produce power. Storing it with not be the sole remit of big batteries or hydrogen cells. Your TV and car will also be part of the energy system. The TV thing might sound like science fiction, but such solutions are already under development.

However, our energy infrastructure is not geared for the constant flux and interaction between different parts. Asymmetries are also present here.

Which leads to many opportunities for entrepreneurs.

“Power production as an industry is relatively risk averse. Technologies are generally not backed until there is a case for rolling it out on an industrial scale. Funding tends to follow technology, which is quite logical when considering the investment level. Getting it wrong is extremely expensive,” Michael Ware says.

He sees many potential open opportunities generated by the asymmetries. Some of which require entrepreneurs to take a gamble on likely changes in the energy sector.

“Contractually, and to some degree financially, there is a lack of incentive to use smart grid-connected things like electric cars as a storage medium. This can be considered a market failure – or opportunity – at the moment,” he says.

In conclusion, storage in various forms is likely to be the foundation of the next revolution in how we use and consume energy. Instant consummation of energy at the time of production is going the way of the dinosaurs, and forward-thinking companies are already avoiding peak prices by both installing storage and setting up their own generation businesses. Both the industrial user and the domestic consumer no long have to be passive purchasers of energy and through technology can be active participants as buyers and sellers in a growing and increasingly fragmented market.