Utilities spark investment surge, in defensive renewable strategy

European and North American utilities tripled their investments into distributed energy startups between 2010 and 2016, investing $2.9bn in 130 companies since 2009, according to GTM Research – with 2016 seeing $1bn invested alone. Utilities are eager to expand their cleantech portfolios, investing in a range of areas to support their energy transition – while at the same time investing as a defensive strategy, to protect their market share.

Wind and solar costs now rival conventional fossil fuels, and are cheaper in some markets. Customers want renewables and greater control of their energy use, and utilities are transitioning to enable both trends. But transition creates new challenges that startups are in the perfect position to address. These issues often center around data-management and customer experience.

Investment activity into conventional energy generation is still subdued, due to a continued oversupply of traditional fuels. EY found that continuing low interest rates, and a surplus of global capital, were providing a favorable environment for mergers and acquisitions in the energy sector. In the same report, EY said the search for new energy business models was mostly driving the investment.

Accompanying the investment in startups, renewable technology has taken 48% of the volumes of investment deals globally – accounting for $6.1bn in terms in Q2 2017. Investment in renewables is set to grow, according to the International Energy Agency, which says renewable energy investment will amount to $7tn by 2040. Trillions more will be invested in energy efficiency and demand-side management, to accompany renewable integration.

Matthias Dill, the managing director of Germany-based Statkraft Ventures, said three fundamental trends are 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.

Distributed energy requires utilities to reconfigure their operations in many areas, from their relationships with customers, to their network operations – creating a range of opportunities for stat-ups to fulfil.

In Europe, it is evident that utilities are changing their business models. Both EON and RWE split up their fossil fuel and renewable assets last year. RWE created Innogy to focus on renewable energy electric vehicles and retail markets, and EON opened Uniper to separate its fossil fuel operations into a separate entity. These new ventures are both seeking out additional investment opportunities.

Mid-sized European power companies and distribution network operators (DNOs) are also investing. UK-based Drax Group acquired commercial energy supplier Opus Energy last year for $453m.

Netherlands-based Enceo invested in two German companies – virtual power plant (VPP) developer Next Kraftwerke, one of the largest VPP aggregators of energy with 2.8GW of assets under its management, and LichtBlick, a renewable energy provider.

Next Kraftwerke uses its combined capacity to actively trade electricity, optimize its production and offer demand response (DR) solutions to the German market. The investment is intended to support an expansion into other markets in Europe outside of Germany.

Enceo bought LichtBlick, and soon added Dutch smart thermostat company Quby. Smart home investments are especially appealing to incumbent power utilities, because they bring new business possibilities and, once acquired, no longer present an acute threat.

A mixture of other players made energy market focused acquisitions recently. Last year, Oracle bought Opower, a utility software company, for $532m. The acquisition has enabled Oracle to flesh out its cloud utility data management platform, and partner with Huawei to offer a data management and network solution for a utility with advanced meter infrastructure (AMI) hardware.

Google, bought smart device maker Nest, for $3.2bn in 2014. However, Nest only generated $340m in sales revenue in 2015, according to Recode, and the deal is widely regarded as a major underperformance.

One of the hottest areas for acquisition activity has been into big data and artificial intelligence. A study by accountancy firm BDO, found mergers and acquisitions involving energy companies and AI startups had soared in average value.

Acquisitions of AI software solutions are designed to solve problems arising from the transformation of an electric grid facing increasing growth in distributed energy resources such as solar and electric vehicles.

Notably, smart meter vendor Itron recently acquired Comverge in May for $100m, giving Itron added data analytics platform capabilities, in a deal that will make Itron a major contender in the demand response industry. Italian utility Enel also purchased a demand response and analytics platform EnerNOC, for $250m, with the price reflecting the tough conditions of the demand response market in the US. EnerNOC and Comverge were purchased at significant discounts from past valuations.

Generator rental firm Aggreko paid $52m for Younicos and its Y.Q software platform, which is designed to help manage battery storage assets. Enel also purchase Demand Energy, a developer and operator of energy response systems and software

Most of the big utilities already have large subsidiaries focused on delivering energy analytics platforms, strengthening these platform with acquisitions – such as EDF’s purchase of Groom Energy Solutions, to use in its analytics platform subsidiary Dalkia.

Anglelist has tracked a reported 2,595 startups in clean energy, many of which are already bringing products to market. The high volumes of M&A could be driven by competitive concern that one of these players will begin to take market share from incumbents, and that the acquisition activity is in part defensive.

A growing number of startups are looking to capitalize on commercializing blockchain-based energy trading concepts. These are likely going become the next focus of corporate energy M&A.

In June, EON and Enel traded energy over a Blockchain-based peer-to-peer network provided by Ponton. Conjoule, a blockchain platform developer hatched in Innogy’s Innovation Hub in 2015, pulled $5.3m in funding from TEPCO this July.

And that’s not to forget battery storage, a sector where AES signed a joint venture with Siemens to merge their storage practices under the name Fluence. Last year saw Engie took a controlling stake in Green Charge, and French energy giant Total picked up Saft in the largest battery acquisition ever – $1.1bn.