Consolidation in the Intelligent Energy Sector
Consolidation in an industry sector can be a good or a bad sign.
The waves of consolidation in the PV manufacturing sector for example, presaged (when it was vertical consolidation to lock up access to demand for panels) and then highlighted the overcapacity in that industry. Much of the ongoing consolidation upstream in the solar value chain at this point is opportunistic consolidation of IP on the cheap. Not exciting at all from an investor's perspective.
But the looming consolidation in the "intelligent energy" (ie: IT applications in energy efficiency) sector is, I believe, a very different story. One that is positioning the sector to start showing some really exciting growth stories.
There is a paradox at the heart of the building energy efficiency opportunity.
Many venture investors have shied away from the sector because it doesn't lend itself to what they consider "proprietary technology" that has massive scale -- because it is a highly fragmented market, when you get down to ground level. A home in Nevada behaves very differently and has very different energy costs than a home in Connecticut; much less trying to compare either building to an office building in Chicago, or a foundry in Idaho. So the matrix of optimal lighting, HVAC, etc. solutions ends up looking quite different from customer to customer.
And yet conversely, many of the basic solutions do have commonalities; and many customers end up having some of the same space-driven needs in common. That foundry in Idaho does have an attached office that's smaller than, but has similar needs to, that Chicago office building. Those homes both have opportunities to participate in automated demand response programs and voluntary efficiency programs.
As we've discussed here before, one of the challenges for "single solution" vendors is figuring out how to scale up in the face of such a fragmented market. It's tough to navigate through that matrix of potential customers to find the ones that need your particular solution AND have budget, authorization and motivation to act. One solution we've discussed is to cast a very wide net, and harvest the scattered "easy wins" out there.
But an alternative approach is to offer a full solution set. If you have a full suite of solutions, it's more likely that any single customer will have a need you can satisfy. And that's what the looming consolidation in the intelligent energy sector is shaping up to look like. An early mover in this wave, EnerNOC, acquired several ancillary businesses in energy procurement, carbon accounting and wireless demand control for small commercial facilities -- acquisitions with mixed results, but clear intent. And then yesterday's announcement of Nest's acquisition of MyEnergy. These were acquisitions to provide more completeness of offering to customers who want a single vendor to solve their overall energy issues, not just offer one particular solution. They don't complete that aspiration, of course, but they're pointed in that direction.
While there have been and will continue to be opportunistic acquisitions of distressed assets, of course, I believe this is going to be a healthy consolidation wave in this sector. Why? Because the most strategically-valuable acquisitions will be the ones that customers are already experienced with and are proven out in the marketplace, not distressed assets. Acquisition targets that already have some additional strategic value beyond any proprietary technology, such as customer/user networks, brand recognition, etc. This will be real companies buying real companies, and if done right, will end up with even faster sales growth. And in intelligent energy in particular, it is relatively easier (stress: relatively) to integrate different offerings into a consolidated single platform for customers.
What this likely means is that we're going to start seeing the emergence of several acquiring platforms that could eventually challenge the incumbent sleepy technology providers in these markets (the Johnson Controls, Honeywells and Rockwell Automations of the world). These acquirers will increasingly look to offer a full-service solution set to a particular category of customers -- utilities on the one hand, and on the demand side likely different platforms for different major categories like residential, retail, manufacturers, etc. Some solutions will be outright acquired, others will be licensed or otherwise brought into the solution set without an acquisition. But for major categories, the offer will be "one stop shopping" for their energy needs.
Controls providers will be well-positioned, if their solutions can be easily integrated into a wide range of other vendors' equipment. Network effects really come to the fore when you're looking to consolidate control of a very fragmented user equipment base onto one platform.
This also likely means that owning the customer relationship, is going to become even more valuable. Those who own the customer interactions are going to want to be such consolidation platforms; startups that can aggregate a significant customer or user base and aren't planning on driving consolidation will themselves become prime acquisition targets.
The rapid proliferation of new, intelligent solutions for the building energy efficiency market has therefore opened up an opportunity for some new, big players to emerge. And for the incumbent providers to also therefore need to drive strategic acquisitions of their own so that their offerings to their customer base also don't develop gaps.
This feels like the launch of an arms race in intelligent energy, in other words. And investors who are building and selling into it should be pretty excited right about now.
Rob Day is a Partner with Black Coral Capital, based in Boston. He has been a cleantech private equity investor since 2004, and acts or has served as a Director, Observer and advisory board member to multiple companies in the energy tech and related sectors. Rob was a co-founder of the Renewable Energy Business Network (www.rebn.org), a non-profit organization which was acquired in 2009 by ...
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