 |
|
|
|
|
|
|
|
|
|
 |
|
|
Phone: (202) 483-4443
Social Media
|
|
|
|
|
|
|
|
|
 |
|
|
|
|
01-15-004
It’s A Wild World For Investors In The Distributed Energy Sector
by Jamie Wimberly for Electricity Today
“Oh baby, baby, it’s a wild world,
it’s hard to get by just upon a smile …”
When I sat down to write an article on investing in the distributed energy sector (all hardware and software applications that make the distribution grid run better and more efficiently), this Cat Stevens’ song just kept going through my mind. And a wild world it is for manufacturers and vendors of distributed, alternative and emerging energy technologies and the firms and funds that finance and invest in them!
When our firm, the Distributed Energy Financial Group (DEFG), was just getting started, we put out a press release after the blackout in the U.S. and Canada entitled: “DEFG Cautiously Optimistic About DE Sector.”
At that time, we felt that the blackout and other disturbances in the North American power grid were going to nicely highlight the value proposition of power quality, reliability and the enhanced ability of utilities to control and manage their distribution grids, and that DE companies provided products and services that would meet at least some of those customer demands in the future.
For now, we were right (or lucky) for the most part. Companies that we recommended like Satcon Technology (SATC), Plug Power (PLUG), and American Superconductor (AMSC) have appreciated considerably since then, sometimes doubling or tripling in just six months.
I know because not only do I follow these companies’ performance very closely, but unlike my partners, I also own shares in many of them.
But the sentiment that there are good deals and investments to be made is also increasingly shared by a number of financial firms and funds. New venture capital funds are being formed. Specialized funds focusing on project development and financing, such as Sun Edison which focuses on solar projects, have been established. Companies like Allied Capital, Baker Capital and other established sources of mezzanine finance are beginning to invest in the sector. And energy companies as diverse as Chevron Texaco and DTE are making acquisitions and are running profitable business units focused on the DE sector.
Let me emphasize, though, the word cautiously in our press release title. As we caution investors in the press release, investing in or financing the distributed energy sector is not for the weak of heart. The sector will continue to be marked by volatility, “down rounds” when DE firms burn through a couple rounds of finance before getting anywhere near profitability, lags in product development, an uncertain regulatory environment, rocky transitions from the research and development phase to commercialization, uneven executions of business plans, and any number of other bumps in the road.
As one of my colleagues in the financial world commented, “We treat most of these companies as essentially venture capital plays – no matter what they say to the contrary.”
Yet, there are opportunities as well.Why Now?
The Distributed Energy Financial Group (DEFG) was formed to provide focused, independent and credible financial analysis, information products and advisory services for investors seeking to make acquisitions or to finance companies and projects, or for vendors, manufacturers, utilities and others seeking to expand their business in the distributed energy sector. Our objective is to then become a well-known and credible channel into deal flow. In short, our firm seeks to be a bridge between the capital markets, providers of products and services, and end users.
We created DEFG because we feel the time is ripe for the distributed energy sector to finally gain traction in the market. Like with all major transformations due to technology, there is that magical inflection point in the growth trajectory, when flat growth over the years turns into an arrow shooting into the sky. Over the next five to ten years, we believe that that inflection point will be realized.
There are a number of important drivers present leading us to this conclusion, including but not limited to:
Aging Distribution Infrastructure: With all of the focus on the lack of new investment in transmission capacity due to the blackout, the overburdened and aging distribution infrastructure of many electric distribution companies has been all but overlooked. One only has to examine how the capacity rates of many distribution feeders and substations, especially in urban areas, have reached their limit to realize that something has to be done.
Customer Demand: Demand for electricity continues to increase as does the density of demand – more machines and applications, particularly information technologies and programs, using greater amounts of electricity relative to other forms of energy. As utilities and suppliers continue to unbundle their businesses and bills, DEFG believes that more differentiation and segmentation of consumer offerings will occur once the market figures out what customers want and how to price the offerings.
Smart Grid: DEFG is a firm believer that the electric industry will continue to move from a commodity-focused, silo-based, heavily regulated approach towards a network-oriented, functional and horizontal structured, competitive and consumer-driven industry. In short, if you begin to think of the grid using the Internet or even real estate as reference points, then you begin to think much more of the underlying value of the grid in different ways with value nodes that have not been fully understood or exploited.
Public Policy Drivers: There are a whole array of public policy drivers that make distributed energy investments more attractive, including security concerns, implementation of resource portfolio standards and other incentives for “clean energy,” efforts to development domestic energy production, to name a few.
There are other important drivers, including individual DE companies becoming better at managing and growing their businesses, but the point to be made is that DEFG believes that trends favorable to DE in all its manifestations are becoming stronger and harder to ignore.
Financing The Stuff
To say that the future of the distributed energy sector should brighten is one thing, financing companies and projects in the sector is quite another.
DEFG is currently hosting the Distributed Energy Investment Consortium to bring together senior executives from the financial and DE sectors to examine the question of how to increase capital flows into the distributed energy sector. From our discussions within the Consortium, it is clear that a disconnect exists between the expectations, focus, and even language of the two sectors.
What vendors, manufacturers and suppliers of DE products and services must first understand is that the problem is not a lack of capital or interest in investing in the sector. In fact, there is a wave of capital building for investments in the sector.
The challenge is to know what kind of financing that you are seeking, or in other words, to know who you are talking to and what their investment parameters are (“their box”). Executives in the DE sector tend to focus on what their technologies are and can do, rather than explaining clearly who is buying their goods and services and how they expect to grow in the future. DE executives need to learn how to speak to the financial community in a way that they can understand.
When speaking with the financial community, there are a few things to keep in mind...
The first and most important consideration for an investor is how to get their money back at the end of the deal. In other words, they simply are not willing to lose money and will do everything they can, including taking over your company, to avoid that proposition. Smart DE executives will have an exit strategy laid out beforehand to answer this question up front.
For the financial community, money is not the important variable – risk is. And generally speaking, their risk tolerance is very low, meaning no tolerance of technology risk, technology application risk (using proven technologies in new ways), commodity risk, to name a few.
Financial firms see almost the entire sector as being risky. Therefore, it should come as no surprise when they expect returns of 20 percent or more for their investments.
Almost universally, financial firms want to invest in companies with cash flow and earnings. In other words, what is your value proposition now and into the future?
Each company, technology and project is different and represents a different opportunity. However, if DE executives can begin the conversation with responses to the points above, and know beforehand who they are talking to, then the process should go a lot more smoothly and successfully.
Many believe that the capital available to the DE sector is scarce and very expensive. In fact, a wave of capital is building and beginning to crest. What will bring this wave to shore are discussions leading to good deals. So, hold onto your hats.
It’s a wild world...
Jamie Wimberly is a managing partner and CEO of the Distributed Energy Financial Group, LLC (DEFG). In addition to DEFG, he co-founded and serves on the Board of the Center for the Advancement of Energy Markets (CAEM) and also serves on the investment Board of vFinance. Mr. Wimberly has more than ten years of experience in the energy industry and is widely regarded as one of North America’s energy experts.
|
|
|
|
 |
|
|
|
|
.gif)
.jpg)
.jpg)
