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2004-03-20
Analysis Calls on DE Companies to Get Real
Electricity Daily April 20, 2004 Volume 22 Number 076
Distributed energy companies, struggling to find their niche in the electricity business, need to get real.That’s a conclusion of a comprehensive analysis of the distributed energy biz by the Washington-based Distributed Energy Financial Group. DEFG predicts “rapid growth in numerous DE technologies” over the next few years. But in its Power Point report – Distributed Energy Sector Review – DEFG notes that some companies in the field have an unrealistic view of the role of investors in breakthrough technologies.
Some of the companies, says the report, “hope to pay very little to those who assume significant risk. This lack of realism must be overcome.”DEFG adopts an expansive definition of the investor sector, which they say “includes end-use efficiency, small-scale generation, generation-enabling technologies, demand response technologies, renewable technologies, and technologies that improve the ‘intelligence’ of the electric distribution utility grid and the integration of consumer technologies into the grid.” The sector’s growth, says the analysis, “will be driven by the aging electric utility infrastructure and customers preferences for more reliability, higher power quality, energy portability, and better cost control.”
“The Distributed Energy Financial Group was created because we strongly believe that the distributed energy sector will reach an inflection point, or tipping point, in its growth trajectory within the next three to five years, with very rapid growth thereafter,” said Jamie Wimberly, managing Partner and CEO. “The Sector Review confirms that we are on track to realize that vision.” But Tom Lord, managing partner and COO, urged caution. “While we are optimistic about the future,” Lord said, “the distributed energy sector will remain extremely volatile and speculative over the next couple of years. We expect a shake out in the short- to mid-term with at least some of the pure play companies either being bought or going bankrupt. There will be winners and losers.”
One of the problems facing the distributed energy sector, says the analysis, is the diminishing scale of projects. “The initial market that defined ‘DE’ for many investors,” notes the report, “was megawatt-scale generation. These megawatt-scale [distributed generation] investments allowed for project financing to succeed even in the face of significant transaction action costs.
As DG projects have fallen in size, the traditional project financing has been untenable in the face of these transactions costs. Yet many DE provider companies do not lend themselves to the kind of aggregation necessary to make them able to receive financing.
”Several segments of the DE industry – notably fuel cells and photovoltaics – have seen problems in “transitioning from research and development to commercialization,” says the report. Smart grid technologies have faced “traditionally cautious electric utilities.” For wind, the “on again/off again” problem with production tax credits have cut into project development. “These issues,” says analysis, “have created high volatility in the market value of pure play DE stocks and diminished retail investor interest in the sector.”
Nonetheless, says DEFG, some firms in the sector have performed well; others, not so well, since the August 2003 blackout. “DEFG recommended 12 stocks immediately following the blackout,” says the report. “An evenly balanced portfolio of these stocks would have increase 49 percent in the seven months (but with significant volatility). In general, large cap companies and manufacturers of mature DE technologies have been leaders, and emerging technology companies have been laggards.”
In a gaming exercise, members of DEFG’s “Investment Consortium” formed three teams to pick portfolios on Jan. 30, 2003 and compare performance. “The consensus of the consortium,” says DEFG, “has been that many of the pure play companies will not existing in the mid-term (one to three years). The consortium also believes that the sector will see more consolidation, with companies and assets bought at a nice premium for investors.”
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