In just the last few years, the energy industry has undergone a period of massive transformation. While the onset of distributed generation was an initial catalyst for change, other factors including record-low power prices, new market entrants and changing political regimes have all taken a heavy toll on businesses. These external factors are forcing energy producers of all types, from utility giants to independent power producers, to reconsider how they’re managing their internal processes and operations. In order for business to remain competitive and take advantage of the ever-growing opportunities ahead, change is key, and with that comes a renewed focus on operational efficiency.
Though it may be unwelcomed at first, change is necessary in order to mature. In many ways, this industry transformation has been stimulated by the economic gains that renewables are making over legacy forms of power. Steadily declining module and installation costs have contributed to unprecedented lows in power prices which as a result, have led to the surge in demand in new and emerging geographies. This, in turn, drove the record-breaking capacity additions we observed in the 2016 auctions in South America, Mexico and Dubai. However, with power prices continuing to decline, long-term pricing agreements are now becoming a thing of the past. IPPs, which have relied on the stability of such agreements, are now finding it nearly impossible to compete in the Wild West of renewable development, where global developers with vast balance sheets and steady cash flows are competing for the prestige of lowest bidder—and winning.
As a response to these challenges, we’re now seeing market consolidation happen on much larger scale than ever before. IPPs who aren’t attached to large balance sheets or lack the backing of large private equity owners are now merging with larger established organizations with deep pockets of capital. M&A is not a new phenomenon in solar, as a number of large utilities acquired smaller developers in order to get their footing in distributed generation at the beginning of the decade. However, we’ve seen how change has impacted companies who aren’t equipped to handle it.
SunEdison showed us that acquiring companies is the easy part, but streamlining them into a single, profitable business is a different story...
This first wave of solar acquisitions was arguably a failure as they failed to produce the intended investment thesis. Their failure to invest the time and resources needed in order to integrate their company cultures, business processes and IT platforms led to trouble. The tale of SunEdison is a classic example, which showed us that acquiring companies is the easy part, but streamlining them into a single, profitable business is a different story.
As the utility and commercial solar sectors enter into another consolidation phase, there is much more at stake this time around. Power producers of all sizes are combining their businesses as the battle for US market share heats up. Now, new market entrants from the banking, automobile and technology industries want in on the action. Tesla’s merger with SolarCity is likely the first of many mergers as EV penetration continues to grow exponentially in the coming years. Banks, retail giants and Silicon Valley techies such as Google, Apple and Amazon are now some of the top procurers of solar and wind energy in the United States. If these signs are a bellwether for anything, it’s apparent that the renewable energy sector is changing quickly and ripe with opportunity. Regardless of size or origin, the companies that learn from past mistakes, and in turn focus on streamlining their business, strengthening the balance sheet, and delivering value to shareholders, will be poised for success.
Step-function improvements in operational efficiency
This time around, the difference between success and failure will lie in companies’ ability to make step-function improvements in operational efficiency, rather than incremental improvements and optimization of current processes. In order for them to unite their businesses and take advantage of new opportunities, companies must be able to do more with less. As a result, many energy companies are looking at digitalization initiatives as the change agent. With a digitalization strategy that orchestrates people, processes, and platforms simultaneously to achieve operational speed and efficiency, companies are poised to become more agile in their ability to confront and take advantage of continuous change. Moreover, they are in the best position to emerge from the business transformation and digitalization process with a sustainable competitive advantage.
Written by Haresh Patel, CEO and co-founder of Mercatus, Inc., a provider of cloud-based software solutions for renewable energy investment.