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Utilities’ investments in distributed energy companies is gathering pace. Not that it was trundling along by any means. In Europe and North America alone, investments between 2010 and 2016 totalled close to $3 billion.
Energy storage plays a central part in distributed energy systems, so it is little wonder that utilities have been investing quite heavily in this area as well. A trend that hasn’t let up in 2017 and 2018.
Recently, American AES and German Siemens announced a joint energy storage venture. One of its core markets will be the U.S. where analysts predict a tenfold increase in market size to $3.2 billion by 2022. A figure dwarfed by EDF announcing that it plans to invest €8 billion (US$9.96 billion) in deploying 10GW of new energy storage projects by 2035. Other utilities look set to follow suit, with 85% of utilities surveyed saying they expect to see moderate to significant growth in grid-scale energy storage and 90% expecting the same kind of growth in distributed generation and storage.
It begs the question: why are utilities investing so heavily in energy storage? There are many good reasons. Here are seven of the most important.
1: Energy storage competition is heating up
One reason for the investments is that competition for energy storage companies is taking off, as more and more companies are investing in the space. There is also increased activity from PE firms and VCs. The UK’s first listed energy storage fund is an example of that. It aims to raise £100 million that will be invested in battery projects and companies. Across the Atlantic, Battery Ventures just raised $1.25 billion for two new funds.
As is the case with renewables, it is leading to increased competition for promising targets. This competition includes utilities, who are increasingly looking to invest in the space. I think one reason could be that they are looking at what WhatsApp and Skype did to telecom companies and seeing similarities to what the combination of energy storage and renewables is starting to do to energy production.
2: Utilities’ insider’s advantage
Energy storage projects compliment utilities’ existing, expanding portfolio of renewable energy production systems. Not only that, it is often easier for a utility to make the economic case for energy storage than it is for competing investors. It could be likened to owning a dynamo (power plant), which gives you a strong case for investing in rechargeable batteries (energy storage).
At the same time, utilities have an in-depth understanding of the laws and regulations relating to power production and consumption. This helps give them an insider’s advantage when it comes to developing utility scale energy storage projects. Investing in energy storage now enable utilities to exploit that advantage before other companies develop the same kind of expertise and insights.
3: It works with existing energy producing infrastructure
An often-overlooked fact is that energy storage is not necessarily tied hand and foot to renewable energy. In fact, a growing trend is pairing energy storage and fossil fuel power production units.
One example is General Electric and Southern California Edison’s battery-gas turbine hybrid system. It combines a 10 MW, 4.3 MWh battery system with a 50 MW gas turbine.
The business case is that by connecting battery backup to the gas turbine, the power utility gets both a faster response time to demand peaks and can have a more stable running of the gas turbine, which in turn gives lower emissions and more efficient production.
4: To go further into renewables and tech
UK-based Centrica is a good example of an acquisition strategy that is increasingly being deployed by utilities. Since 2016, it has bought energy trading platform Neas Energy, combined heat and power provider ENER-G Cogen, IoT detection technology specialist FlowGem and the demand response company REStore.
My analysis is that each acquisition complements its renewable energy portfolio, and the targeted companies also each have technological solutions that Centrica can use in its existing business areas.
As David Roberts put it in an article for Vox, there’s a revolution happening in electricity, driven by renewables and technology – and storage. Utilities need to keep up, and M&A is looking like a preferred way to do so.
5: To manage renewables’ fluctuations
As I have previously written about, the shift towards renewable energy creates new opportunities, but it also creates major challenges.
One challenge that is especially pertinent to utilities is finding ways to deal with the increasingly complex demand-supply equation, as renewables do not produce energy at a stable rate, like powerplants, but fluctuates depending on the elements. This, in turn, makes things like peak demand calculations much more complex, potentially raising costs for utilities.
The Centrica – REstore deal illustrates how M&A can help solve the conundrum. REstore offers something called FlexPond, a system that uses sensors and software to give real-time updates information of demand, making a utility better able to respond to fluctuations.
This can be done via ramping up production in power plants, by buying power on the power markets – or by drawing on energy storage systems.
6: Getting closer to changing consumers
At Greentech Media’s Grid Edge World Forum 2017 conference in San Jose, Andrew Bennett, senior vice president for Schneider Electric North America had an eloquent point about the future of utilities and M&A:
“There are two no-regret decisions for utilities - renewable energy and anything that gets them closer to customers,” he said.
Energy customers, especially enterprises and companies, are changing, demanding greater control over their energy usage. This includes making decisions on when to purchase energy, have the ability to store backup energy on-site and being able to go with 100% renewables. Utilities need to innovate to meet those demands – or turn to M&A in order to provide the demanded services.
7: Emulating telcos
I want to end by going back to something I mentioned in the first point: utilities not wanting to emulate telecom companies by missing out on energy’s answer to WhatsApp or Skype. What I think utilities are doing is using M&A in relation to energy storage to be like telecoms in the time after WhatsApp et al. massacred their text-message revenue.
To explain: Both telecoms and energy are large, investment-heavy industries. Both work with very long investment timelines, and both are in the grips of technological disruption that is affecting their core business areas.
While telecoms missed the boat with regards to services like Skype and WhatsApp, they are busy expanding their business portfolios into different, related verticals.
Energy utilities are doing the same, perhaps taking a lesson from telecoms, in order to futureproof their companies and to gain market shares in the new, developing energy markets where renewables, along with new technologies and energy storage, are the order of the day.