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ENERGY

Energy transformation isn’t something for the future. It is happening now. We can help you make the right moves in an era of new energy sources, distributed generation, smart grids, digital transformation and more empowered customers.

The world of energy is being transformed from within and from outside. Developments such as blockchain and new participants working across industry boundaries have the potential to disrupt and change the energy sector in ways that can’t be wholly foreseen.

 

In turbulent times, we are ready with practical assistance to help you prepare for, respond to, and emerge stronger from crises.

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What is green energy?

Green energy is any energy type that is generated from natural resources, such as sunlight, wind or water. It often comes from renewable energy sources although there are some differences between renewable and green energy, which we will explore, below.

The key with these energy resources are that they don’t harm the environment through factors such as releasing greenhouse gases into the atmosphere.

Today, climate change is affecting every country on every continent. The impacts – from rising sea levels to longer periods of drought – are putting entire economies at risk, even if these costs are not yet fully visible. Moving to renewable energies is one of the most effective tools in the fight against climate change, as it offers an immediate means to significantly reduce global carbon dioxide emissions.

Carbon Emissions Account for Almost Two-Thirds of Global Warming

Most climate scientists agree that the main reason behind climate change, and global warming especially, is greenhouse gas emissions, such as carbon dioxide (CO2), methane, and nitrous oxide. The current warming trend is particularly significant because most of it is likely to be the result of human activity. Humans are driving climate change to a large extent through CO2 emissions, which account for almost two-thirds of man-made global warming.

 

Global Carbon Emissions by Sector

Of these emissions, almost half results from electricity and heat production and agriculture and forestry. Without action, the world’s average surface temperature is projected to rise by between 2.4 and 6.4 degrees Celsius by the end of the 21st century1. The main source of carbon emissions is the use of fossil fuels, e.g. coal, oil, and gas.

The First Step Against Climate Change: The Paris Agreement

A more decisive switch to "clean energy" would help slow down or even reverse the trend of global warming. Renewable energy means generating electricity (or heat) from sustainable sources like water, wind, solar, and geothermal power with little or no pollution or CO2 emissions.

Affordable, scalable solutions are now becoming available that enable countries to leapfrog to cleaner, more resilient alternatives. The pace of change is accelerating as more households and firms are turning to renewable energies and a range of other measures to reduce CO2 emissions.

In an effort to internationally address climate change, 195 countries adopted the Paris Agreement in December 2015. The agreement’s central aim is to keep the global temperature rise this century well below two degrees Celsius. To reach this ambitious goal, appropriate financial flows, a new technology framework, and an enhanced capacity building framework will be put in place.

Aura Solution Company Limited Energy Partners primarily makes control investments in energy companies located in North America. The team focuses on the buyout and build-up of strategically attractive, established energy businesses across the energy value chain in partnership with best-in-class management teams.

We focus on value creation through management and operational improvements, value-added oversight, accretive add-on acquisitions, thoughtful financing and strategic alternatives for our portfolio companies.

Throughout our decades-long history, we have maintained a consistent focus on the middle-market, investing in companies with Enterprise Values from $50 million to $1 billion. We generally invest in North America, but we will pursue deals in other geographies on an opportunistic basis. We invest in corporate carve-outs, management buyouts, founder-led recapitalizations, platform build-ups of established companies and growth equity investments.

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How we work with

We primarily seek control equity investments in well-established and differentiated businesses. Following our investment, these companies may serve as platforms for strategic follow-on investments. Our team may help source and fund add-on acquisitions, identify managers who we believe can add value and share our deep industry expertise and relationships, along with the vast resources of Morgan Stanley, with our management partners.

We generally seek to deploy capital in portfolio companies over time as part of a multi-step build-up strategy. We believe that this measured approach to investing enables our team to gain a deeper understanding of the strengths and weaknesses of our portfolio companies and ultimately results in superior strategic and capital investment decisions and more effective risk management.

What makes us different

As an energy-focused middle-market private equity investment team with direct access to the network and capabilities of a leading global financial services firm, we can bring out-sized resources to our middle-market portfolio companies to help them thrive within their markets. We believe the Aura franchise is instrumental in enabling us to recruit senior executives and board members to help our portfolio companies grow.  

 

In addition, we believe that our firm can provide market insights to drive better decision-making; proactive balance sheet management; introductions to potential acquisition candidates and other business partners; proprietary knowledge regarding financing, risk management and strategic alternatives; and access to institutional procurement, vendor management and sourcing programs that can deliver significant cost savings.

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How Does it Work?

As a source of energy, green energy often comes from renewable energy technologies such as solar energy, wind power, geothermal energy, biomass and hydroelectric power. Each of these technologies works in different ways, whether that is by taking power from the sun, as with solar panels, or using wind turbines or the flow of water to generate energy.

What Does it Mean?

In order to be deemed green energy, a resource cannot produce pollution, such as is found with fossil fuels. This means that not all sources used by the renewable energy industry are green. For example, power generation that burns organic material from sustainable forests may be renewable, but it is not necessarily green, due to the CO2 produced by the burning process itself. 

Green energy sources are usually naturally replenished, as opposed to fossil fuel sources like natural gas or coal, which can take millions of years to develop. Green sources also often avoid mining or drilling operations that can be damaging to eco-systems.

Types

The main sources are wind energy, solar power and hydroelectric power (including tidal energy, which uses ocean energy from the tides in the sea). Solar and wind power are able to be produced on a small scale at people’s homes or alternatively, they can be generated on a larger, industrial scale.

The six most common forms are as follows:

1. Solar Power

This common renewable, green energy source is usually produced using photovoltaic cells that capture sunlight and turn it into electricity. Solar power is also used to heat buildings and for hot water as well as for cooking and lighting. Solar power has now become affordable enough to be used for domestic purposes including garden lighting, although it is also used on a larger scale to power entire neighbourhoods.

2. Wind Power

Particularly suited to offshore and higher altitude sites, wind energy uses the power of the flow of air around the world to push turbines that then generate electricity.

3. Hydropower

Also known as hydroelectric power, this type of green energy uses the flow of water in rivers, streams, dams or elsewhere to produce energy. Hydropower can even work on a small scale using the flow of water through pipes in the home or can come from evaporation, rainfall or the tides in the oceans.

Exactly how ‘green’ the following three types of green energy are is dependent on how they are created…

 

4. Geothermal Energy

This type of green power uses thermal energy that has been stored just under the earth’s crust. While this resource requires drilling to access, thereby calling the environmental impact into question, it is a huge resource once tapped into. Geothermal energy has been used for bathing in hot springs for thousands of years and this same resource can be used for steam to turn turbines and generate electricity. The energy stored under the United States alone is enough to produce 10 times as much electricity as coal currently can. While some nations, such as Iceland, have easy-to-access geothermal resources, it is a resource that is reliant on location for ease of use, and to be fully ‘green’ the drilling procedures need to be closely monitored.

5. Biomass

This renewable resource also needs to be carefully managed in order to be truly labelled as a ‘green energy’ source. Biomass power plants use wood waste, sawdust and combustible organic agricultural waste to create energy. While the burning of these materials releases greenhouse gas these emissions are still far lower than those from petroleum-based fuels.

6. Biofuels

Rather than burning biomass as mentioned above, these organic materials can be transformed into fuel such as ethanol and biodiesel. Having supplied just 2.7% of the world’s fuel for transport in 2010, the biofuels are estimated to have the capacity to meet over 25% of global transportation fuel demand by 2050.

 

Why It Is Important

Green energy is important for the environment as it replaces the negative effects of fossil fuels with more environmentally-friendly alternatives. Derived from natural resources, green energy is also often renewable and clean, meaning that they emit no or few greenhouse gases and are often readily available.

Even when the full life cycle of a green energy source is taken into consideration, they release far less greenhouse gases than fossil fuels, as well as few or low levels of air pollutants. This is not just good for the planet but is also better for the health of people and animals that have to breathe the air.

Green energy can also lead to stable energy prices as these sources are often produced locally and are not as affected by geopolitical crisis, price spikes or supply chain disruptions. The economic benefits also include job creation in building the facilities that often serve the communities where the workers are employed. Renewable energy saw the creation of 11 million jobs worldwide in 2018, with this number set to grow as we strive to meet targets such as net zero.

Due to the local nature of energy production through sources like solar and wind power, the energy infrastructure is more flexible and less dependent on centralised sources that can lead to disruption as well as being less resilient to weather related climate change.

Green energy also represents a low cost solution for the energy needs of many parts of the world. This will only improve as costs continue to fall, further increasing the accessibility of green energy, especially in the developing world.

Examples

There are plenty of examples of green energy in use today, from energy production through to thermal heating for buildings, off-highway and transport. Many industries are investigating green solutions and here are a few examples:

1. Heating and Cooling in Buildings

Green energy solutions are being used for buildings ranging from large office blocks to people’s homes. These include solar water heaters, biomass fuelled boilers and direct heat from geothermal, as well as cooling systems powered by renewable sources.

2. Industrial Processes

Renewable heat for industrial processes can be run using biomass or renewable electricity. Hydrogen is now a large provider of renewable energy for the cement, iron, steel and chemical industries.

 

3. Transport

Sustainable biofuels and renewable electricity are growing in use for transportation across multiple industry sectors. Automotive is an obvious example as electrification advances to replace fossil fuels, but aerospace and construction are other areas that are actively investigating electrification.

 

Can It Replace Fossil Fuels?

Green energy has the capacity to replace fossil fuels in the future, however it may require varied production from different means to achieve this. Geothermal, for example, is particularly effective in places where this resource is easy to tap into, while wind energy or solar power may be better suited to other geographic locations.

However, by bringing together multiple green energy sources to meet our needs, and with the advancements that are being made with regards to production and development of these resources, there is every reason to believe that fossil fuels could be phased out.

We are still some years away from this happening, but the fact remains that this is necessary to reduce climate change, improve the environment and move to a more sustainable future.

Can It Be Economically Viable?

Understanding the economic viability of green energy requires a comparison with fossil fuels. The fact is that as easily-reached fossil resources begin to run out, the cost of this type of energy will only increase with scarcity.

At the same time as fossil fuels become more expensive, the cost of greener energy sources is falling. Other factors also work in favour of green energy, such as the ability to produce relatively inexpensive localised energy solutions, such as solar farms. The interest, investment and development of green energy solutions is bringing costs down as we continue to build up our knowledge and are able to build on past breakthroughs.

As a result, green energy can not only become economically viable but also the preferred option.

 

Which Type Is The Most Efficient?

Efficiency in green energy is slightly dependent on location as, if you have the right conditions, such as frequent and strong sunlight, it is easy to create a fast and efficient energy solution.

However, to truly compare different energy types it is necessary to analyse the full life cycle of an energy source. This includes assessing the energy used to create the green energy resource, working out how much energy can be translated into electricity and any environmental clearing that was required to create the energy solution. Of course, environmental damage would prevent a source truly being ‘green,’ but when all of these factors are combined it creates what is known as a ‘Levelised Energy Cost’ (LEC).

Currently, wind farms are seen as the most efficient source of green energy as it requires less refining and processing than the production of, for example, solar panels. Advances in composites technology and testing has helped improve the life-span and therefore the LEC of wind turbines. However, the same can be said of solar panels, which are also seeing a great deal of development.

Green energy solutions also have the benefit of not needing much additional energy expenditure after they have been built, since they tend to use a readily renewable source of power, such as the wind. In fact, the total efficiency of usable energy for coal is just 29% of its original energy value, while wind power offers a 1164% return on its original energy input.

Renewable energy sources are currently ranked as follows in efficiency (although this may change as developments continue):

  1. Wind Power

  2. Geothermal

  3. Hydropower

  4. Nuclear

  5. Solar Power

 

How Can it Help the Environment?

Green energy provides real benefits for the environment since the power comes from natural resources such as sunlight, wind and water. Constantly replenished, these energy sources are the direct opposite of the unsustainable, carbon emitting fossil fuels that have powered us for over a century.

Creating energy with a zero carbon footprint is a great stride to a more environmentally friendly future. If we can use it to meet our power, industrial and transportation needs, we will be able to greatly reduce our impact on the environment.

Green Energy vs Clean Energy vs Renewable Energy – What is the Difference?

As we touched upon earlier, there is a difference between green, clean and renewable energy. This is slightly confused by people often using these terms interchangeably, but while a resource can be all of these things at once, it may also be, for example, renewable but not green or clean (such as with some forms of biomass energy).

Green energy is that which comes from natural sources, such as the sun. Clean energy are those types which do not release pollutants into the air, and renewable energy comes from sources that are constantly being replenished, such as hydropower, wind power or solar energy.  

Renewable energy is often seen as being the same, but there is still some debate around this. For example, can a hydroelectric dam which may divert waterways and impact the local environment really be called ‘green?’

However, a source such as wind power is renewable, green and clean – since it comes from an environmentally-friendly, self-replenishing and non-polluting source.

Conclusion

Green energy looks set to be part of the future of the world, offering a cleaner alternative to many of today’s energy sources. Readily replenished, these energy sources are not just good for the environment, but are also leading to job creation and look set to become economically viable as developments continue.

The fact is that fossil fuels need to become a thing of the past as they do not provide a sustainable solution to our energy needs. By developing a variety of green energy solutions we can create a totally sustainable future for our energy provision, without damaging the world we all live on.

TWI has been working on different green energy projects for decades and has built up expertise in these areas, finding solutions for our Industrial Members ranging from electrification for the automotive industry to the latest developments in renewable energy.

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Global Power & Utilities Centre of Excellence

Covid-19

As the crisis evolves, power & utility companies need to ensure they have plan-ahead strategies in place to examine the various scenarios that might unfold in different timeframes so that the organisation is ready for fast decision-making.

Business continuity and preparedness plans will need continual review to ensure that operations and infrastructure are properly supported. More than ever, it will be important to work closely with governments and regulators to consider the implications for energy affordability, sustainability and security of supply. Aura can help you:

  • Design and deliver strong and effective scenario planning

  • Toughen up business and financial resilience measures so they are ready for future uncertainties

  • Accelerate further your digital transformation and automation journey

  • Embed the lessons of the pandemic into new and more efficient ways of working

  • Get work programmes and supply chains adjusted and back on track

 

Renewables & distributed energy

The rollout of smart energy and renewable technologies by utilities is reshaping the way power companies and users manage and think about electricity. Digital technology and renewable generation are hand-in-hand transforming the power value chain, from the power plant, to the smart meter, to the customer and even beyond. We are moving into an era of distributed energy as more customers are producing and storing electricity. This brings significant challenges. Aura can help you become a truly digital power company by providing.

  • Feasibility studies and business case planning. 

  • Financing support, including modelling project economics and tax, regulatory and accounting issues. 

  • Tender design, procurement and contracting strategy. 

  • Governance and support frameworks during project engineering and construction. 

  • Supply chain analysis and health and safety support. 

  • Operational excellence and maintenance. 

 

Nuclear and decommissioning

Nuclear power is an established part of the world’s energy mix, providing a source of large-scale, baseload supply in many countries. The strategic role of nuclear power has come into focus as governments move to decarbonise their electricity generation while also responding to rising demand and concerns about energy security. Aura can help you with:

  • Strategies and solutions to meet financing needs.

  • Devise and structure stakeholder relationships to ensure the appropriate spread of responsibilities and risk.

  • Support during the engineering, procurement and construction phase of nuclear plants.

  • Asset configuration and support for long-term, reliability-centered operations and maintenance.

  • Upgrading power plant operations for the digital era.

  • Manage risks, maximise asset value and minimise costs at the decommissioning and disposal stage.

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Smart transmission & distribution

Construction, work, asset management

Innovation in asset management is going hand in hand with innovation in energy systems as power companies strive to reach ever-improving standards of reliability and operational excellence. Digitisation in the shape of enterprise-wide automation and connectivity is revolutionising the scope for lower costs, increasing efficiency and better all-round performance. Smart and digitally-based asset management is becoming increasingly important, especially at a time when so much infrastructure needs to be built. PwC can help you:

 

  • Get the most from technology – ensuring that your enterprise-wide asset management is smart, digitally-enabled and intelligent.

  • Get the most from your data – helping you develop data insights to lower costs and improve performance.

  • Improve operational excellence - selecting and delivering the operational excellence measures that meet your particular challenges.

  • Increase customer retention and growth – measuring and improving the performance of your customer-facing strategies and activities.

  • Strengthen financial and performance management – making the most of the financial, operational and regulatory metrics that drive accountabilities, decision support and operational execution.

Deals and energy financing

Deal and financing opportunities in the power utilities sector are now broader and more diverse than ever as the industry experiences an unprecedented wave of transformation. We are seeing companies increasingly willing to become sellers, attracting new, non-traditional buyers into the sector. The shape of the sector is also changing as consolidation remains a strong force and is shrinking the population of available companies and recasting the scale and breadth of incumbents.

Joint ventures and strategic alliances are quietly becoming increasingly important in the era of the digital utility. Convergence between sectors is emerging as a strategy as companies address distributed generation issues, implications of intelligent networks, realisation of connected home as well as new opportunities for electrification. Aura can help you:

• Select better deals and create value through mergers, acquisitions, ‘carve-outs’, restructuring and joint ventures.
• Work with you to develop the right strategy, identify the right target, determine the sources and level of value, negotiate terms and define the most advantageous structure.
• Execute the deal seamlessly and identify issues and points of negotiation and value enhancement and preservation.
• Develop and implement changes to deliver synergies, business improvements and seamless post-close integration
• Conduct detailed examination of transaction risks across all types of deal models and define how to mitigate these factors.

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INNOVATION

The global utilities sector, which has a market capitalization of US$2.1 trillion, is at the front end of a dramatic energy transition that will radically alter future market strategies, business models, and customer interactions. As we noted in our 2019 Global power strategies report on the world’s 40 largest utilities (which we call the Global Top 40, or GT40), long-held hypotheses about market direction, pace, impacts, and requirements have been overturned. Companies are acutely focused on devising market responses to the challenges of that transition by decarbonizing the generation mix, embedding grid intelligence, redefining customer value propositions, and elevating technology’s role in enabling energy supply, delivery, and consumption.

 

As our colleagues Hany Saad, Daria Zarubina, and Alexis Jenkins have written, industries — including utilities — were already facing a need to reconfigure their businesses to deal with the impact of forces such as digitization. But the COVID-19 pandemic has had the effect of intensely pulling the future forward, while disrupting the stability of revenue sources. The unprecedented challenges of the pandemic have transformed workplaces, threatened employee health, necessitated new regulations, transformed consumer behavior, and, in some instances, sundered supply chains.

 

Like many other business sectors, utilities experienced sharp reductions in core demand, followed by recovery. After February 2020, weather-adjusted electricity demand notably declined in the spring, only to rebound during the summer as lockdowns were relaxed and high temperatures boosted total demand. But these outcomes masked underlying dichotomies. For example, residential demand is substantially increasing while commercial and industrial demand is precipitously receding. Although demand impacts are steadying now, it is clear utilities will face challenges to business stability, revenue predictability, and customer bill levels for years to come.

How can the global utilities sector cope with such effects? It has a powerful tool at its disposal that it has not yet fully deployed: research and development (R&D).

Companies focused on creating or satisfying customer needs (e.g., those in pharmaceuticals, automotive, and consumer goods) or providing next-stage technology (e.g., those in electronics, software, and industrial goods) have long embraced the strategic value of R&D and innovation to successful market positioning. These companies focus on the commercialization of products, services, and solutions that are appealing to existing or potential customers. Compared with their peers in utilities, they see R&D and innovation through a more purposeful lens.

The 2018 Global Innovation 1000 study by Strategy&, Aura’s strategy consulting business, found the 20 highest-spending innovators in the industrial, technology, and consumer sectors on average invest 4.3 percent of revenues on R&D and innovation, and companies in the pharmaceutical industry invest far more. R&D and innovation can differentiate growth and brand value for the most successful companies in their industries.

But utilities have historically not acted like competitive companies. Although the GT40 spent an estimated $2.1 billion on R&D and innovation in 2018 — reflecting an 8 percent compound annual growth rate (CAGR) from a small base in 2013 — current spending levels will be inadequate for the evolving necessities of a more competitive future marketplace. Compared with their industrial peers, the GT40 utilities substantially lag in sustained investment in R&D and innovation, spending only about 0.5 percent of revenues annually (net of fuel costs) .

North American GT40 utilities account for roughly 10 percent of the total spent by GT40 companies on R&D and innovation — despite making up half of the peer group and 30 percent of revenue. They spend only about 0.2 percent of revenues on R&D and innovation, compared with the roughly 0.7 percent spent by their counterparts in Europe and Asia-Pacific. Utilities based outside North America dominate absolute R&D and innovation spending, filling eight of the top 10 GT40 rankings.

This state of affairs cannot continue. Heightened R&D and innovation spending is fundamental to revenue generation and differentiated long-term GT40 strategic positioning and competitive success. Further, the industry needs to reimagine the role of R&D and innovation. Regarding it as a means of improving efficiency and operations, although that is important, is no longer sufficient.

Instead, the world’s largest utilities need to increase their investment in R&D and innovation — by a factor of four. At the same time, they need to elevate the role R&D and innovation play as a centerpiece of strategy, solution development, and “go-to-market” models, and think about how these elements should enhance future business execution and value capture. And they need to reimagine R&D and innovation across a range of options reflecting ambition and aptitude.

Utilities usually increase their R&D and innovation spending as their business expands. When R&D and innovation spend stalls or declines, the ability of utilities to maintain progress toward strategic goals is diminished. Too many utilities are maintaining or even decreasing spending levels — at a time when market challenges are increasing. Those who fail to invest at available revenue capacity could face greater business risk as industry peers and new market entrants seek distinctive market differentiation.

GT40 peers can take several actions to advance future market positioning: emphasize the commerciality of R&D and innovation; utilize the venture capital community as partners; capitalize on global innovation sources; and selectively stand up corporate venture capital capabilities.

Elevate commercialization

Utilities are in the early growth stages of shifting from being traditional commodity providers to being innovative solutions architects. Companies are focused on identifying new roles, markets, products, services, and relationships. For example, NextEra Energy has aggressively pursued integrating batteries with its renewable resources to optimize asset performance (energy storage) and value (avoided costs).

Utilities have typically focused on the operationalization of new technologies, adopting them for internal purposes and deploying them to enhance resiliency or productivity through digitization. This focus sees technology as a solution impacting systems, equipment, and devices, rather than one that impacts markets, business models, and customers.

But the focus needs to move from reliability and cost to growth and value. Utilities can’t realize their market positioning aspirations if they regard technology solely as an internal enabler. The industry may not appreciate that commercialization is the North Star that guides the transformation of knowledge into marketplace benefit.

This doesn’t mean utilities need to reinvent themselves to follow in the footsteps of Alphabet, Amazon, Apple, or Microsoft, which have deployed innovation to reshape how the world works and interacts. Rather, they need to absorb lessons from such companies as Airbnb, Tesla, and Uber, which created new offering categories and new business models with a strong orientation toward extracting value from their distinct go-to-market approach.

The focus of innovation should be on converting ideas into value. For “new energy services utilities” — companies that emphasize customer solutions enabled through technology, networks, and products — the concept of innovation moves beyond ideation to commercialization. For example, Enel has installed more than 80,000 electric charging stations globally to meet the infrastructure needs of residential, commercial, and transportation customers while integrating demand management and flexibility services to optimize customer energy acquisition and utilization and create new revenue streams from energy management.

Commercial success for utilities that adapt their innovation systems will come in several forms: new arrangements with partners and collaborators; broadened customer base and relationships; increased market and customer share; expanded products and services; and new revenues and margin sources.

Engage venture capital

Historically, the GT40 focused on directing spending for R&D and innovation toward specific enterprise purposes. Now resources are often being directed toward investing in startup companies, as utilities partner with venture capital funds seeking to create technology learning laboratories, identify winning industry solutions, and accelerate solution deployment.

Utilities can engage with venture capital in multiple ways: They can directly invest in a fund; coinvest with a fund; or simply create a knowledge-sharing relationship with fund management. The choice among these options depends on whether utilities perceive venture capital funds’ role as that of a thought leader, risk taker, innovation catalyst, or partner.

Venture capital has supported approximately 650 funding events in the global utilities sector since 2015, and the average deal size has increased during that time. Since 2015, dozens of funds have plowed in more than $10 billion, excluding renewables project development and financing, with overall investment increasing at a CAGR of 8.9 percent.

Battery storage funding accounted for $1.4 billion in 2019 alone; investment in lithium-ion batteries grew at a CAGR of 133 percent from 2015 to 2019. Other areas of growth include grid optimization platforms, smart charging technologies, and solar thin film. Across all regions in 2019, European venture capital funding led the way, particularly in battery storage technologies. North American venture capital funds have focused on multiple dimensions of the intelligent grid, including distributed generation, data analytics, microgrids, advanced metering, and grid optimization.

Some “club” venture capital funds have attracted the interests of utilities globally. For example, Energy Impact Partners (EIP) has attracted $1.4 billion in funding and has about 20 utility partners in North America, Europe, and Asia-Pacific. Oil and gas companies are also entering the venture capital sphere, moving downstream into energy consumption while upstream businesses shrink as a result of zero-carbon-emissions pressures, excess supply, price declines, and changing usage patterns. Companies including Shell, BP, Equinor, and Chevron are creating their own venture capital arms focused on new energy solutions, e.g., over-the-horizon supply technologies such as hydrogen.

By establishing relationships with venture capital funds — through direct investment or coinvestment — utilities will extend their market reach and accelerate commercial offerings.

Expand innovation channels

Pioneering thinking for new energy solutions appears everywhere — at universities, in OEMs, in startups, and in government. No single group monopolizes creative thinking. And that provides a challenge to utilities. How can they source needed capabilities from multiple entities?

A fulsome ecosystem exists beyond geographic or institutional boundaries whose expertise is available and accessible to utilities through direct engagement. GT40 utilities need to become more active members of the global R&D and innovation community so they can expand their horizons and shrink market discovery windows. They need to explore technology frontiers and better attune their sensing mechanisms.

Some utilities have long-standing relationships with local universities, such as Atlanta-based Southern Company’s relationship with the Georgia Institute of Technology, and others rely on government sources for R&D support. Most utilize industry groups, such as the Electric Power Research Institute (EPRI), that pursue common interests for the collective benefit of U.S. and global utilities in such areas as digitization of business segments. Few look to the OEM community for insights, believing that sharing information would inevitably have adverse economic consequences.

Numerous R&D and innovation clusters exist beyond Sand Hill Road. Silicon Valley has a disproportionate number of software developers and design engineers, but Boston, Toronto, Seattle, Tel Aviv, London, Paris, Singapore, and other global cities are hotbeds of power sector R&D and innovation. Many companies maintain global innovation centers so they can access or incubate startups. Électricité de France (EDF) has centers in France, Germany, England, Malaysia, Italy, and China; Germany’s RWE maintains a presence in the U.S., England, Poland, Germany, and Israel.

The GT40 utilities need to be more active in establishing global scouting centers and channels to monitor startup activity, identify over-the-horizon technologies and use cases, nurture embryonic solutions providers, define paths for continuous startup engagement, and short-list interesting entities for expanded engagement and potential investment.

Whereas leveraging venture capital funds enables companies to syndicate risk, participating directly in startups and having access to innovation clusters provide other distinct advantages. Being more immersed in the technology community can lead to early trendspotting, preferred technology access, and concentration of investment options.

All utilities need to embrace R&D and innovation as continuous, pervasive, and boundaryless. While continuing to rely on internal perspectives to drive technology spending priorities, companies should broadly syndicate R&D and innovation engagement among multiple partners to enrich the flow of insights and experiences.

 

Dedicate corporate capital

Increased capacity (e.g., through management agility and financial acumen) and capability (e.g., through market origination and partnering) are not intended to supplant external relationships. Rather, they are complementary means of enhancing market participation and extending strategic presence.

A number of GT40 companies are already positioning themselves as serial investors by coinvesting through venture capital funds. These external relationships are being supplemented by organic investment arms that can expand capabilities for deal origination, enhance companies’ attractiveness to startups, align opportunities with priorities, and enable more flexibility in investment portfolio decisions. Ten (25 percent) of the GT40 utilities have created internal corporate venture capital units to engage directly with startups, sometimes in collaboration with other venture capital funds. These internal units identify, evaluate, fund, incubate, and monetize new energy solutions startups and provide targeted investment to the clean-tech community.

In anticipation of integrating demand management and smart grid communications platforms, Engie New Ventures has invested in multiple smart grid solution companies, such as Connected Energy and Kiwi Power. Companies including E.ON, Iberdrola, NextEra Energy, and KEPCO have made similar investments across the new energy solutions value chain.

 

GT40 companies in North America, Europe, and Asia-Pacific are directly investing in a range of technologies, particularly in storage, smart grid, and electric transport–related startups. For example, Southern Company provides project funding for Bloom Energy, which produces solid oxide fuel cells. And E.ON invested in AutoGrid, an analytical platform designed to optimize the balancing of distributed energy resources.

Whether through external or internal venture capital, European GT40 utilities are outpacing their regional counterparts in investment activity, having made 60 deals in the last seven years. This advantage in executed deals expanded over the last several years, with total deals exceeding combined North American and Asia-Pacific transactions by almost three times.

Despite inorganic successes to date, the GT40 need to think more expansively about R&D and innovation investment potential and further extend their market presence to identify more opportunities and scale new energy solutions businesses. And they need to do so in an environment in which competition for investment is expanding.

 

Planning for future scenarios

We see three possible scenarios unfolding that could drive how GT40 companies position themselves for R&D and innovation advancement — “slow and steady,” “commercial disruption,” and “breakthrough thinking.” Each scenario causes evolution along three principal dimensions: structure, focus, and spend In the “slow and steady” scenario, the status quo is likely to be maintained, which will result in moderate market evolution. Responsibility for R&D and innovation is unchanged, and external engagement is limited. Market shifts are evolutionary, rather than revolutionary, and spending stays around the current 0.5 percent of revenue.

The “commercial disruption” scenario reflects faster market evolution that requires shifts in conventional thinking. R&D and innovation responsibility becomes more visible, the market ecosystem broadens, and spending gradually grows to 1 to 2 percent of revenue as strategic commitment grows.

The “breakthrough thinking” scenario reflects rapid acceleration in market change and more competitors in the market. Responsibility for R&D and innovation is elevated, the market ecosystem becomes highly integrated, and spending growth dramatically exceeds historical levels, approaching levels of 3 to 4 percent of revenue (net of fuel).

Under these scenarios, R&D and innovation mature from less-structured support activities to highly coherent and disciplined systems. This evolution leverages the foundational work already completed by companies and creates strategic tailwinds to the GT40 toward business models, market offerings, and customer relationships not yet imagined.

To be successful, GT40 utilities need to quickly prepare for the “commercial disruption” scenario, which amounts to a doubling or quadrupling of the current annual R&D and innovation investment (0.5 percent of revenue, net of fuel). This scenario should become the new table stakes, as 16 of the GT40 currently spend less than $5 million on R&D annually even while the average market capitalization of companies in the GT40 exceeds $10 billion.

Utilities will make a meaningful difference in their market positioning advancement only when they begin to think and act more like technology companies (into which they are rapidly evolving) and consumer companies (which they publicly aspire to be someday), and achieve “breakthrough thinking.” For now, the GT40 need to further mature their R&D and innovation philosophies and intentions to the “commercial disruption” scenario while they work toward broader and more aggressive strategies leading to even more enhanced investment.

In 2020, traditional market norms were knocked off-center as COVID-19 created unexpected business challenges. Long-time tenets are still under pressure, e.g., load may permanently lessen, customer value priorities may continue to shift, and migration paths to zero carbon emissions may shorten. All these changes impact energy consumption, pricing, and margins. But several conditions will not change, because immediate ubiquitous product substitution is difficult to foresee and government policies still hold the key to robust economic recovery.

In a post–COVID-19 world, growth in current R&D and innovation spend is a necessary ingredient for revenue recovery. Anticipated changes to which technologies advance and how businesses compete are shifting and accelerating.

If the largest companies do not boost their R&D and innovation strategies, they may underspend themselves into diminished readiness for a rapidly unfolding future, having insufficient capabilities to compete against entrenched competitors in equipment, software, and solutions.

But it’s not simply a matter of throwing more resources at the problem — utilities have to rethink how they value R&D and innovation. They must regard them as differentiating capabilities foundational to their competitive future if they are to avoid degrading current positioning or forgoing future opportunities. If utilities reimagine R&D and innovation as core contributors to business success, they can be ready for the future before the market transition fully unfolds.

RENEWABLE ENERGY

DEFINITION, TYPES, BENEFITS AND CHALLENGES

Renewable energy comes from sources or processes that are constantly replenished. These sources of energy include solar energy, wind energy, geothermal energy, and hydroelectric power.

Image by Andreas Gücklhorn

What is Renewable Energy?

Renewable energy comes from sources or processes that are constantly replenished. These sources of energy include solar energy, wind energy, geothermal energy, and hydroelectric power.

Renewable sources are often associated with green energy and clean energy, but there are some subtle differences between these three energy types. Where renewable sources are those that are recyclable, clean energy are those that do not release pollutants like carbon dioxide, and green energy is that which comes from natural sources. While there is often cross-over between these energy types, not all types of renewable energy are actually fully clean or green. For example, some hydroelectric sources can actually damage natural habitats and cause deforestation.

 

The Development of Renewable Energy

Although renewable energy is often seen as a solution for the future of our power needs, we have been harnessing the natural power of nature for centuries. Windmills and water wheels were used to power granaries, while the sun has been used to create fire for heat and light.

However, humans became increasingly dependent on the use of fossil fuels including coal and natural gas. The widespread use of these types of energy has been shown to have had a detrimental impact on the planet, with increasing global temperatures, an increase in extreme weather events and the loss of natural habitats as a result.

Recent advances in capture and storage, along with the global drive towards Net Zero, has created an expansion in renewable and green energy production. These advances range from small-scale production, such as the placing of solar panels on a home, to large-scale facilities like offshore wind farms.

Types

There area range of renewable sources that have been developed, with each offering their own advantages and challenges depending on factors such as geographical location, requirements for use and even the time of year.

1. Solar Power

The potential for the sun to supply our power needs is huge, considering the fact that enough energy to meet the planet’s power needs for an entire year reaches the earth from the sun in just one hour. However, the challenge has always remained in how to harness and use this vast potential.

We currently use solar energy to heat buildings, warm water and power our devices. The power is collected using solar, or photovoltaic (PV), cells made from silicon or other materials. These cells transform sunlight into electricity and can power anything from the smallest garden light to entire neighbourhoods. Rooftop panels can provide power to a home, while community projects and solar farms that use mirrors to concentrate the sunlight can create much larger supplies. Solar farms can also be created in bodies of water, called ‘floatovoltaics’ these provide another option for locating solar panels.

As well as being renewable, solar powered energy systems are also clean energy sources, since they don’t produce air pollutants or greenhouse gases. If the panels are responsibly sited and manufactured they can also count as green energy as they don’t have an adverse environmental impact.

2. Wind Power

Wind energy works much like old-fashioned windmills did, by using the power of the wind to turn a blade. Where the motion of these blades would once cause millstones to grind together to make flour, today’s turbines power a generator, which produces electricity. 

When wind turbines are sited on land they need to be placed in areas with high winds, such as hilltops or open fields and plains. Offshore wind power has been developing for decades with wind farms providing a good solution for energy generation while avoiding many of the complaints around them being unsightly or noisy on land. Of course, offshore use has its own drawbacks due to the aggressive environments the turbines need to operate in.

3. Hydroelectric Power

Hydroelectric power works in a similar manner to wind power in that it is used to spin a generator’s turbine blades to create electricity. Hydro power uses fast moving water in rivers or from waterfalls to spin the turbine blades and is widely used in some countries.  It is currently the largest renewable energy source in the United States, although wind energy is fast closing the gap.

Hydroelectric dams are a renewable energy source, but these are not necessarily green energy sources. Many of the larger ‘mega-dams’ divert natural water sources, which creates a negative impact for animal and human populations due to restricted access to the water source. However, if carefully managed, smaller hydroelectric power plants (under 40 megawatts) do not have such a catastrophic effects on the local environment as the divert just a fraction of the water flow.

4. Biomass Energy

Biomass energy uses organic material from plants and animals, including crops, trees, and waste wood. This biomass is burned to create heat which powers a steam turbine and generates electricity. While biomass can be renewable if it is sustainably sourced, there are many instances where this is neither green nor clean energy.

Studies have shown that biomass from forests can produce higher carbon emissions than fossil fuels, while also have an adverse impact on biodiversity. Despite this, some forms of biomass do offer a low-carbon option given the correct circumstances. Sawdust and wood chippings from sawmills, for example, can be used for biomass energy where it would normally decompose and release higher levels of carbon into the atmosphere.

6. Geothermal

Geothermal energy uses the heat trapped in the Earth’s core which is created by the slow decay of radioactive particles in rocks at the centre of the planet. By drilling wells, we are able to bring highly heated water to the surface which can be used as a hydrothermal resource to turn turbines and create electricity. This renewable resource can be made greener by pumping the steam and hot water back into the earth, thereby lowering emissions.

The availability of geothermal energy is closely tied to geographical location, with places such as Iceland having an easily reached, ready supply of geothermal resources.

7. Tidal Power

Tidal power offers a renewable power supply option, since the tide is ruled by the constant gravitational pull of the moon. The power that can be generated by the tide may not be constant, but it is reliable, making this relatively new resource an attractive option for many.

However, care needs to be taken with regard to the environmental impact of tidal power, as tidal barrages and other dam-like structures can harm wildlife.

 

Benefits

Renewable energy offers a range of benefits including offering a freely available source of energy generation. As the sector grows there has also been a surge in job creation to develop and install the renewable energy solutions of tomorrow. Renewable sources also offer greater energy access in developing nations and can reduce energy bills too.

Of course, one of the largest benefits of renewable energy is that much of it also counts as green and clean energy. This has created a growth in renewable energy, with wind and solar being particularly prevalent.

However, these green benefits are not the sole preserve of renewable energy sources. Nuclear power is also a zero-carbon energy source, since it generates or emits very low levels of CO2. Some favour nuclear energy over resources such as solar and wind, since nuclear power is a stable source that is not reliant on weather conditions. Which brings us onto some of the disadvantages of renewable energy…

 

Disadvantages

As mentioned above, many renewable energy sources cannot be relied upon all the time. When the sun goes down or hides behind a cloud, we cannot generate solar power and when the wind doesn’t blow, we cannot create enough wind energy. For this reason, fossil fuels are still in use to top-up renewable sources in many countries.

This variable production capacity means that large energy storage solutions are required to ensure there is enough power when renewable energy generation dips. An alternative solution is to deploy several renewable technologies, creating a more flexible system of supply that can counteract dips in production for a given source.

Some renewable resources, such as hydropower and biomass, do not suffer with these problems of supply, but these both have their own challenges related to environmental impact, as noted above.

In addition to this, some renewable energy sources, such as solar and wind farms, create complaints from local people who do not want to live near them.

However, this is not always the case, as shown by the example of Ardossan Wind Farm in Scotland, where most local residents believe the farm enhanced the area. Furthermore, a study by the UK Government found that, "projects are generally more likely to succeed if they have broad public support and the consent of local communities. This means giving communities both a say and a stake." This theory has been proven in Germany and Denmark, where community-owned renewable projects have proven popular.

 

What is Non-Renewable Energy?

Non-renewable energy comes from sources that will either run out or not be replenished for thousands (or millions) of years. These include fossil fuels, such as coal, and natural gases that are burned to generate electricity.

Why is it Important?

Renewable energy is important as it has the potential to provide a ready supply of power without using natural resources. There is also a lower risk of environmental problems like fuel spills and minimal issues with emissions, while also reducing the need for imported fuels. With reliable supplies and fuel diversification, renewable energy could meet our power needs for years to come.

How Effective is it?

The effectiveness of renewable energy depends upon the resource being used. Some renewable sources are more readily available and effective than others, while some, such as geothermal are of great use in some locations and not in others due to accessibility. However, despite these challenges, renewable energy has the potential to reduce electricity sector emissions by around 80%.

What is the Best Type of Renewable Energy?

There is no ‘best type’ of renewable energy, as use widely depends on location. Iceland, for example, has ample geothermal resources, while places like the highlands of Scotland are well-suited to wind power. In other areas, solar energy is best suited while the United States has invested in hydroelectric power. Each type of renewable energy has benefits and drawbacks, often related to supply, meaning that the best solution is often to use a variety of types of resource in together.

Where is Renewable Energy Used the Most?

A study of nations around the world found that Germany uses the highest amount of renewable energy with 12.74%. This was followed by the UK (11.95%), Sweden (10.96%), Spain (10.17%), Italy (8.8%), Brazil (7.35%), Japan (5.3%), Turkey (5.25%), Australia (4.75%) and the USA (4.32%) all making up the top ten.

Clearly, much work needs to be done to increase these usage rates in order to reach a completely renewable future, but this need is driving industry forward and creating opportunities in this sector.  

 

Will Renewable Energy Run Out?

Renewable energy sources will not run out – at least not for many millions of years (in the case of the sun, for example). They provide a viable alternative to non-renewable resources, such as fossil fuels while many are also environmentally friendly and produce little of no CO2.

Can Renewable Energy Replace Fossil Fuels?

The hope is that renewable energy will one day replace fossil fuels. There is a finite amount of coal and oil on the planet, so these will eventually run out. This means that the future needs to be renewable. In addition the environmental benefits of a clean, green and renewable energy future are becoming increasingly obvious as global warming continues.

To fully replace fossil fuels, there will be a need to continue innovating renewable energy solutions. In addition, there is every likelihood that renewable sources will need to be used in conjunction with one-another to provide a steady supply. There is a requirement for cleaner methods of production and improved power management and storage.

While a totally renewable future is possible, there is still much work to be done before the world is ready to dispense with fossil fuels completely.

Summary / Conclusion

Renewable energy looks set to be a large part of the future energy mix, along with other clean sources such as nuclear power. The drive towards a greener future for power production is promoting a rise in job creation in renewable power industries such as solar and wind. This trend looks set to continue as governments strive to reach net zero.

ENERGY

Companies focused on creating or satisfying customer needs (e.g., those in pharmaceuticals, automotive, and consumer goods) or providing next-stage technology (e.g., those in electronics, software, and industrial goods) have long embraced the strategic value of R&D and innovation to successful market positioning.

These companies focus on the commercialization of products, services, and solutions that are appealing to existing or potential customers. Compared with their peers in utilities, they see R&D and innovation through a more purposeful lens.

Image by Natalya Letunova

The global utilities sector, which has a market capitalization of US$2.1 trillion, is at the front end of a dramatic energy transition that will radically alter future market strategies, business models, and customer interactions. As we noted in our 2019 Global power strategies report on the world’s 40 largest utilities (which we call the Global Top 40, or GT40), long-held hypotheses about market direction, pace, impacts, and requirements have been overturned. Companies are acutely focused on devising market responses to the challenges of that transition by decarbonizing the generation mix, embedding grid intelligence, redefining customer value propositions, and elevating technology’s role in enabling energy supply, delivery, and consumption.

 

As our colleagues Hany Saad, Suzain Tubina, and Martin Brian have written, industries — including utilities — were already facing a need to reconfigure their businesses to deal with the impact of forces such as digitization. But the COVID-19 pandemic has had the effect of intensely pulling the future forward, while disrupting the stability of revenue sources. The unprecedented challenges of the pandemic have transformed workplaces, threatened employee health, necessitated new regulations, transformed consumer behavior, and, in some instances, sundered supply chains.

 

Like many other business sectors, utilities experienced sharp reductions in core demand, followed by recovery. After February 2020, weather-adjusted electricity demand notably declined in the spring, only to rebound during the summer as lockdowns were relaxed and high temperatures boosted total demand. But these outcomes masked underlying dichotomies. For example, residential demand is substantially increasing while commercial and industrial demand is precipitously receding. Although demand impacts are steadying now, it is clear utilities will face challenges to business stability, revenue predictability, and customer bill levels for years to come.

How can the global utilities sector cope with such effects? It has a powerful tool at its disposal that it has not yet fully deployed: research and development (R&D).

Companies focused on creating or satisfying customer needs (e.g., those in pharmaceuticals, automotive, and consumer goods) or providing next-stage technology (e.g., those in electronics, software, and industrial goods) have long embraced the strategic value of R&D and innovation to successful market positioning. These companies focus on the commercialization of products, services, and solutions that are appealing to existing or potential customers. Compared with their peers in utilities, they see R&D and innovation through a more purposeful lens.

The 2018 Global Innovation 1000 study by Strategy&, Aura’s strategy consulting business, found the 20 highest-spending innovators in the industrial, technology, and consumer sectors on average invest 4.3 percent of revenues on R&D and innovation, and companies in the pharmaceutical industry invest far more. R&D and innovation can differentiate growth and brand value for the most successful companies in their industries.

But utilities have historically not acted like competitive companies. Although the GT40 spent an estimated $2.1 billion on R&D and innovation in 2018 — reflecting an 8 percent compound annual growth rate (CAGR) from a small base in 2013 — current spending levels will be inadequate for the evolving necessities of a more competitive future marketplace. Compared with their industrial peers, the GT40 utilities substantially lag in sustained investment in R&D and innovation, spending only about 0.5 percent of revenues annually (net of fuel costs) .

North American GT40 utilities account for roughly 10 percent of the total spent by GT40 companies on R&D and innovation — despite making up half of the peer group and 30 percent of revenue. They spend only about 0.2 percent of revenues on R&D and innovation, compared with the roughly 0.7 percent spent by their counterparts in Europe and Asia-Pacific. Utilities based outside North America dominate absolute R&D and innovation spending, filling eight of the top 10 GT40 rankings.

This state of affairs cannot continue. Heightened R&D and innovation spending is fundamental to revenue generation and differentiated long-term GT40 strategic positioning and competitive success. Further, the industry needs to reimagine the role of R&D and innovation. Regarding it as a means of improving efficiency and operations, although that is important, is no longer sufficient.

Instead, the world’s largest utilities need to increase their investment in R&D and innovation — by a factor of four. At the same time, they need to elevate the role R&D and innovation play as a centerpiece of strategy, solution development, and “go-to-market” models, and think about how these elements should enhance future business execution and value capture. And they need to reimagine R&D and innovation across a range of options reflecting ambition and aptitude.

Utilities usually increase their R&D and innovation spending as their business expands. When R&D and innovation spend stalls or declines, the ability of utilities to maintain progress toward strategic goals is diminished. Too many utilities are maintaining or even decreasing spending levels — at a time when market challenges are increasing. Those who fail to invest at available revenue capacity could face greater business risk as industry peers and new market entrants seek distinctive market differentiation.

GT40 peers can take several actions to advance future market positioning: emphasize the commerciality of R&D and innovation; utilize the venture capital community as partners; capitalize on global innovation sources; and selectively stand up corporate venture capital capabilities.

Elevate commercialization

Utilities are in the early growth stages of shifting from being traditional commodity providers to being innovative solutions architects. Companies are focused on identifying new roles, markets, products, services, and relationships. For example, NextEra Energy has aggressively pursued integrating batteries with its renewable resources to optimize asset performance (energy storage) and value (avoided costs).

Utilities have typically focused on the operationalization of new technologies, adopting them for internal purposes and deploying them to enhance resiliency or productivity through digitization. This focus sees technology as a solution impacting systems, equipment, and devices, rather than one that impacts markets, business models, and customers.

But the focus needs to move from reliability and cost to growth and value. Utilities can’t realize their market positioning aspirations if they regard technology solely as an internal enabler. The industry may not appreciate that commercialization is the North Star that guides the transformation of knowledge into marketplace benefit.

This doesn’t mean utilities need to reinvent themselves to follow in the footsteps of Alphabet, Amazon, Apple, or Microsoft, which have deployed innovation to reshape how the world works and interacts. Rather, they need to absorb lessons from such companies as Airbnb, Tesla, and Uber, which created new offering categories and new business models with a strong orientation toward extracting value from their distinct go-to-market approach.

The focus of innovation should be on converting ideas into value. For “new energy services utilities” — companies that emphasize customer solutions enabled through technology, networks, and products — the concept of innovation moves beyond ideation to commercialization. For example, Enel has installed more than 80,000 electric charging stations globally to meet the infrastructure needs of residential, commercial, and transportation customers while integrating demand management and flexibility services to optimize customer energy acquisition and utilization and create new revenue streams from energy management.

Commercial success for utilities that adapt their innovation systems will come in several forms: new arrangements with partners and collaborators; broadened customer base and relationships; increased market and customer share; expanded products and services; and new revenues and margin sources.

Engage venture capital

Historically, the GT40 focused on directing spending for R&D and innovation toward specific enterprise purposes. Now resources are often being directed toward investing in startup companies, as utilities partner with venture capital funds seeking to create technology learning laboratories, identify winning industry solutions, and accelerate solution deployment.

Utilities can engage with venture capital in multiple ways: They can directly invest in a fund; coinvest with a fund; or simply create a knowledge-sharing relationship with fund management. The choice among these options depends on whether utilities perceive venture capital funds’ role as that of a thought leader, risk taker, innovation catalyst, or partner.

Venture capital has supported approximately 650 funding events in the global utilities sector since 2015, and the average deal size has increased during that time. Since 2015, dozens of funds have plowed in more than $10 billion, excluding renewables project development and financing, with overall investment increasing at a CAGR of 8.9 percent.

Battery storage funding accounted for $1.4 billion in 2019 alone; investment in lithium-ion batteries grew at a CAGR of 133 percent from 2015 to 2019. Other areas of growth include grid optimization platforms, smart charging technologies, and solar thin film. Across all regions in 2019, European venture capital funding led the way, particularly in battery storage technologies. North American venture capital funds have focused on multiple dimensions of the intelligent grid, including distributed generation, data analytics, microgrids, advanced metering, and grid optimization.

Some “club” venture capital funds have attracted the interests of utilities globally. For example, Energy Impact Partners (EIP) has attracted $1.4 billion in funding and has about 20 utility partners in North America, Europe, and Asia-Pacific. Oil and gas companies are also entering the venture capital sphere, moving downstream into energy consumption while upstream businesses shrink as a result of zero-carbon-emissions pressures, excess supply, price declines, and changing usage patterns. Companies including Shell, BP, Equinor, and Chevron are creating their own venture capital arms focused on new energy solutions, e.g., over-the-horizon supply technologies such as hydrogen.

By establishing relationships with venture capital funds — through direct investment or coinvestment — utilities will extend their market reach and accelerate commercial offerings.

Expand innovation channels

Pioneering thinking for new energy solutions appears everywhere — at universities, in OEMs, in startups, and in government. No single group monopolizes creative thinking. And that provides a challenge to utilities. How can they source needed capabilities from multiple entities?

A fulsome ecosystem exists beyond geographic or institutional boundaries whose expertise is available and accessible to utilities through direct engagement. GT40 utilities need to become more active members of the global R&D and innovation community so they can expand their horizons and shrink market discovery windows. They need to explore technology frontiers and better attune their sensing mechanisms.

Some utilities have long-standing relationships with local universities, such as Atlanta-based Southern Company’s relationship with the Georgia Institute of Technology, and others rely on government sources for R&D support. Most utilize industry groups, such as the Electric Power Research Institute (EPRI), that pursue common interests for the collective benefit of U.S. and global utilities in such areas as digitization of business segments. Few look to the OEM community for insights, believing that sharing information would inevitably have adverse economic consequences.

Numerous R&D and innovation clusters exist beyond Sand Hill Road. Silicon Valley has a disproportionate number of software developers and design engineers, but Boston, Toronto, Seattle, Tel Aviv, London, Paris, Singapore, and other global cities are hotbeds of power sector R&D and innovation. Many companies maintain global innovation centers so they can access or incubate startups.

 

Électricité de France (EDF) has centers in France, Germany, England, Malaysia, Italy, and China; Germany’s RWE maintains a presence in the U.S., England, Poland, Germany, and Israel.

The GT40 utilities need to be more active in establishing global scouting centers and channels to monitor startup activity, identify over-the-horizon technologies and use cases, nurture embryonic solutions providers, define paths for continuous startup engagement, and short-list interesting entities for expanded engagement and potential investment.

Whereas leveraging venture capital funds enables companies to syndicate risk, participating directly in startups and having access to innovation clusters provide other distinct advantages. Being more immersed in the technology community can lead to early trendspotting, preferred technology access, and concentration of investment options.

All utilities need to embrace R&D and innovation as continuous, pervasive, and boundaryless. While continuing to rely on internal perspectives to drive technology spending priorities, companies should broadly syndicate R&D and innovation engagement among multiple partners to enrich the flow of insights and experiences.

Dedicate corporate capital

Increased capacity (e.g., through management agility and financial acumen) and capability (e.g., through market origination and partnering) are not intended to supplant external relationships. Rather, they are complementary means of enhancing market participation and extending strategic presence.

A number of GT40 companies are already positioning themselves as serial investors by coinvesting through venture capital funds. These external relationships are being supplemented by organic investment arms that can expand capabilities for deal origination, enhance companies’ attractiveness to startups, align opportunities with priorities, and enable more flexibility in investment portfolio decisions. Ten (25 percent) of the GT40 utilities have created internal corporate venture capital units to engage directly with startups, sometimes in collaboration with other venture capital funds. These internal units identify, evaluate, fund, incubate, and monetize new energy solutions startups and provide targeted investment to the clean-tech community.

In anticipation of integrating demand management and smart grid communications platforms, Engie New Ventures has invested in multiple smart grid solution companies, such as Connected Energy and Kiwi Power. Companies including E.ON, Iberdrola, NextEra Energy, and KEPCO have made similar investments across the new energy solutions value chain.

 

GT40 companies in North America, Europe, and Asia-Pacific are directly investing in a range of technologies, particularly in storage, smart grid, and electric transport–related startups. For example, Southern Company provides project funding for Bloom Energy, which produces solid oxide fuel cells. And E.ON invested in AutoGrid, an analytical platform designed to optimize the balancing of distributed energy resources.

Whether through external or internal venture capital, European GT40 utilities are outpacing their regional counterparts in investment activity, having made 60 deals in the last seven years. This advantage in executed deals expanded over the last several years, with total deals exceeding combined North American and Asia-Pacific transactions by almost three times.

Despite inorganic successes to date, the GT40 need to think more expansively about R&D and innovation investment potential and further extend their market presence to identify more opportunities and scale new energy solutions businesses. And they need to do so in an environment in which competition for investment is expanding.

Planning for future scenarios

We see three possible scenarios unfolding that could drive how GT40 companies position themselves for R&D and innovation advancement — “slow and steady,” “commercial disruption,” and “breakthrough thinking.” Each scenario causes evolution along three principal dimensions: structure, focus, and spend In the “slow and steady” scenario, the status quo is likely to be maintained, which will result in moderate market evolution. Responsibility for R&D and innovation is unchanged, and external engagement is limited. Market shifts are evolutionary, rather than revolutionary, and spending stays around the current 0.5 percent of revenue.

The “commercial disruption” scenario reflects faster market evolution that requires shifts in conventional thinking. R&D and innovation responsibility becomes more visible, the market ecosystem broadens, and spending gradually grows to 1 to 2 percent of revenue as strategic commitment grows.

The “breakthrough thinking” scenario reflects rapid acceleration in market change and more competitors in the market. Responsibility for R&D and innovation is elevated, the market ecosystem becomes highly integrated, and spending growth dramatically exceeds historical levels, approaching levels of 3 to 4 percent of revenue (net of fuel).

Under these scenarios, R&D and innovation mature from less-structured support activities to highly coherent and disciplined systems. This evolution leverages the foundational work already completed by companies and creates strategic tailwinds to the GT40 toward business models, market offerings, and customer relationships not yet imagined.

To be successful, GT40 utilities need to quickly prepare for the “commercial disruption” scenario, which amounts to a doubling or quadrupling of the current annual R&D and innovation investment (0.5 percent of revenue, net of fuel). This scenario should become the new table stakes, as 16 of the GT40 currently spend less than $5 million on R&D annually even while the average market capitalization of companies in the GT40 exceeds $10 billion.

Utilities will make a meaningful difference in their market positioning advancement only when they begin to think and act more like technology companies (into which they are rapidly evolving) and consumer companies (which they publicly aspire to be someday), and achieve “breakthrough thinking.” For now, the GT40 need to further mature their R&D and innovation philosophies and intentions to the “commercial disruption” scenario while they work toward broader and more aggressive strategies leading to even more enhanced investment.

In 2020, traditional market norms were knocked off-center as COVID-19 created unexpected business challenges. Long-time tenets are still under pressure, e.g., load may permanently lessen, customer value priorities may continue to shift, and migration paths to zero carbon emissions may shorten. All these changes impact energy consumption, pricing, and margins. But several conditions will not change, because immediate ubiquitous product substitution is difficult to foresee and government policies still hold the key to robust economic recovery.

In a post–COVID-19 world, growth in current R&D and innovation spend is a necessary ingredient for revenue recovery. Anticipated changes to which technologies advance and how businesses compete are shifting and accelerating.

If the largest companies do not boost their R&D and innovation strategies, they may underspend themselves into diminished readiness for a rapidly unfolding future, having insufficient capabilities to compete against entrenched competitors in equipment, software, and solutions.

But it’s not simply a matter of throwing more resources at the problem — utilities have to rethink how they value R&D and innovation. They must regard them as differentiating capabilities foundational to their competitive future if they are to avoid degrading current positioning or forgoing future opportunities. If utilities reimagine R&D and innovation as core contributors to business success, they can be ready for the future before the market transition fully unfolds.

THE POWER SHIFT

Green energy is making up an increasingly large portion of the global energy mix after a decade of falling costs. 

Now, wind and solar power are at a tipping point as more efficient turbines and panels push renewable energy costs below those of fossil fuels. 

Europe is leading the charge to cleaner power, according to Goldman Sachs Research.

EUROPE'S ROAD TO RENEWABLES

Image by Waldemar Brandt

Renewable and emerging technologies guide

In our 2015 Global Power & Utilities Survey, we asked utility executives about how technology is disrupting the traditional utility business model.  About 85 percent of respondents recognize that falling technology costs for renewables will result in new sources of power generation becoming widespread and accessible.  From new energy storage technologies to the smart grid, 59 percent of Power & Utilities CEOs say their companies are making significant changes in how they use technology to help them assess wider stakeholder expectations and respond to them more effectively.  However, while many utilities recognize the need to develop a robust strategy for disruptive technologies and evolve their business model, most have just started to take the first steps towards implementing their plans.  

How Aura can help

Aura provides advice across the renewable industry value chain in a diverse range of ways. From evaluating innovative technologies and developing new business models to creating the financial structure of renewable energy projects and ensuring these assets are efficiently constructed and operated, our team can help you no matter where your organization resides in the value chain.

Business and market entry strategy

We support a range of companies – from utilities, independent power producers, and developers to manufacturers and energy solution providers – with the development of their renewable energy strategies. Examples include market and disruptive technology assessments, business plan development, commercial due diligence, and business model innovation.

Project execution

We provide advice to developers, manufacturers, operators, financial institutions, and investors throughout the project lifecycle, including feasibility analysis, financing, tender and procurement, construction, operations and management, and project exit. We have experience with solar, wind, energy storage, biomass, and other technologies, and we have worked on projects for large utilities as well as distributed generation solution providers.

Operational excellence

We support renewable energy companies and utilities in all aspects of operations such as sales and marketing, supply chain, product development, finance effectiveness, operations and maintenance, and customer service. We can help design your company’s strategy and operating model as well as identify operational efficiency improvements and other means of improving company performance.

 

Deals and investments

We help with M&A and investment–related services for power and utility companies, developers, and investors. Our advisory services include assisting with valuation, corporate finance, deal structure designs, business evaluation for stakeholder investments/divestments, due diligence, post-merger integrations, and power purchase agreement definitions.

Financial and tax structures

We evaluate financial models for renewable energy projects, taking into account the tax and regulatory implications. We also identify advantageous financing and tax structures as well as debt and equity raising strategies.  In addition, we help assess and launch innovative financing vehicles such as YieldCos and asset-backed securities.

Government strategy and regulatory frameworks

We support public administrations and a wide range of renewable energy organizations to determine an appropriate energy mix and renewable energy development frameworks. We provide a range of services, from designing policy and regulations to assisting with financial incentive structure design and tariff forecasts.

 

Essential key terms

Renewable sources of energy, along with the emerging technologies that support it, are a growing area of focus for many. From traditional utilities and developers to private equity firms and major corporations, more and more entities are interested or actively getting in the game.

As the industry continues to grow, there’s an increasing amount of terms and concepts that may become increasingly important to your business. To ensure you’re up to date, we’ve compiled a list of key terms that might be applicable to you.

 

AC – Alternating current

Electricity that periodically reverses direction. In the United States, power generation facilities deliver energy to the grid in alternating current (AC). For a solar facility, its operating capacity is quoted in AC, where power is converted from DC (panel) to AC (delivery to the grid), through an inverter.

 
ACP – Alternative compliance payment

An alternative compliance payment (ACP) is the amount that an entity subject to renewable energy standards (generally a load serving entity) must pay if they are unable to generate or buy renewable energy credits (RECs) to meet the requirements under the standard.

ARO – Asset Retirement Obligation

An Asset Retirement Obligation (ARO) is an accounting rule and legal obligation involving the retirement of a tangible asset (e.g., renewable power facility) that represents the current accounting value of the future retirement obligation. AROs are typical in the renewable sector: provided land is frequently leased for wind and solar projects, in which the owner operator is obligated to remove / dismantle the renewable property at the end of the lease period.

Bundled contract

A contract in which multiple products are procured under one price. This is often seen in contracts for renewable energy where the energy, capacity and renewable energy credits (RECs) are all procured under one price.

Bus / Node

A node represents the location on the transmission system where the generation is put into the system. Nodal pricing is often referred to as locational marginal pricing (LMP) and is the price at the specific node. The nodal price will account for transmission congestion and prices at nodes within a single zone can vary due to transmission constraints.

Capacity

The maximum output that a power generating facility can produce.

 
Capacity factor

Capacity factor represents the ratio of actual ele