Venture capital investment is helping utilities adapt to change

As the power and utilities sector reaches an inflection point, technology continues to play a significant role in shaping industry strategy. The latest EY Power Transactions and Trends report shows venture capitalists are becoming an important source of funding to fuel the growth of these energy technologies, but participating in venture capital investment will require utilities to shift their traditional mindset, writes Miles Huq from EY

Why is venture capital important for energy?

The traditional utilities industry is being disrupted by low-cost distributed energy resources, improved energy efficiency and technology that is empowering customers to take control of their own energy consumption. These changes are triggering a fundamental shift in how electricity is produced, used, stored and traded.

This new, fast-paced and dynamic environment demands agile, bold decisions around where to focus investment now for future success. Many utilities are struggling, however, to adapt because they are burdened by a slow-moving regulatory environment, ties to legacy grid-scale assets and a risk-averse investor base. To address these challenges, venture capital offers a way to challenge the status quo and drive awareness of business disruptors.

Top targets

In Power Transactions and Trends, we focus on the key disruptive energy trends most suited to venture capital investment:

• Transportation: By 2050, we will need to source half of the world’s power from cleanly generated electricity. The “electrification of everything” will be a key driver of load growth, with electric vehicles (EVs) leading the charge. EVs are a convergence point in grid transformation, bringing together utilities, oil and gas companies, and car manufacturers in the evolution of EVs and EV infrastructure.
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• Digital and analytics: Technology is focused on better understanding customer behaviour, as well as understanding grid transactions.
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• Efficiency and manufacturing: Continued improvements in the performance of technologies, including solar panels and battery storage, are helping boost energy efficiency.
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• Behind the meter: Advances in behind-the-meter technologies are focused on expanding distributed energy resources, such as rooftop solar and battery storage, as well as demand response services.
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• Waste to energy: The rapidly developing technology turns waste into usable energy, including biogas and biofuel.
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The innovation and high-growth potential on offer by these technologies are increasingly attracting venture capitalists. In total, these investors injected $2.1 billion into the global utilities sector in Q2 2019, with transportation the biggest focus of funding, particularly in the Americas and Asia-Pacific.

In Europe, we saw growing interest in digital and analytics and behind-the-meter technology. Norway-based eSmart Systems, which has developed predictive maintenance software for utilities, raised $34 million, including investment from Energy Impact Partners (EIP). EIP’s Michael Donnelly cited the technology’s potential for broader application as part of the fund’s motivation for investing: “eSmart’s intelligent analytics solution for energy and utility companies has immediate use cases for our investor base. It helps utilities efficiently and effectively analyse existing and expanding data sources (including images and sensors), providing actionable insights for transmission and distribution systems.”

The venture capital mindset

But utilities keen to capture venture capital investment to get ahead of disruption will need to shift their traditional mindset and way of operating if they are to catch the eye of investors in a competitive market. In particular, they will need to adopt key characteristics required by venture capitalists:

• Commitment: Approximately three in ten investments may fail, and very few exceed expectations. Invested capital may be tied up for several years with no exit strategy available. Senior management needs to be committed to the venture capital process and not use it as a short-term strategy.
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• Being supportive but not controlling: Utilities have a lot to offer a start-up, including deep industry knowledge, an existing customer base and a business platform. But utilities need to support entrepreneurs and not try to force them to adapt to their traditional power and utilities culture.
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• Process discipline: Investors should have established processes to conduct due diligence and close deals quickly. Companies should identify the key business units and corporate functions to be involved. Regardless of whether an investment succeeds or fails, companies need to ensure they capture the relevant market insights to distribute throughout the company.
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• Increased competition but also collaboration: Financial venture capital firms, oil and gas majors, and power and utilities companies are all seeking venture capital investments. This creates a crowded field, but venture capital funding rounds show these players can come together as co-investors to support emerging technology.

Adopting venture capital

To be sure, high-risk venture capital investing is at the opposite end of the spectrum to traditional regulated utility investment. Successfully changing the utility mindset to capture this funding will not be easy, but those that can make the shift will be better placed to focus on the emerging technologies set to disrupt the industry. Those that fail may well be disrupted themselves.

Miles Huq is EY Global Power and Utilities Transaction Advisory Services Leader. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.

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