Companies in the power and utilities sector that fail to adopt key characteristics required by venture capitalists and attract investment may well be disrupted themselves
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.
In Power Transactions and Trends, we focus on the key disruptive energy trends most suited to venture capital investment:
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:
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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