Cleantech Venture Capital in a Deregulated and Distributed Energy Model

14 August 2017

Venture capitalists have traditionally held an investment focus to a tight group of industries such as IT, media, biotechnology and financial services. Over the last decade, ‘cleantech’ VC exposures have taken full flight across renewable energy, biofuels and the sustainability subsector. Why? VC Managers have reassessed the cleantech risk/return profile which now presents an enhanced, possible up-side in portfolio performance factored by less capital intensive projects, deregulation, distribution scale, corporate governance and trade sale appetite.

In the US market, investor owned utilities (i.e. not public), serve ~65% of the total electric and power customer base. These investments were initially made under a rationale to provide stable, reliable and affordable energy with long-term, fixed-price contracts that would guarantee a steady stream of customers and a steady return for shareholders. These operations did not necessarily anticipate that the future utility customer would have demands beyond price such as their energy be low-carbon, off-peak loaded or exclusively produced by nearby renewables.

A new cleantech customer has emerged but at a timely ‘tech-push’ / ‘market pull’ juncture.

Current VC Cleantech Investment

Although the May 2017 Brookings report noted flat growth in VC cleantech investment, the more noted change in performance was seen by the 87% of deployed VC funds now allocating to later-stage companies. The riskier, early-stage clean technologies and companies are perhaps not finding the same attention of VC funds as before but nevertheless the quantum change is promising and follow-through investments have been overwhelmingly pursued.

Global VC Cleantech Investment
Source: Brookings, i3 Connect, May 2017

Decentralised Energy & Distributed Blockchain

The increased breadth to energy innovations by on-site retail and off-site commercial energy distribution are radically challenging traditional utility systems. The monumental enhancements being found in battery storage has potential to greatly improve efficient energy delivery that is resilient, low-cost, zero-carbon and perhaps owned and administrated directly by the consumer.

An emerging electrical grid is now culminating to allow decentralised production and a control system that is not necessarily top-down. However, the distributed nature of a transactive grid presents challenges, primarily to technical control and administration. This of which is attempting to be addressed by blockchain protocols to management of hardware and software stacks to bridge energy production, sourcing, payment and output.

The cleantech or renewable energy blockchain model is generally utilised by:

  • Decentralised buying/selling of energy.
  • Cryptocurrency integration to producer switching.
  • Ownership register and Asset Management condition.
  • Guarantees of origin, certification of renewable energy and emission allowances.
  • Metering and billing of electricity consumption and heat use.
  • Billing of electric mobility.

empirical pi’s cleantech blockchain leaders have been identified as Greeneum and SolarChange. More on this to be published in due course.

Commercial Customers becoming their Own Utility

Commercial, public and industry energy consumers far outweigh the meterage of other segments. As both legislated and self-regulated measures prescribe carbon limits to major commercial consumers in efforts to align to the United Nations Framework Convention on Climate Change (Paris, December 2015), corporate VC interest to renewable energy has and will grow substantially with hopes for immediate, restorative environmental impact.

Electricity Consumption by Segment
Source: IRENA, IEA Energy Balances 2016

At present, corporations interested in sourcing power from renewable sources must generally procure renewable energy from the utility, install renewable energy on-site, or purchase renewable energy certificates separate from the underlying energy. Current VC investment targets are broadening the range of cleantech options from developing on-site solar power, battery storage, payment and administrative systems, equipment and appliances auto-regulation. Corporate VC endeavours have consisted of direct investments into internal and external mandates, as well as fund of-fund investments that reflect the respective corporate capabilities.

Commercial and Industrial Asset Managers are becoming increasingly aware of the opportunities to apply ‘meter’ value, particularly in a distributed energy model. This has raised the base line demand of Asset Managers who now seek proprietary system integrations, granular views of energy usage, consolidated costs and savings opportunities and real-time access to system performance.

Typically, multiple pathways are and increasing more available for corporates to procure renewables.

Corporate Approaches to Renewable Energy Procurement
Source: CDP, 2017
Corporate Renewable Energy Procurement Mechanisms
  On / Off Site Capex Required Operations & Maintenance Project Size Contract Length Level of Risk
Corporate Ownership Both Yes Company or Outsource Scalable No Production Risk
PPAs (Direct & Financial) Both No (but financial commitment) No Scalable Long-term Basis Risk
Utility Green Tariff Off Site No No Large Long-term Low to Medium
Direct Access Off Site No No Scalable Varies Low to Medium
Community Renewables Off Site Depends No Small to Medium Varies Low to Medium
Unbundled Certificates Off Site No No Scalable Shorter No Project Level Risk
Source: ‘Policies for Enabling Corporate Sourcing of Renewable Energy Internationally,’ 21st Century Power Partnership Report, May 2017.

Public Policy Facilitation

While promising, partnerships between utilities, corporates and start-ups aren’t exactly easy to create. Cleantech start-ups previously needed to grow and attract enough capital to get to a point where they’re in a position to partner with a utility. This pathway has been challenged by radically simplifying the present multi-tiered system, in which power producers, transmission system operators, distribution system operators and suppliers can efficiently transact. The ability to directly link producers with consumers, or turn consumer themselves to producers, is an exciting new VC arena provided networks are incentivised to reflect new protocols.

Prioritising Public Policy for corporate VC cleantech investment has the potential to unlock significant financial resources to truly realise the ambitious greenhouse emissions target.

Promoting a liberalised or more open electricity market will allow generation services to be decoupled from transmission and distribution, and non-utility generators can bid generation services into competitive wholesale markets. Suppliers may also find capability to compete at the retail level, matching electricity consumers with their now enhanced demands in choice. In addition, competitive wholesale energy markets provide price transparency to corporate buyers and can enable more sophisticated transactions between generators and off-takers.

Removal of the traditional vertically integrated monopoly and restrictive regulation has provided opportunities for new entrants in a similar manner that may be comparable to the telecommunications sector. In the United Kingdom for example, deregulation has freed up all standby capacity and consequently driven prices down. However, reducing prices does not necessarily make it more attractive for VC investors unless a cost base restructure drives margin.

Strong discourse is present among climate and energy policymakers as to which instruments in ‘technology R&D push’ or ‘market pull’ models bring the best result given the pressing Paris emissions target.

However, policies that are based on a poor understanding of investor preferences run the risk of crowding out, rather than facilitating, private investment in the renewable energy sector. A dialogue of guidance between leading cleantech VC Managers and Public Policymakers need to be dynamic to ensure the ‘‘cash flow valley of death’’ are not exacerbated by inherent information asymmetries in deployment of new technologies.

The Innovation Chain and ‘Valley of Death’
Source: ‘Technology Innovation and Climate Change Policy’, Grubb, 2004


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