There have been some really big announcements in the corporate world lately about clean energy businesses.
- E.ON split its business between power plants, and grids and renewables
- NRG announced the spin-out, sale, or possible JV of a "GreenCo"
- SunEdison announced layoffs and a refocusing
- GE announced the formation of Current to focus on distributed energy
Are these positive events? Negative? Are there any lessons to be learned from this? With all the typical corporate "All is well!" rhetoric, it's a bit confusing.
But dig a little bit into all of these announcements, and there is one basic takeaway: Distributed energy technology is now a big, fast-growth business that is putting pressure on the incumbent industries, and execution and focus matters.
Out of the four recent announcements, the NRG and SunEdison announcements are potentially the most negative.
While some have lauded the NRG GreenCo announcement as a positive development, the fact is that on the investor call announcing the move, CEO David Crane was quite explicit that the GreenCo will be given a finite amount of capital not much larger than the company's internal forecasts suggest is necessary to get to breakeven -- and not a dime more. While this can end up being a positive for the GreenCo business, if they get to profitability and/or find a great acquirer or strategic partner, it's also clearly a retrenchment by NRG away from these markets. It's NRG telling Wall Street, "OK, we get it, we're going to stop pouring capital into these markets." And for good reason: The GreenCo is forecast to burn through $125 million over the next year in getting to breakeven.
Meanwhile, the SunEdison story, as told by GTM's Stephen Lacey in the above-linked article, seems really to be about SunEdison's strategic focus, the Vivint acquisition and other acquisitions. After all, the solar industry continues to grow very rapidly, so it's hard to take the developments at that one company as any kind of indication that market conditions aren't what they seem, at least at an overarching level. Certainly YieldCos are at a "pressured" part of the cycle, and both SunEdison and NRG had bet heavily on that model. But that's an issue of model, not market.
On the other hand, E.ON's shift seems to be a jettisoning of the centralized power generation business and a focusing on downstream. And now GE is creating a business focused on advanced behind-the-meter energy solutions that it says is already at $1 billion in annual revenues, and that will grow to $5 billion over the next five years.
Here's how I see it: It was fine for big traditional companies to have smallish efforts in new energy solutions. But with that market getting big and highly competitive, execution is at a premium and focused execution is necessary to succeed. But those traditional companies are not inherently focused on these new solutions. And the new solutions put pressure on the traditional -- still quite large -- markets.
It puts the big companies in an awkward position, both internally and with Wall Street.
On the Wall Street side: Are you a sleepy utility with predictable earnings? Or are you an exciting, new energy tech company? Few investors are looking for companies that straddle those two visions. The investors are either looking for one or the other. I saw this a decade and a half ago when consulting with a large investor-owned utility that had invested in new energy technologies -- Wall Street didn't like it. The new internal startups weren't big enough to be exciting to shareholders looking for exposure to the upside of the new markets, but they were burning cash and yanking around quarterly earnings in ways the conservative investors didn't like either. The first step to addressing this "straddle" is to carve out the new solutions into a division that can be clearly reported and understood in investor communications. The next step is spinning them out altogether.
On the internal side: These internal startups may start out "cute" and palatable to the incumbent businesses, but as they grow, the schisms become clear. It doesn't have to become antagonistic; the internal startups may not even truly pose a threat to the traditional business. It's enough that different skill sets, risk-tolerance levels, and external communications are necessary for each camp to succeed. That's really hard to manage at the C-suite level. And so this also pushes toward carving them out internally and eventually spinning out. Throw in big cash losses, and that just ramps up the pressure in the C-suite and even at the board of directors level.
So these moves are a mixed bag -- some are exciting for the companies involved, some are concerning. But overall, they just point out that distributed energy is now big time. The age of behind-the-meter is upon us, and the new winners and losers are starting to be sorted out. And it's forcing some major moves at the corporate level. We're entering a really dynamic period for the industry.