by Julian Spector
July 24, 2019

Private equity is developing a taste for energy storage. 

Energy Capital Partners, an energy investment heavyweight with $19 billion at its disposal, acquired commercial and industrial storage developer and owner Convergent earlier this month. 

On the surface, private equity appears to fit naturally with storage development. Despite the high-tech veneer of lithium-ion, storage projects are infrastructure, generating returns over decades, not months or a couple years. These projects need capital more patient than the venture capitalists that flooded the sector as energy storage heated up.

And yet, private equity has refrained from taking a direct role in storage installation, even as the market has grown precipitously. In the words of Elta Kolo, who tracks grid edge mergers and acquisitions at Wood Mackenzie Power & Renewables, ECP's move into storage "is way ahead of the market."

Asking around, I still haven't tracked down another case of private equity taking direct ownership of a pure-play storage developer, as opposed to the more common practice of owning projects in dedicated financing funds.

What remains to be seen is if the initial sampling stimulates a hunger for more, or if the experience is best enjoyed once.

To answer that question, we must examine what choices Convergent made that proved attractive to a private equity backer, and what will change under the new ownership. We'll compare that to the other ownership structures that storage companies have used so far to see what other opportunities await.

Projects over pipeline

Convergent diverged from C&I sector trends in ways that proved attractive to Energy Capital Partners.

CEO Johannes Rittershausen kept the company firmly in developer territory when many C&I peers starting turning into platform companies.

AMS, for instance, started as a venture-backed C&I developer, but decided that that business demanded too much working capital. It raised a $34 million Series B on the promise of developing software for economic dispatch.

Stem, too, has shifted gears to emphasize its software smarts, moving more of the development work onto the plates of solar installers. That playbook is attractive, if not essential, for venture capitalist investors.

Convergent, instead, raised $70 million into the company to invest in building and owning projects.

"We've been pitched on pipelines, but Johannes and team have actually executed," ECP principal Andrew Gilbert told me in an interview.

Those operating projects came with a track record of customer relationships that ECP could investigate to corroborate the startup's claims about itself. A recent partnership with Shell speaks well of Convergent's ability to win over big customers.

Lastly, ECP liked Convergent's focus on a sweet spot market: larger than the typical C&I battery but smaller than utility-scale.

The problem with smaller projects is they cost effort and money to install, but offer smaller returns. On the other hand, Gilbert and Rittershausen both described large-scale utility-scale storage as commoditized and highly competitive. Convergent specializes in larger industrial systems driven by customer needs; it won the title for largest C&I battery in North America in 2018.

ECP wants to put hundreds of millions of dollars into this "middle market" before it gets flooded with big, well-capitalized players like the largest scale of storage competition has.

What private equity enables

The key benefit from the deal for Convergent will be a scaling up of ambition: It can focus on building without having to worry where the money will come from.

"It is a capital-intensive business, so an investor with a bigger balance sheet is critical at this time," Gilbert said.

In the past, Convergent would hit up investors for $5 million to $10 million checks as the need arose, Rittershausen said. Now the company can plan on up to $100 million in annual capital allocations. And the relationship takes fundraising off the agenda for the executive team.

"Now we can concentrate solely on growth, solely on value creation," Rittershausen said. "It’s a life-changer."

That outlook differentiates Convergent's private equity experience from Tendril, the utility data analytics and customer engagement startup that received a majority investment late last year from private equity firm Rubicon Technology Partners.

Since December, Rubicon has bankrolled a buying spree that includes startups EEme, EnergySavvy and FirstFuel Software and culminated last week in a merger with Simple Energy, resulting in a newly branded company, Uplight.

That approach reflects Rubicon's focus, as my GTM colleague Jeff St. John described it following the investment: "Rubicon specializes in taking ownership stakes in enterprise software-as-a-service companies serving particular industry verticals and providing them the financial support to expand organically or through acquiring other companies."

Energy Capital Partners specializes in owning and operating energy and power infrastructure for the long term.

A more analogous deal emerged last week, when BlackRock Real Assets bought an 80 percent stake in GE's distributed solar business, which also does some storage development. That investment will allow the company to expand development activities and own projects, which it could not do earlier.

Other ways to finance

I've been trying to track down other prominent cases of private equity firms buying a storage developer, and it's hard to do.

The more classic approach is for them to invest in project financing funds that buy up projects other companies build; see Macquarie's $200 million fund for AMS projects or Stem's $100 million financing deal with Starwood Energy Group. ECP evidently wants to take a more hands-on role in crafting the development process, rather than buying up someone else's work after the fact.

The private-equity-backed storage independent power producer may well be a new category, then. It differs slightly from the ownership structures we've seen in the market previously, namely:

  • VC-backed: Tailored to companies with a strong software component to enable scale. Examples being AMS, Stem, Green Charge before acquisition by Engie. Typically partner with infrastructure investors to own constructed projects, allowing the developer to offer zero-money-down financing.
  • IPP or utility-backed: Storage as a new vertical within an existing energy developer, benefiting from development expertise, utility contacts, balance sheet. IPP examples include NextEra, Invenergy, AES. Optimized for big, ambitious projects that require low cost of capital. Utility-backed companies include Enel X and Engie, which stand out for packaging storage among a broad range of clean energy services.
  • Legacy engineering firm: They know electrical engineering and have money to invest in new businesses. The question is, will they stick with it? S&C Electric was in and then out of the market, and GE tried and discarded several storage configurations over the years. Schneider Electric is differentiating itself on industrial microgrid design involving storage, and Siemens channeled its storage expertise into the Fluence joint venture with AES.

The storage development specialists active today tend to fall into one of these categories, meaning there aren't many unaffiliated targets remaining if ECP's peers want to acquire a storage shop of their own. Totally independent storage developers are becoming a rare breed.

The lesson from this acquisition, then, is that a small developer that builds real projects and pleases customers has the option of parlaying that track record into partnership with private equity.

At this point, though, there are more equity firms with energy and infrastructure expertise than there are storage companies in a position to woo them.