In early January, Ormat Technologies announced it was buying Viridity Energy for $35 million, an acquisition that – according to its press release – would “mark Ormat’s entry into the growing energy storage and demand response markets, with an established North American presence.”
The press release describes Viridity as having over 850 MW of customer load under contract across 3,000 sites, including management of a portfolio of non-utility storage assets located in the northeastern U.S. with over 80,000 operational market hours.
As a former SVP who ran the demand response business at Constellation, I was curious as to the logic behind this acquisition. Demand response is, after all, some what different than developing and managing geothermal energy resources – the core competencies Ormat is known for. I was fortunate to arrange a conversation with Ormat’s CEO Isaac Angel to discuss the transaction and find out more about the logic behind the transaction.
Angel is quick to acknowledge that the deal might surprise the casual observer, both in terms of the sector and the specific company. Ormat is one of the world’s leading geothermal companies, having installed over 2,000 megawatts of capacity (MW) in 23 countries (and owing 710 MW of generation in the US, Guatemala, Guadeloupe and Kenya). Ormat also develops solar resources, offers remote energy solutions, and provides a technology to convert industrial waste heat into electricity.
The company has also done quite well over the past five years, showing a relatively steady climb in its stock price from the mid-teens in 2012 to the mid-$50’s per share recently. However, Angel indicates that Ormat is continuously looking into other growth areas and its evolving strategy calls for strengthening the company beyond the realm of geothermal energy. This strategy envisions expansion into other geographies as well as the acquisition of companies that can add to Ormat’s technology and leverage its existing assets. Angel notes,
“We looked for where the market was going, and we realized that there was a new opening in the market for C&I (commercial and industrial) solutions behind the meter, and grid solutions in front of the meter.”
With the addition of so many intermittent resources coming onto the grid in the U.S. as well as other parts of the world (and particularly northern Europe), Angel sees the need for the types of solutions offered by Viridity. These include demand response and ancillary services like frequency regulation and voltage stabilization solutions for the grid (that can also be combined with storage solutions). C&I companies are also demanding new whole power solutions that utilities may not be capable of delivering. Angel believes that in order to deliver these “you have to have storage. It’s not necessarily the end solution, but it’s part of the solution and it can be base-load with solar and wind and geothermal or anything else.”
The company’s goal was to provide an end-to-end offering for the C&I market, but it previously lacked the requisite software to be successful. So the company began looking into companies in the area of storage and grid management. Angel indicates that Viridity and its demand response capabilities were not originally in Ormat’s strategic focus,
“But then we realized that, through Viridity, we are getting a lot of knowledge and direct experience in storage assets operated in relevant markets . Obviously it’s a human resource and experience acquisition and customer base and customer relationships and know-how, both technical and management.”
With the acquisition all but complete, the next step is to integrate Viridity with the new parent company, integrating Ormat’s engineering, energy performance contracting, permitting departments – and most especially its balance sheet – with the professional capabilities of Viridity. The company plans on growing its U.S. market through Viridity’s team and customer base, but the acquisition of additional small software companies may take place if both need and opportunity exist. However, while additional software companies may be in play, battery companies are not on the list of potential targets, as they are consumer products and can be commoditized (much the way solar panels and inverters have been in recent years).
The expected synergy here also extends to the balance sheet, as Ormat’s financial strength will allow it (through Viridity) to approach more customers with additional offerings. Indeed, Angel indicates that the company is currently in long-term negotiations with C&I customers to offer additional solutions in the U.S. and Europe.
“They require an end-to-end solution which is not only providing them with a PPA for electricity for 5 or 10 years, but also an O&M and storage solution, and together with Viridity we will be able to provide more comprehensive solutions than we can provide today.”
Prior to the acquisition, Isaac laments that Ormat has had to pass on “fairly big numbers of storage opportunities, specifically on the West Coast but also on the East Coast, which until today we didn’t really go after.” With Viridity and its balance sheet, that all changes, and – given Ormat’s past experience with solar development and Viridity’s experience with Storage projects – the company is also likely to pursue development of combined solar and storage projects.
So yet more consolidation takes places in the DR space. The Ormat-Viridity transaction is intriguing in several ways. First, it may finally provide Viridity with some much needed lift and allow it to reach a promise it has never quite realized. In addition, the acquisition holds the potential to broaden the offerings to the C&I space, and integrate solutions that until now have been sold as one-offs. C&I customers have been dealing with the complex and convoluted world of electricity for a long time, with many vendor companies unable to offer integrated solutions. With Viridity’s software and Ormat’s financial throw-weight and expertise perhaps that may be about to change.
Angel indicates that Ormat’s goal of acquiring Viridity is to build “a spearhead in which we will be able to increase our ability in the storage industry, both behind and in front of the meter.”
This story could be very interesting to watch as it unfolds.