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A state of affairs that cannot be ignored – This past month, Fitch Ratings issued a note highlighting the risk of solar energy net metering to the creditworthiness of America’s publicly traded electric utilities. The agency noted that distributed (rooftop) solar now represents 1% of all energy generated, and the potential to further eat into utility revenues is an issue to be concerned about.

Indeed, electricity sales have declined in five of the past eight years. It’s not just solar, though. Efficient end use technologies, such as LED lighting and better HVAC systems further cut waste. The emerging universe of cheap and ultimately ubiquitous sensors promises to further reduce consumption by allowing us to see when, where and how energy is consumed at the end-use level. This holds the promise to do two things:

  • reduce demand when electricity is more expensive (thereby slashing utility demand charge revenues), and
  • cut overall kilowatt-hour consumption by creating the opportunity for use-directed consumption (for example, fine tuning where, when and how much lighting and heating/cooling you need). In short, sensors and a pervasive IT network have the potential to substitute intelligence for raw materials.

Finally, the rapidly evolving energy storage market holds the potential to dramatically increase the phenomenon known as ‘load defection’ (which is when a significant portion of your load is served by your own resources, often a combination of solar and batteries, but you’re still connected to the power grid).

Image: US EIA - not a reassuring picture

Image: US EIA – not a reassuring picture

The utilities’ response – Clearly, there is a tectonic shift going on in energy markets that has already affected utilities and this dynamic is accelerating as costs of alternatives continue to plummet. U.S. utilities and energy holding companies are responding in a number of ways, by:

  • putting up a fight against solar net metering in the regulatory arena
  • in some cases, integrating the emerging technologies into their business plans and investment strategies, and
  • investing in the some of the same technologies and companies that may be threats, so that they may learn and profit from the evolution as it occurs.

The regulatory response – Investor-owned utilities are fighting back hard against distributed solar and the net metering construct that they see as cutting into their revenues. Net metering holds sway in most states, but three states (Arizona, Hawaii, and Nevada) have already revised their rules. A recent survey indicated that in 2015, 27 states had considered or enacted changes to net metering policies, and 21 utilities in 13 states were eyeing new or increased charges for customers with rooftop solar. Another recent analysis indicates that changes to net metering are possible in eight states and likely in another two. As the distributed solar resource grows across the country, this dynamic can only be expected to intensify.

Integration into the business model – At the same time, many utilities and energy holding companies are working to take advantage of this new dynamic and striving to turn it to their advantage. So, for example, New York’s Consolidated Edison is working with SunPower and Sunverge in a pilot to create integrated solar/storage offerings in their residential customer base and optimize the resource within the context of grid requirements. Likewise, Pacific Gas & Electric is teaming up with SolarCity to examine the possible impacts of storage and smart inverters in stabilizing the grid. California utilities are also working with companies such as Advanced Microgrid, Stem, and Green Charge networks to create visibility into distributed storage assets that can help manage the overall grid. At this point, such programs are in the early stages and much remains to be learned. New regulatory models will also need to be developed. Meanwhile, costs of these technologies continue to fall rapidly, increasing the financial viability and potential for broader adoption of these approaches (to cite one example of declining costs, the CTO of Stem recently indicated that battery costs are 70% less than they were just 18 months ago).

Investing directly in renewables projects – Many utility holding companies are also making significant investments in large-scale renewables, which are now cheaper on a cost-per-megawatt-hour basis than fossil-fired energy in many markets. The Wall Street Journal reported recently that Southern Company intends to spend over $5 billion in renewables over the next three years, twice its expected outlays on new nuclear, gas, and coal-fired generation. Duke is stepping up its renewables commitment, from 3,800 MW to 8,000 MW by 2020, with investments of $3 billion over the next five years. For its part, Berkshire Hathaway already generates over 25% of it electricity from renewables and indicates all future investments will be solely in renewables.

In fact, utility holding companies own half of the existing utility-scale solar, as well as 5,000 megawatts (also about 50%) of the solar generating resources expected to come online in the next year-and-a-half.  Some of the same companies are committed to wind as well. For example, Duke operates 2,100 MW of wind, Xcel Energy owns 6,500 MW, and NextEra is market leader at 12,400 MW of wind in North America (and about 15% of the total U.S. installed wind capacity; 9% of its solar as well). These companies are also beginning to embrace storage, although that industry is very much in its nascent stage.

Utilities and energy companies as part owners in the evolving energy revolution – In addition to making major investments in large-scale renewables projects, a number of energy holding companies have increased their investments in alternative energy and technology companies themselves. Consider just a few key data points: in 2013 Edison International bought solar energy company SoCore – a company focused on commercial and industrial sector solar offerings. That same year, Duke Energy made an equity investment in Clean Power Finance, a financial service and software company supporting the solar industry. French energy company Engie (formerly GDF Suez) has also made some major investments, including taking an 80 percent stake in commercial storage company Green Charge Networks, and buying both Ecova (an energy and resource management company serving the commercial and industrial space) and Opterra (an energy services company).

One of the more aggressive utility venture investors in the alternative emerging energy economy is Constellation Energy Technology Ventures (CTV – a subsidiary of Exelon). The company’s explicit role is to “invest in venture stage energy solution companies” and “engage with technology companies that have the potential to complement or disrupt Exelon’s core businesses.” CTV generally invests jointly with other players and typically makes bets ranging from $1 to 10 million. Over the past several years they have invested in 15 different companies, ranging from storage to electric vehicle charging networks.

Energy Impact Partners: A utility investor partnership – A more recent – and well-funded – addition to the utility investor game comes in the form of Energy Impact Partners, LLC, (EIP) which was launched in October 2015 with initial support from Excel, National Grid, and Southern Company. EIP’s focus is similar to that of Constellation, encompassing areas such as smart grid, storage, sensors and the internet-of-things, analytics, and energy services.

The core team of ten staff is largely comprised of former GE employees, some of whom were previously active in GE’s equity group. They bring to this new venture an approach that was honed at GE, using the corporate venture arm for the benefit of the broader operating business.

The goal of EIP, as CEO and Managing Partner Hans Kobler put it in a recent conversation, is to “work with a handful of partners that are highly complementary in different regulatory environments with different experiences and are willing to share.” With EIP’s members worth $200 billion in market cap and with tens of billions of annual capital expenditures, the potential impact of this effort could be formidable.

Shortly after take-off, EIP expanded its reach to add Oncor, Ameren, and Great Plains Energy. Kobler indicates that the goal is to further round out the group with partners from both the U.S. and abroad, and to assemble a formidable investment war chest. “We are already north of $200 million and will stop at $400 million,” he says.

The objectives of this enterprise are to work with partners to “see what is coming over the horizon” in terms of technologies that could strengthen core businesses. Partners also “want to know what are the big threats coming towards them. Our goal is to find the movers and leader of the energy infrastructure… Proactive or reactive at least they know what is coming.”

Target investments will be companies with solid technologies and histories that are at an inflection point in their potential growth trajectory. An example of this is EIP’s leading role in a recent $20 million investment in Autogrid, a leader in the Internet of energy space. EIP will also occasionally invest in less mature companies if the technology has the potential to be “highly transformative.”

The process of finding these investments – typically in North America – is ‘highly methodical,’ starting with meetings with current partners to identify segments of interest, tap subject matter experts, and boil down a list of companies to a small number that may be of interest. These companies are then invited to present to the team, and after vetting a number of entities in a particular market segment, EIP will develop a report for the investment partners outlining the landscape and prospects within a particular market segment. If successful, the partners decide to forge ahead with an investment, leading to a typical due diligence process.

Kobler indicates that this process may literally start with thousands of companies, and investigations into hundreds. In some cases, the company may have promising technology, but be too early stage. The plan then is to put them in a ‘nursery’ and test the technologies for a year or two prior to consideration for investment.

EIP should not be mistaken for the typical venture capital firm, though. Many VCs typically expect a 90% failure rate in exchange for a moonshot. By contrast, EIP behaves more conservatively, looking for the best companies in each target sector. “We don’t expect to make 10x in one deal but we are less likely to lose money because we are very risk averse,” Kobler observes. “What we bring to our partners is an insurance policy and added level of vetting from a company perspective and control perspective …We try to make them as smart as possible so they can make their own decision.”

Managing Partner Steve Hellman sums up the effort as follows: “At the end of the day we are a modest collective effort among major companies in a sea of activities moving in all sorts of different vectors. We interact with utilities and stakeholders in the industry constantly… EIP is one mechanism to…gain insights into what is changing, how it is changing and how it will affect their business, improve service, lower costs and increase revenues. There’s a lot of opportunity for utilities and I think they recognize it.”

Not a simple world – As technologies get cheaper, new ones emerge, and business models morph, utilities are caught squarely in the middle of all this change. It’s not as simple as ‘lead, follow, or get out of the way,’ when they have the responsibility to keep the lights on while remaining solvent. As utilities scramble to find ways to respond to change, their response will not be monolithic. Some will be change agents while others fight a rearguard battle (even within different parts of the same company). The smarter ones are already adapting to this new world and putting their chess pieces on the board even as it is still being built.