Providers & Sponsors

Providers and Sponsors

Market Structure Background

As we take a closer look at the renewable energy (RE) market we can come quickly to the conclusion   that we are certainly “inside the tornado”, as Geoffrey Moore would put it. For those of us who have lived through several sweeping technology life cycles we can easily recognize the fact that the RE market in general is way beyond the technophile phase, the early market and even the “chasm” and into major market opportunities.

Not all of the technologies making up the RE world have fared equally though, and some regions of the world are in tornado territory while others are still in a mild breeze. The period of niche-based applications of university professors and corporate sponsoring of base R&D days are over. This is not just talk and is evidenced by the fact that hundreds of companies are flocking to the international RE trade shows and billions of Euros are being invested in green funds or other private initiatives. With the economic crisis in full swing, governments are announcing huge investment plans to bail out the economy and large chunks of this money is going to go to promote renewable energies and infrastructures.

So what have been the causes of this “tipping point”, as coined by Malcolm Gladwell? It is important to understand this point if we are to believe that this is going to turn into a real economy, mainstream market and not just another “dot com” bubble. First of all, a proper context has to exist, markets do not tip just because you have a great product, at an unbeatable price and with a great sales force. This latent need for other energy sources seems to us now quite obvious but in reality we had already had a number energy crisis in the past and I have heard that fossil fuels are running out for as long as I can remember. What has prepared the field for a fire storm is a combination of factors that have rallied the social and economic forces together into desperately wanting not just any energy source (remember nuclear) but energy from clean and renewable sources. This combination, providing the explosive cocktail, has been or rather is: the unprecedented and disruptive increase of primary energy prices, global warming and the green movement, the worst economic crisis most people alive can remember and the massive energy needs of the large emerging economies in a globalized economy.
From a regional point of view it is no wonder that Europe is the world leader in RE. Philosophically, Europe is less politically encumbered and more socially inclined in directly subsidizing new energy sources. Furthermore, Europe is also energy poor and its heavy dependency on external suppliers, over 50% of primary energy, has become a strategic issue for the European Commission and individual member states who have to get their energy from foreign and many times unstable sources.

Market Structure in Europe in Brief

Although the market is entering the tornado it is still in the early phases of development and we can therefore find a great variety of investment and operational models being used across the industry. Many mixes of these models can be found and a short list of the most frequently found ones in Europe in general are:

 

• Utility owned companies. Many utilities have setup independent RE operating companies either to comply with local regulations or for balance sheet reasons.

• Construction owned companies or divisions. As the traditional construction market diminishes many companies are looking to this sector as a means of diversification and survival.

• Independent Service Providers. These companies are building out power plants that they own and operate and their corporate objective to become a player in the lucrative energy market and perhaps consolidate further down the line. Some of these companies are publicly traded, have private or institutional funding or even a mix of these.

• Private Equity Investors. Some private investment firms are dedicated exclusively to the renewable energy sector while others have setup specific funds with an investment portfolio limited to REs’. Venture Capital firms are investing not only in service providers but also in manufacturers and technology developers.  On occasion you will also find capital partners that actually provide the sponsoring service as part of their investment management services supplying the basic project design, permits, licenses, industry partners and contacts etc.

• Sponsors (Promoters). The role of these companies is to provide services to service providers or investors leading to the delivery of a fully operational power generating plant including all the administrative licenses and processes. These plants are then sold off or handed over to the previously agreed upon owner.  As mentioned above, sometimes you will get the sponsoring services from the capital investment firm itself and incorporate a separate company to do the actual build out and operations.
• Mixed models. Some companies are vertically integrated while others own only specific parts of the value chain – don’t forget the funding link. Some manufacturers own and operate some power plants either as a means of gaining experience, test beds or market credibility. On the other hand, some power service providers are investing in technologies, manufacturers or even system integrators. Some of these moves are motivated by cost reduction schemes and others are merely for assuring supply in shortage situations.

• Administration owned. Some local administrations, in particular municipal governments are taking stakes in service companies or even grouping together to form small utilities as a political move, to promote local employment or just to help pay the bills.

Solar PV

The solar photovoltaic market has perhaps the most diverse market playing field. This is probably due to the large range of sizes and applications where photovoltaic technologies are applicable and profitable. FIT policies in Europe have proved to be the most effective way of stimulating the use of this technology (or any RE) and many players, investment or service providers, are focusing strictly on this segment. The flexibility in the use of PV is making it the technology of choice and many players large and small are scrambling for their piece of the market. This segment is attracting large players and project financing is the investment vehicle of choice.

Large ground based plants are typically more capital intensive and attract larger firms and the requirement for large land use is also a complication both in licensing terms as wells as financial and location wise. Private and VC capital are more common, but not limited to these scenarios. Commercial rooftop service provider is a very attractive model where strong FITs are available and there is substantial activity in this area. Some companies are even offering investment opportunities to small individual investors. First the project is funded and then it is built out, almost as if having to do with a housing development. Later, the plant is sold-off to a long term service operator for a gain.

Solar Thermal (Electric)

This technology is somewhat behind in the race for renewable energy but is gaining ground rapidly as publicly imposed quotas in other technologies are reached and technology efficiencies improve. Large land use is an additional investment barrier and is therefore a constraint in the amount and size of players here. Due to this, we again find most of these deployments are being developed by a combination of project financing, internal financing and local banking institutions.

Wind (Large scale)

Both land and water based large scale wind farms is the technology most frequently chosen by the major utilities and larger players, as this technology is the most cost efficient. Larger players are essential here not just because of the deep financial pockets required but also because of the complications arising from the land use and environmental issues and forces. The security provided by the assets involved, are attracting more traditional financial institutions and governmental financing bodies. Project financing still remains an interesting mechanism here. Some mid-sized industrial groups have also entered this market and manufacture specific parts of the technology platform as well as participating in the ownership and operation of the wind farms themselves.

Biofuels

In the biofuel segment you will normally find the same models as in the technologies reviewed above with the added ingredient of interested community authorities (länders, autonomies, departments, regions etc.). Publicly owned investment organisms are very interested in promoting biofuels as a means not only in participating in the clean revolution but since the processes involved are closely related to the surrounding agriculture, it is seen as a way of stimulating and controlling the local economy. More complex investment models are sometimes found here especially in companies which distribute their production instead of just refining the biomass and generating electricity. Subsidies here are not as direct as in FIT based operations and the fact that you have to find your own clients and compete on an open marks a difference.