With more assets for sale and consolidations underway, energy markets are going through a period of uncertainty. Why unifying IT platforms is your best chance for weathering the storm.
It’s no new news that the onset of distributed generation is causing significant challenges for businesses across the energy sector. New technologies, changing consumer demands and increasingly low power prices are forcing energy companies across the spectrum to adapt their business models. Independent power producers are having a particularly hard time dealing with these changes, so much so that many are proclaiming the business model to be “dead.”
With wholesale power prices dropping to extreme lows over the last few years, IPPs are under significant pressure to meet these standards without sacrificing profits. Those who aren’t backed by large capital are finding it increasingly difficult to maintain ownership over their assets. More project equity funds and banks are beginning to take ownership of these portfolios, while the IPP focuses on maintaining operations, maintenance, and other services. As a result of this model change, we’re now seeing 20% of assets for sale in the global market. This trend, identified in the latest version of our Global Insights Report, is likely going to increase as the market cycles through more frequently.
This set of market conditions is paving the way for the second round of major consolidations, with more mergers and acquisitions underway.
However, there are significant lessons to be learned from the first time around. Not one of the acquisitions made by large utilities can be considered a major success. Why? The answer is simple. They failed to manage change and integration of the new business in terms of people (company culture), process (connectivity), and technology (IT infrastructure unification). As a result, organizational productivity, compliance and controls suffered, causing operating expenses to grow out of hand.
In every industry, there are major players who invent the market but are unable to endure in the long run. SunEdison, for example, invented the PPA before filing for bankruptcy. This next wave of market leaders, many of whom we heard from at Solar Asset Management North America, are entering the game with more lean, sophisticated and disciplined business models, and able to provide accurate reporting, financial visibility and operational transparency to investors.
One thing that we can be certain of is that as power market conditions continue to fluctuate, more turnover and consolidation will occur. While making the acquisition is the easy part, merging people, processes and platforms are critical. Without having this strategy in place, players risk building what amounts to a “house of cards.” This time around, let’s hope the new spade of acquisitions learn from the past mistakes.