Fossil Fuel's Last Gasp Signals Real Threat From Renewables and Opportunities for Investment

1 November 2016


It’s not controversial to claim that the dream of limitless, clean energy is now within our grasp. In fact, we’ve been generating clean energy for years through hydro-electric power stations, successful solar and wind farms and even forays into the more esoteric tidal and hot hydrogen methods. As much as the fossil fuel industry would wish it to be different, the fight between renewables and non-renewables is all but over – the only thing left to argue about is price point and delivery.

 

Fossil fuel’s dramatic price drop may be the last death throes of our industrial past and the signifier of the success of the new energy revolution. Over the last 10 years, the generation of solar and wind energy has only gotten cheaper whilst productivity has increased. It is inevitable that the battle for cheap sourcing of energy can only be won by renewables. Fossil fuel’s desperate attempt to squeeze innovation by making it uneconomic is not sustainable, and all the while, they are selling their finite resource at a painfully low price.

 

Delivery of energy to the end consumer via the grid (transmission) is the next arena for innovation that will propel clean energy from an ideal to a viable source of power. Traditionally, solar and wind have been seen as patchy and unreliable, unable to step up during a supply-demand imbalance. The assumption that gas generators can automatically rectify an imbalance has been one of the main reasons for their endurance. Not only has a relatively recent (if controversial) study called gas plants’ reliability into question, but new technological innovations in renewable energy delivery to the grid may make them more reliable than gas.

 

Equally, by its very nature, solar and wind power are distributed across a large geographical area and have created logistical problems for traditional transition systems that are linear in their approach. Technologies that facilitate the bi-directional approach, smart transit and smart grids are very much in demand. The forward-thinking utility companies are investing in innovations that allow us to run an energy system from renewable sources. They have recognized the inevitable shift away from fossil fuels and are therefore worth watching. This means we’re looking to invest further up the supply chain in companies that develop the technology to implement the change. Not only will these technologies be able to manage supply, but they will also optimize the efficiency of the grid itself.

 

The last battlefield for renewables is downstream with the consumer. The two main fronts are energy storage and tailored solutions for large commercial and industrial energy customers. Alternative energy storage meets its match when it’s pitted against oil in the transport industry. Renewables can’t really be competitive unless there is a real investment in infrastructure and small-scale storage. Tesla immediately comes to mind, with its headline-grabbing cars and the most recent $1,000 down-payment stunt for the Model 3. However, that hides the real innovation in energy storage that Tesla, and companies like it, are making. Leclanché (one of our portfolio companies) is innovating not only for electrified transportation but also ready-made storage for home and businesses. While the growth in green, tailored solutions is only outpaced by the number of consultants offering to intermediate the service.

 

Most centrally, all this innovation comes to nothing if the classic investment criteria aren’t in evidence. It’s easy to be blinded by the potential of some of these technologies. It takes a cool head to remain focused on good management, value creation initiatives, pragmatic execution and clearly defined exit strategies, all key attributes of successful private equity investments. Even though we are strong believers in the imminent arrival of the energy revolution and support a move from growth towards efficiency, we still approach the analysis of each company with the disciplined due diligence framework that has been proven over the last decade at ACE, namely, multiple-step investment diligence process under the supervision of ACE’s Investment Committee, thorough risk management assessment and efficient structuring.