The Importance of Industry Leadership

The energetic mood in New York at the Renewable Energy Finance Forum (REFF) on Wall Street in June wasn’t just about the growing strength of an industry that continues to average double digit growth rates in business-as-usual wind and solar PV across the globe. It centred on the explosive growth of a project pipeline covering an increasingly broad array of technologies – from solar thermal to power storage and energy efficiency – as well as bearing witness to the diversity of investors weighing in on the sector.

Global investment in renewable energy grew to just under US$150 billion in 2007, up 60% from the previous year. This accounts for almost 10% of the global spend in energy. At the prestigious ACORE (American Council for Renewable Energy) Leadership Council dinner during the event, over a hundred chairmen and chief executives discussed shareholders’ sustained interest in the returns their companies have achieved and the renewable energy industry’s apparently insatiable demand for capital to fuel its rapid growth.

Demand in the sector is at an all-time high, and this includes the demand for qualified leadership. A recent poll by New Energy Finance noted that over a third of clean energy executives believe ‘the recruitment challenge is very serious’. Three appointments were noted as particularly challenging – 48% said that the chief technology officer was the most difficult to find, while 46% put the chief executive officer in this category; 37% said acquiring senior project management talent was a tough task restricting the growth of their business.

With such strong demand for qualified management and engineering leadership, salaries are rising strongly and new opportunities – geographic and technological – are plentiful. The fact that leadership has become such a prominent issue for the renewables industry is a sure sign of the industry’s coming of age. It also reflects the break-neck pace of the industry’s scale-up, which shows little indication of abatment even in today’s less certain economic environment.

Similar to the flow of financial capital breaking into new waters with emerging and riskier technology ventures, the flow of human capital is equally telling. Already, 2008 has been a watershed year for lateral moves by senior industry executives and investors. Exploring some of the main trends that have shaped the first half of 2008 can reveal much, as they will continue to heavily influence renewable energy recruitment.

Joining the big league private equity club

One of 2008’s most pronounced trends has been for some of the industry’s most talented chief executive officers to move into running their own renewable energy funds. This trend, which emerged towards the end of 2007, is picking up momentum in the second half of 2008.

In late 2007, for example, Neil Auerbach – a former partner of Goldman Sachs proprietary investment group who invested in Horizon Wind Energy and First Solar – joined forces with John Cavalier, former vice-chairman of Credit Suisse Investment banking, to form Hudson Clean Energy Partners, a New Jersey-based fund which, in spite of turbulent conditions, is estimated to have raised over $1 billion from the market already. A number of accomplished wind and solar industry executives have also joined the pair as ‘Entrepreneurs In Residence’.

Traditional energy private equity firms First Reserve and Riverstone are also in the game, with over $1 billion from their newly raised funds allocated towards renewable energy investments. Last summer, Riverstone announced the appointment of former BP plc boss Lord Browne to expand and lead its efforts in the renewable energy markets. Subsequently, a number of other senior leaders from BP’s ranks have followed suit, notably Chris Hunt, one of the principals leading the creation and growth of BP Alternative Energy.

Another recent top-end move in the investment world was the appointment of George Coelho, who has a strong track record in private equity and technology, as head of Venture Capital at leading investor Good Energies.

On the corporate side of the fence, Tulsi Tanti, the entrepreneur behind Suzlon Energy, is also exploring new investment avenues. Tanti, chairman of Suzlon Energy, has built the fifth largest wind turbine company in the world in just 13 years. In the early 1990s, Tanti managed the family textile business in the city of Surat in western India. One of the business’s greatest challenges was the unreliable supply of electricity, which led Tanti to purchase two turbines from Vestas in 1994. Recognizing the huge opportunity in the wind industry, Tanti formed Suzlon Energy with relatives in 1995, and has fuelled its rapid growth with a series of acquisitions including Suedwind in the late 1990s, Hansen Transmissions in 2006 and German turbine manufacturer REpower in 2007.

This year, however, Tanti took a new direction and formed Colossus Holdings, a Singapore-based investment fund. In July 2008, Colossus formed a joint venture with Bahrain-based Arcapita Bank to acquire Honiton Energy, a London-based company. Together they plan to invest up to $2 billion to develop 1.6 GW of wind capacity in Inner Mongolia by 2012.

These examples are varied, reflecting both leadership and money shifting as top management and financiers adjust their risk profiles to optimize their exposure to the rapidly developing renewable energy industry. But the underlying trend, which involves fundamental shifts in approach by some of the industry’s leading lights, has implications for the industry as a whole.

The movement of top leadership in any industry can be destabilizing to other firms. When top leaders move, they often take their best people with them. They are leaders by nature, and others follow them. HRH Prince Charles recently recruited both British Land’s chief executive and chief operations officer (among other property sector heavyweights) to head up his £1 billion ($2 billion) sustainable property fund, Tellesma. Meanwhile, Eddie O’Connor, founder and chief executive of Airtricity until it was sold in 2007, has assembled a management team for his new venture, Mainstream Renewable Power, in less than six months. We should never underestimate the convening power of established leaders!

This trend of renewable energy’s leading figures forming their own investment funds or seeking to make their own investments seems set to grow, as they diversify their technological and geographic reach. The industry’s rapid development means that its pioneers are still energetic enough to shape its future. With the success of these new investing platforms, the market is already answering the following important question:

Who better to build the next generation of successful renewable energy investment platforms than those proven leaders with a track record of creating value and growing an industry?

Technology and the rise of venture

However, the question the industry is not answering so effectively is: where is the next generation of proven leaders going to come from? The industry is growing at such a pace, and opportunities are proliferating so rapidly, that there is a real risk of a leadership vacuum being created. This question is starting to be addressed as the renewable energy technologies spectrum broadens, making skills from other industries more relevant. Offshore wind, for example, can learn much from the established offshore oil and gas industry, while the skills acquired in establishing now-mature technologies such as wind power can be usefully applied to scale and industrialize newer renewable technologies.

Technology diversification is shaping recruitment trends in renewable energy. Just as new investment funds are seeking opportunities across technologies, with perhaps a mix of mature and emerging technologies, many of the larger developers have moved, in the past two years, to a multi-technology platform.

The trend of IPP (independent power producer) development models moving to the wind industry began to take shape in Europe in the 1990s. As these wind developers have grown, many have diversified into newer technologies.

Renewable Energy Systems (RES) Group, for example, started as a wind turbine manufacturer, owned by the McAlpine family, in 1982. At that time the UK was following a similar path to the US and supporting the domestic development of wind turbine technology. Subsequently, in the early 1990s RES moved into developing wind farms in the UK and Ireland, and thereafter in the US, France and Portugal. Indeed, RES has become one of the largest wind developers in the US, with 1400 MW of wind energy under development there. Even so, RES has now diversified into other technologies in its home market. In the UK, the RES Heat and Power Group works in solar hot water heating, solar PV, ground source heat pumps, woodchip biomass and CHP, as well as energy efficiency technologies and energy efficient building materials.

Other companies diversifying across multiple technologies confirm the trend. Ireland’s NTR plc has always been adventurous in character, successfully exiting its wind development company in the US and Europe (Airtricity), but also moving into recycling-led waste management (Greenstar) and biofuels (Bioverda). Its most recent venture, a significant $100 million investment with more to follow, is in utility-scale solar thermal developer Sterling Energy Systems. This investment involves far less-proven technology, and therefore presents quite different risks to those that the company already has (manufacturing, for example).

This portfolio approach makes sense in an industry characterized by multiple technologies at very different stages of maturity, but with room for more than one winner – renewable technologies work alongside each other, in different environments, rather than necessarily competing. Nonetheless, proven management is central if investors are to back this kind of portfolio strategy.

Individual executives are also transferring their skills across technologies. Martin McAdam, for example, the former head of Airtricity in the US, recently moved back to the UK to become chief executive of marine renewable energy company Aquamarine Power, backed by utility Scottish & Southern Energy. Shai Agassi, former chief operations officer of software giant SAP, left to set up Project Better Place which has to date attracted over $200 million in venture investment. Launched in October 2007, Better Place will build its first Electric Recharge Grids in Israel and Denmark and plans to deploy the infrastructure on a country-by-country basis with initial deployments beginning in 2010. In May 2008, the company presented a prototype of its electric car at a press conference in Tel Aviv. Shai Agassi estimated that the company’s partner, the Renault-Nissan alliance, would likely invest $500 million to $1 billion in developing the swappable-battery electric cars.

And it’s not just the corporate players that are diversifying; investors are also casting their net wider. Climate Change Capital (CCC), for example, is considering diversifying into land, forestry and ecosystems. CCC, which is already the world’s biggest carbon fund ($1 billion plus) and has an established private equity arm, is using its position in the market to develop new fund concepts that others will no doubt emulate.

Access to capital is one of the main advantages of technology diversification. Investors are happier to back established players with a track record of building successful businesses than start-ups, especially in today’s tighter capital markets. The term ‘venture infrastructure’ might be used to describe the combination of infrastructure investment (typically predictable, tangible and long-term) with early-stage technology investment that increasingly characterizes the renewable energy industry. And, as the capital markets have become more volatile, there has been a flight of capital towards stable investments such as infrastructure.

Renewable technology enhances and future-proofs infrastructure assets, but it relies heavily (and unusually heavily relative to traditional infrastructure investment) on high-quality management teams that bring together a wide range of skills, especially where the technology involved is new.

A recent example of Venture Infrastructure is Riverstone’s joint venture with US power group AES to build utility-scale grid-connected photovoltaic installations. Each partner is investing up to $500 million of equity in what is effectively a start-up. AES’s expertise is in large-scale generation and more recently wind power, but its management strength, with AES veteran Robert Hemphill at the helm, has allowed it to leverage far higher investment than a less well connected, but otherwise identical, green-field project in a relatively new technology would have otherwise done.

The implications for recruitment are clear: find the right people, and the money will follow. Of course, this is nothing new – early-stage capital has always recognized the importance of a strong management team. But in the renewable energy industry, which covers such a wide range of different technologies and applications, there is less homogeneity and therefore a less obvious managerial track record to seek out. Investors are therefore looking for a combination of established talent, drawn from those who have already operated in the renewable industry (and who therefore understand the all-important policy backdrop, for instance), and new skillsets appropriate to the new industry.

NTR’s new management team for Sterling Energy Systems, for example, draws on some legacy management from NTR but also an entirely new set of skills which have been brought in. As the renewables industry develops and diversifies, so its players’ organograms shift.

Exporting talent: multinational investment hubs

As the renewable energy industry matures and demands a tax-efficient global supply chain, geographic boundaries are becoming blurred – requiring executives to become more mobile. High demand is forcing developers to source components from further afield – the UK’s Scottish & Southern Energy, for example, is exploring buying its wind turbines from China, which would be a significant shift for a European developer – and this in turn is driving recruitment trends as skills in one area become transferable to another, and boundaries come down.

This globalization can be observed at many different levels. At this year’s Windpower conference in Houston it was amazing to see those along the supply chain – from turbine manufacturers to developers – coming together on their booths, talking in a vast range of different languages.

The market for top talent is becoming increasingly global and mobile. In a world where European utilities have bought 43,000 MW of electric generation capacity in North America, and the most innovative urban sustainable development is in Abu Dhabi, those global executives who excel in multi-cultural environments are in particularly strong demand.

Abu Dhabi’s Masdar Initiative, for example, is recruiting a management team to drive forward its bold and long-term vision for the world’s first fully sustainable city and centre of renewable technology excellence. High profile moves between countries are becoming a characteristic of the industry.

Talent in established industry has always flowed geographically – particularly in industries where the stakes are high, such as investment banking – and this is starting to happen in renewable energy, with high-flying executives moving fluidly across the Atlantic and boards becoming increasingly multi-national (Honiton’s, for example, includes British and Chinese directors).

But while the global renewable energy platform is emerging, it is not yet fully established, and markets continue to show their own distinct characteristics, driven partly by the very different regulatory environments that are fundamental to the industry’s growth, but that vary enormously from country to country. There are still clear focal points in the global renewable energy industry, many of them in Europe where attractive policy, development talent and deep capital markets have converged. But market differences are also exploited via merger and acquisition activity, and this is fuelling executive movement and consequently accelerates the transfer of management talent.

The transatlantic axis is a prominent example, as European companies snap up US assets, such as Germany’s E.ON acquiring Airtricity’s US wind assets. Within this the Spanish-US wind platform is particularly strong. The so-called ‘club’ includes some of the world’s largest wind manufacturers and developers, such as Iberdrola, Gamesa, Acciona and EDP – which acquired Horizon Wind Energy from Goldman Sachs for $2.9 billion in one of 2007’s headline deals. There are also signs of this axis broadening – Spanish wind investor Fersa, for example, is making inroads into China. Earlier this year, it signed a joint venture with China’s Lubei Corporation to build up to 10 GW of wind power in China’s Shandong region.

This cross-border activity is likely only to intensify and this will, in turn, drive the already growing tide of executive flow around the shrinking world.

Compensation trends

This mobile, entrepreneurial and multi-skilled leadership naturally comes at a price. The boundaries between executives and financiers have become increasingly fluid in many industries, but in the renewable energy industry, which is so hotly courted by investors, the distinction is even less clear-cut. Remuneration packages are developing along financial sector lines, with performance-linked components and equity participation becoming increasingly commonplace.

Increasing acquisition activity from the US has also fuelled this trend, making US-style pay packages the norm globally. Rising external investment continues to drive remuneration packages upwards, particularly the performance-linked elements which increasingly account for a greater share of total compensation for senior executives.

One trend gaining ground in executive compensation packages is the ‘cash & carry’ model. In addition to base salary, it is increasingly common for a carried interest in the business in the form of equity to be earned. The carried portion is generally a significant multiple of the base salary, and is earned on an annualized basis.

Another trend that is evidence of the tight market for top talent is the wide range of forms of ‘lock-in’ – contractual elements to ensure a top executive stays with a firm for a fixed period of time. These range from the guaranteed bonus to retention or contract completion bonuses, stock options, equity grants and points of carried interest distributed by partners.

The effect of higher pay scales and increasingly complex remuneration packages is trickling down to smaller companies. Smaller companies are not only struggling to catch up with their larger peers’ revenues; they must also compete in terms of human capital and the salary rewards necessary to retain the best people. Smaller firms must remain market-competitive if they are to retain their top talent in today’s tight marketplace.

Success truly does hinge on human capital. The talent pool for top leadership in renewable energy is global and mobile and, critically, there is a shortage of proven talent.

Michael Naylor and Daniel Muir lead specialist executive search firm Forrester Partners’ global practice area.
e-mail: dm@forresterpartners.com
web: www.forresterpartners.com