Project Development, Wind Power

Building Real Businesses in Renewable Energy

Renewable energy is arguably the most appealing growth segment of the entire energy sector. Renewable technologies are continually improving, and so also are the economics of renewables relative to conventional energy forms.

RE Insider – March 24, 2003 Furthermore, demographic trends favor broadening adoption of renewables, as surveys consistently show widespread public support for renewable energy sources, particularly among younger, more well educated and more affluent consumers and these survey results are increasingly borne out by accelerating activity in green power markets. Lastly, it is widely agreed that environmental issues and associated government regulations and policies will only become more (rather than less) significant in the coming years, thus adding further impetus to the renewables bandwagon. These forces promoting the growth of renewables are already at play. During the past 10 years, both solar and wind energy have recurrently exhibited double-digit annual growth rates. This year-on-year growth has propelled the renewable sector to represent today a multi-billion dollar industry and the above-noted factors lead many observers to project ongoing growth at robust rates in this now-substantial industry for many years, perhaps even decades. There simply aren’t many segments of economic activity of such size offering such significant growth prospects hence, the clear appeal of the commercial opportunities in renewable energy. While renewable energy continues to expand to significance within the massive energy sector, this is largely being accomplished through an ever-growing litany of very small companies. Although there are some notable exceptions – Shell, GE and FPL come to mind most prominently – the vast majority of companies in the renewable energy sector are quite modest. For a sector of non-trivial size, it is striking how few healthy mid-sized businesses generating more than a few million dollars of revenue actually exist. Indeed, if one defines a business as an enterprise intending to generate profits from the marketplace, then many renewable energy companies aren’t really businesses at all, but rather a collection of science projects, subsidy gatherers, hobbyists and idealists. Clearly, some of these companies will not survive, and arguably deserve to perish from the “creative destruction” inherent in vibrant capitalism, as they do not provide true economic value to customers operating on free will. But others possess the kernel of a viable business idea, and could legitimately become well-positioned to capture some portion of the enormous opportunities afforded by the renewables sector. Alas, the key word in this last sentence is could: in fact, most small companies in the renewable energy sector are not now well-positioned to capture the longer-term opportunities. They are undercapitalized. They do not have adequately sound management teams and competitive strategies. They do not operate in an efficient and effective manner in their markets. Some of these shortcomings are driven by lack of appetite. A peculiar aspect of the renewables industry is the prevalence of “mom-and-pop” participants who simply don’t seek to grow to large scale. That may be adequate to satisfy the founder’s ambitions. However, if the objective is to change the world – or less loftily, to make a lot of money – through renewables, then this “small is good” philosophy won’t work. For renewables to fulfill their vast promise in the energy marketplace, strong business practices must be more widely adopted by players in the sector, so that they can develop growing enterprises that earn real and sizable profits. As the collapse of so many ill-fated (and ill-advised) companies in the past few years has amply demonstrated, profits are ultimately the engine to ensure a company’s ongoing viability to survive during tough times, much less grow over the longer-term. In short, “real” financially-driven businesses will be the ones that deliver renewable energy to the masses. Yet, many of the smaller and emerging renewable energy companies currently in the sector are not oriented first and foremost to financial success. It is likely that such companies will either fail or be relegated permanently to marginal niches. It is unlikely that they will lead the way in the renewable energy marketplace. This is a call to leaders of companies already in the renewables market to evaluate if they have what it takes to capitalize on the opportunities likely to be afforded to them in the years to come. With the economy suffering through a period of doldrums, good management talent is more available now than in the boom days of the late 1990s, and huge sums of capital are “on the sidelines” awaiting compelling investment opportunities in otherwise uncertain times. As a result, even in these difficult economic conditions, the resources are available to transform immature renewable energy companies into potential long-term winners. This is also a call for companies with significant financial wherewithal to be more actively seeking opportunities in the renewable energy sector. Along with other energy and financial assets, company valuations are depressed in the renewable energy space, even though long-term prospects for renewables have not appreciably dimmed. The time is therefore ripe for attractively priced acquisitions offering promising long-term potential, and delay could be costly – either in terms of higher future prices or missed opportunities. In either case, investment is required. When circumstances are in such flux as they are today, it takes courage to make such bets. But a disproportionate share of the long-term spoils offered by renewables is likely to accrue to those who are early movers in taking a leadership position in the marketplace. The prize is there to be taken, and indeed is large enough to be shared by many. We seek to help companies realize such opportunities from the renewable energy space – those who aspire to build businesses with enduring commercial viability to achieve financial success. About the Author Richard T. Stuebi has been an executive and a consultant in the electricity industry for 16 years. In 1999, Stuebi founded NextWave Energy, a professional advisory services firm serving private sector clients with interests in new energy technologies or business concepts, with particular focus on renewable energy and distributed generation opportunities. Previously, Stuebi was a Senior Vice President at Louis Dreyfus, a management consultant specializing in the power sector at McKinsey & Co. for over 6 years, and an analyst of the North American electricity and coal industries at ICF Resources. He can be reached at [email protected]