Tipping Point for Distributed Energy?

The Distributed Energy Financial Group (DEFG) released its first annual “Distributed Energy Sector Review” (DESR) calling it the first comprehensive attempt to review, measure and make recommendations on the financial drivers, performance, and investments in the promising but volatile distributed energy sector.

Washington, D.C. – April 21, 2004 [SolarAccess.com] “The Distributed Energy Financial Group was created because we strongly believe that the distributed energy sector will reach an inflection point, or tipping point, in its growth trajectory within the next three to five years, with very rapid growth thereafter,” said Jamie Wimberly, Managing Partner and CEO of DEFG. “The Sector Review confirms that we are on track to realize that vision.” Tom Lord, Managing Partner and COO, urged caution though, “While we are optimistic about the future, the distributed energy sector will remain extremely volatile and speculative over the next couple of years. We expect a shake out in the short- to mid-term with at least some of the pure play companies either being bought or going bankrupt. There will be winners and losers.” Key findings in the DESR include: – The economics of the sector is being shaped by a number of strong drivers: Changing customer preferences, a volatile natural gas market, electricity market restructuring, aging and overloaded utility infrastructure, utility market strategies, public policies, rapid technological change and integration, and macro and micro-economic trends. – The drivers have a complex interplay with the DE sector, and the DESR identifies negative, mixed and positive impacts. – A gap currently exists between the capital markets and energy technology companies. This gap is largely one of translation, meaning that investors and DE providers are usually not talking in the same terms. A new analytical framework is needed to understand the opportunities and challenges. – To analyze the sector, traditional market metrics are not enough. An investor must have a complete understanding of the market/financial, regulatory and technical metrics to fully understand the risks and potential returns in the sector. – The financial performance of the sector has largely been very positive, especially after the August 2003 blackout that more clearly defined the value proposition of many of the DE providers. The DESR used various portfolios of publicly traded firms as a proxy to measure the performance of the sector. Since August, for example, DEFG’s recommended portfolio increased in value by 49 percent. – Individual stocks and company performance are very volatile, speculative and subject to sharp swings. The consensus of the Distributed Energy Investment Consortium, a DEFG project involving 20 firms, was that many of the pure play companies will either be bought or disappear over the next couple of years. As a broad proposition, the capital markets treat all investments — even publicly traded companies — as venture capital. – The private placement market for the distributed energy sector is picking up and more investors are entering into deals. DEFG expects that trend to intensify. On the other hand, DEFG does not foresee many initial public offerings (IPOs) over the next couple of years. Project financing of DE projects is problematic. – The distributed energy sector is hindered by a clear framework to segment the sector in a way that investors can understand. The Sector Review reviews four approaches to segment the sector: standard financial analysis, value chain approach, customer value approach, and pure technology segmentation. The Distributed Energy Sector Review is a 150+ PowerPoint presentation broken into four main sections and two appendices: – Section 1: Overview and Key DE Sector Drivers – Section 2: Financial Analytical Perspective and Framework – Section 3: Review of DE Sector’s Financial Performance – Section 4: Segmentation and Models – Appendix A: Public Policies Impacting DE Sector – Appendix B: Individual Company Financials
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