On July 24, Mercom Capital Group (MCG) released its “Q2 2018 Battery Storage, Smart Grid and Efficiency Funding and M&A Report.” The report is available online, though it is a bit pricey at $299 to $499.
Mercom Capital Group is a highly regarded clean energy consulting firm with worldwide influence. Its new report provides a picture of mergers and acquisitions (M&A) and other funding that took place during the second quarter in the fields of battery storage, smart grid, and energy efficiency.
By comparing the second quarter with the first, and this year’s activity with last year’s, the report gives a view to developing trends in the areas it covers. Please note, however, that the view is rather restricted, because it focuses narrowly on M&A and on venture capital funding (VC), along with specific other investments, such as new clean technology funds.
As we might expect, there is good news and bad. The report spoke to a worldwide decline in corporate funding in the areas it covered, from $2.8 billion in the first half (H1) of 2017 to $2.4 billion in H1 of 2018.
Private and corporate venture capital funding for battery storage, smart grid, and energy efficiency declined from $1 billion for H1 of 2017 to $839 million in H1 of this year. The area that appears to have been hardest hit is smart grid technology, which saw a decline of 56%, from $304 million to $135 million. Energy efficiency also suffered badly, with a 32% decline for the half, from $242 million to $165 million. For venture capital investments, only battery storage technology got a boost, an increase of 12%, from $480 million in H1 of 2017 to $539 million in the same half of 2018.
Before we get too depressed by all of this, we should look at the amounts of money involved here. They remind me of a quote, “A billion here a billion there, pretty soon you are talking about real money.” The quote has been attributed to U.S. Senator Everett Dirksen. The amounts of money we are talking about were really significant when Dirksen retired from the Senate, back in 1969. Today, however, there are people in this world for whom a couple hundred million is the cost of a second home.
The reason why these amounts are so small is that the investments are very specialized, including M&A and VC for a limited set technologies. The data do not necessarily reflect broader trends of renewable energy and efficiency; it is necessary to keep the context of the MCG report in mind.
Investment in clean technology almost inevitably chases the most attractive goals. Smart grid venture capital may have been the rage a year ago, but some investors might pass on smart grid investments today. They may be flocking to real-world investments with high rates of return delivering ready-made technology, instead of venture capital.
For example, consider the $135 million invested in smart grid technology. We should compare that with the investment in the virtual power plant (VPP) in South Australia recently reported by CleanTechnica. That VPP, to be installed by Tesla, will ultimately include 50,000 solar systems, each with 5 kilowatt-hours of photovoltaic panels and 13.5 kilowatt-hours of Tesla Powerwall battery storage. The 50,000 systems in the VPP represent a single business deal, covering systems that could conceivably cost $10,000 each or more. It looks like the cost of that one deal, possibly in the ballpark of $500 million, may be a multiple of the worldwide venture capital put into smart grid technology during H1 of 2018. A single business deal looks to overshadow six months of global VC investment in new smart grid technology.
Another example, also based on Elon Musk’s interactions with South Australia and much better known, is the Hornsdale Power Reserve (HPP). In this famous case, also reported in CleanTechnica, Musk offered to build a 100-megawatt battery in a hundred days, or it would be free to the South Australian government. The state put $50 million into the battery and saved $35 million in the first four months of operation.
HPP may have changed the world decisively. Spending about four hours reviewing news developments in energy and climate change for my website, I read headlines of about 200 to 400 articles every day, and what I have seen in the last six months is a largely unreported trend. Before HPP, wind and solar projects used to be installed to produce low-cost power; since HPP, they are increasingly installed for low-cost power with battery backup. The number of batteries being installed is staggering, compared to what they were less than a year ago. It will be interesting to see the battery companys’ next annual reports.
These new installations all require money. It is possible, and I think likely, that these and other real-world applications are taking money away from VC. Venture capitalists want big returns because they have high risks. Now, they have a new, much less risky investment in battery hardware that can also generate very high rates of return. They can get real-world income, instead of projects that may or may not lead to patents, which may or may not pay off in a big way.
M&A and VC investments in energy efficiency have also declined, but probably for different reasons. Energy efficiency is a not-very-sexy area of endeavor that provides services and goods from businesses all over the world, including many that are small. For many of those businesses, the greatest investment need is the time it takes for education. Unless there is some exciting new technology to be developed, investment in new technology will stay small. But please note that this does not translate into small investment in real-world applications.
The thing that really worries me out of Mercom Capital Group’s figures is not the decreases in efficiency or smart grid investment, as steep as they are. It is the increase in investment in battery technology, where there is a lot of research still to be done. A 13% increase seems curiously small, under the circumstances. Even so, there may be a silver lining. Battery technology worth scores of billions of dollars is very likely being seen as mature enough to be a safe investment with high rates of return.
Last year, Elon Musk made a bet that seemed outrageous. He did this, I think, to justify putting a lot of money into a grand experiment, with a payoff making years of market development unnecessary. And that, I think, was not a bet. It was an act of real genius.