PERSPECTIVE
WORLD-GENERATION NOV/DEC 2015
20
Technological innovation in distribut-
ed generation, hydraulic fracking, and
renewable energy are fundamentally
transforming the market for Independent
Power Producers (IPPs) and utility com-
panies alike. While it’s a brave new world
for energy companies investing in power
producing assets, it is clear that the next
generation of market winners will be
defined by the ability to execute in a land-
scape that is increasingly competitive and
complex.
One characteristic of the changing
energy market is the strategic shift
amongst utilities and traditional IPPs to
reorganize around renewable and distrib-
uted generation technologies. At the same
time, solar focused companies, in particu-
lar, continue to expand their offerings
across new technology types, eroding the
market share afforded to incumbent power
producers. The result is fierce competition
for new markets.
In the US solar market the conse-
quence of this strategic repositioning has
been notable. Based on data consolidated
on over 3000 US solar projects processed
in the Mercatus Energy Investment
Management (EIM) platform, the
Mercatus Distributed Energy Insight
Report shows a thematic decrease in IRR
for solar projects seeking financing.
Indicating that investors have been eager
to fill pipeline, but growing competition
means decreased pricing power and a
need to finance projects with lower
returns.
While the growth of YieldCos has con-
tributed to a lowering cost of capital, and
has thereby opened new market segments,
the more prominent ongoing effect of the
YieldCo will actually be a sustained appe-
tite for new projects, even in the context of
tighter margins.
The same report also illustrates that
there are limited opportunities for invest-
ment in the US Solar market post-2016.
Roughly 85% of US solar projects pro-
cessed in the Mercatus platform have
Commercial Online Date targets before
2017, with a precipitous 80% drop in proj-
ect development between 2016 and 2017. A
closing investment window has driven a
frenzy of acquisitions while also recali-
brating the sights of traditionally US
focused companies onto a global stage and
across new technologies in order to
ensure sustained growth.
Ultimately, the result is that the mar-
kets defined by distributed generation and
renewable energy are now a battleground
for competition between incumbents and
newcomers, and it is increasingly occur-
ring on a global scale.
Energy companies that can execute
effectively will find themselves in the most
favorable positions. Fundamentally, the
challenge of investing into power generat-
ing assets today is that the market is
increasingly complex as competition
necessitates that companies invest in
smaller projects across a variety of tech-
nologies and regions. The result is that
companies can no longer make a couple
core investments a year but rather, they
must hold a voluminous and diversified
pipeline of investments.
The companies that execute swiftly
and effectively on a large number of proj-
ects, while also maintaining the ability to
leverage low cost capital, will gain superi-
or pricing power and gain market share.
Easier said than done – increasing deal
velocity while also reducing risk requires
investment processes that are highly effi-
cient and streamlined.
The first wave of differentiation in the
new energy economy was defined by tech-
nology, the future differentiator will be
defined by
cost structure, productivity
per-employee and velocity to develop and
construct or acquire power plants.
Industries from automobile, retail and the
computer industries have proven that the
first to gain a 10% structural cost advan-
tage or time to market have unassailable
pricing power and the foundation for busi-
ness model innovation. Cosco, Walmart,
Toyota and Amazon are great case studies
to emulate. They used their low cost struc-
ture to crush the competition. They enjoy
very high market share, the lions share of
the profits, and have very enviable market
capitalizations. The energy companies
that can build an efficient execution
machine will be able to navigate a new
market that is extremely competitive and
increasingly complex.
ABOUT THE AUTHOR
Haresh Patel, CEO of Mercatus, Inc.
has led the evolution of the business strat-
egy, services, and Mercatus’ cloud-based
Energy Investment Management (EIM)
SaaS offering for power producers. Since
co-founding the company in 2009 as an
energy finance and services organization,
he has led the evolution of the business
strategy, services, and Mercatus’ cloud-
based Energy Investment Management
(EIM) SaaS offering for energy investors.
Haresh has completed senior manage-
ment programs at Harvard Business
School and Stanford University Business
School and holds a BS in Electrical
Engineering from the University of Notre
Dame.
WINNING IN A CHANGING ENERGY LANDSCAPE
BY HARESH PATEL
