ALLCASTLE PRINCETON + [Smart Grid]

How is the Smart Grid Business Performing – What Shape is it in Now?

Before we answer the question let’s paint some of the background to the smart grid business.

Last month we posed the question "Will Smart Grid outperform its Clean Tech Cousins?". We concluded that for a number of reasons smart grid offers a less risky investment to both financers and players, and that there was a growing trend by investors to move away from the highly capitalised sectors of the renewable market in favour of Smart Grid.

Not all sectors of the smart grid are as capital intensive and as we showed in the April report “Smart Grid is just too big for the Utility Companies to finance and Manage”, it will require some nurturing to overcome some of its growing pains. We concluded that it will require the electrical utility industry to invest massive sums of money and whilst they may be able to justify this based on long term projections, will they be able to find the money? It cannot be generated from cash flow alone and government subsidies are most unlikely to continue at their present generous level.

However in the case of smart grid there is another solution, in the shape of the IT and Communications companies. They will be more than willing to invest their capital and expertise in the smart grid information and communications infrastructure, generating revenues from a plethora of value add services. This would relieve the utility companies of the major responsibility of finding the funds and in an area in which they have little expertise. In our March issue, in an article written by Microsoft entitled “Smart Grid Revolution Becomes Disruptive for Utilities” they kindly shared some of the findings of a study they had commissioned. Expect regular promptings from the IT and Communications industry about the major contribution they can make to the future of smart grid. This industry offers enormous potential and a robust business case that will continue to attract well managed innovative companies, finance and some government support all over the world.

On this occasion we shall judge performance based on business growth and how well players are developing all the business opportunities available to them.

In the last 6 months we have been collecting and analysing data on 4 benchmarks that play a major part in maximizing industry performance. These are: merger & acquisition activity, forming alliances to share technologies and markets, attracting finance to invest in new products and finally reviewing company financial performance. The results show, based on the last 6 months figures, that smart grid suppliers are working hard on all those strategies that can deliver new business opportunities.

This month we have identified 8 acquisitions by companies actively involved in the smart grid business. This is so far the largest number recorded in any single month since we started reporting 6 months ago. Since our first published edition in March we have identified 26 deals to the end of June this year. In the first two months of this year we noted 13 bring the total to 39.

We have searched back to June 2016 and identified 23 significant acquisitions during the 2 and a half years to December 2017. Whilst this will almost certainly have missed some major deals we think that these numbers provide sufficient evidence to show that there has been a significant trend in the growth of consolidation in the smart grid business during the last year and particularly in the last 6 months. In addition we can say for a business of this size and in its early stages of development the results show a significant and relatively high volume of acquisition transactions. So this industry is definitely consolidating and producing stronger and more capable suppliers.

This month we have identified 8 alliance arrangements that have been formalized and this brings the total arrangements confirmed for the last three months to 28. For the first three months of the year we identified 21 arrangements bringing the total to 49 for the first 6 months of the year. We regard these numbers as relatively high compared with similar but larger electrical businesses showing that the smart grid industry is working hard to maximize business opportunities.

In the first 6 months of this year we identified 46 private funding arrangements with almost 60% of this taking place in the last three months. We believe that this number is relatively high compared with similar businesses in the electrical sector but is well down on deals in some other areas of clean tech business. However it is buoyant and growing and it augurs well for the future. It is yet another factor that shows how companies are exploring all opportunities to develop their smart grid business.

Finally we come to assessing the financial performance of players in the business. The financial reports from Itron, Landis & Gyr, Sensus and EnerNoc show increased revenues and profitability. Smaller specialist suppliers such as Comverge, Acorn and Tollgrade have increased their revenues, but not particularly profitably. Major electrical manufacturers such as 3W Power Holdings / AEG Power Solutions much more a bell weather for the fortunes of the electrical transmission and distribution industry turned in a poor performance in 2017. The former had Q1 revenue and profit down year on year by 50% and 90%, respectively, reflecting the late cyclicality of business operations. However they are more optimistic about the future with an order backlog at the end of Q1 2017 standing at €188 million which is 37% higher than compared to the end of Q1 2017. Similarly ABB reported a decline in orders in 2017 of 19 percent (13 percent in local currencies) compared to 2017 due to (1) the global economic downturn which has significantly weakened demand particularly in the industrial and construction related markets and (2) price erosion in both utilities and industrial sectors in many geographical markets.

The only trend that we can confirm from these financial results is that specialist companies serving the AMI sectors are performing very well and are optimistic about future prospects. Smaller and less well established specialists are growing but not yet profitably, but again are forecasting much better returns for 2017. The message that the major electrical giants are delivering is that they have hit the bottom of the trough and that the second half of 2017 will see increased revenues. The good news is that the cycle looks about to go into an upturn this year and smart grid will also benefit in the USA from the additional flow of business from the smart grid stimulus funding program.

The smart grid business is robust, performing well and in good shape.