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Venture Capital Funding is Gaining Traction in the Smart Grid Industry

This time last year our blog ran the title “Will Smart Grid Outperform its Clean Tech Cousins and Become the Jewel in the Crown?” We cited a number of reasons why the financial community found it the rather unattractive dull member of the Clean Tech family but noted that more investors were giving it a second look with some now of the belief that it is a more attractive business proposition than renewables. We explored the reasons why they were changing their minds and these included;

  • *The Renewable Energy business is taking longer to deliver against its promises and needs more funds before it will generate profit. Most systems are capital intensive and rely on “old technology” that has a strong element of empirical science which has not always scaled up too well.
  • *The vast majority require large subsidies to compete against traditional energy sources. Whilst it is a given that these subsidies are necessary and will stay in place for some years, they have in some countries been drastically scaled back. It is the fact that they are dependent upon them that in the present economic climate makes investors nervous.
  • *The major factor that seals the attractiveness of Smart Grid’s investment potential is that unless we have a Smart Grid, renewable electricity power will not be able to deliver. It is the only solution of matching the supply of electricity with demand at the point of usage given the highly variable electrical output received from renewable sources.

Investment in Smart Grid technology is not immune to risk but it does offer some antidotes to these concerns. The first is that the technology is for the most part is well proven and the solution is not so capital intensive and could offer many profitable add on services.

The major part of the business will be retrofitting existing transmission and distribution systems and therefore major cost savings will be gained for minimum capital outlay. That will definitely make the investment proposition more attract for both the electrical utility suppliers and major property and industrial users with the latter installing micro grids.

Currently the Achilles’ heel for Smart Grid is the security issue and closely allied to this is the lack of a common communication protocol. However the world’s major IT and Communications companies are clamouring at the gate to enter this business and we should not doubt that they have the technical and financial strengths to solve these problems. At the same time this would relieve the Utility Companies of the major responsibility of finding the investment funds in this area of the business in which they also have little expertise. Unfortunately the utility companies want to hang on to this value add business and are in many cases intent on stalling progress here.

We are in the final stages of completing a report entitled “Smart Grid – Analysing Global Opportunities” which has the objective of establishing the state of the world Smart Grid industry in 2011, the factors that will shape the business over the next 5 years and then identifying business opportunities, particularly those that can be realised through acquisition, mergers, alliance and investment. This has shown that Venture Capital companies are now more attracted to investing in the Smart Grid Industry.

Mercom Capital Group in their report on smart grid funding in the Second Quarter 2011, shows that venture capital (VC) funding in Smart Grid in Q2 came in at $104 million in 15 deals, compared to $76 million in 13 deals in Q1 of 2011.

Our figures show Venture Funding to be significantly higher with $270million in the first quarter of 2011 and $191million in the second quarter, giving a total of $461 million for the first half of the year. This compared with $506m in the first half of 2010 and $675 million in the second half. These are substantial figures and show that whilst VC funding was down in the first half of this year if the trend for the second half to improve continues, funding could reach $1 billion.

At the same time we have recorded merger and acquisition activity in the Smart Grid sector amounting to a huge $4.734 billion in 12 transactions in Q2 compared to 16 deals at $772 million in Q1 of 2011.

The most significant M&A; transactions were Toshiba Corporation’s acquisition of Landis+Gyr for $2.3 billion and Schneider Electric’s acquisition of Telvent for $2 billion. Golden Gate Capital also pitched in with the acquisition of Tollgrade Communications for $137 million.  At the same time the traditional electrical power transmission and distribution industry has reported significant growth in revenues in 2009 and 2010 and the first 6 months of this year the rate of growth in revenues and profitability has increased.

These facts show that Smart Grid is in a buoyant state and that manufacturers and systems suppliers are confident of its future. It seems that this is now rubbing off onto the VC companies. At the beginning of this year we expected that many of the VC backed pure smart grid companies would go for an IPO in 2011. Silver Spring Networks announced in July that they would be going public through an IPO but there appears to be a delay.

In May Landis + Gyr, was acquired by Toshiba after it had announced that it would go public some 6 months earlier by owners Australian investment group Bayard Capital. Their timing could not have been better as demand for smart meters is expected to peak in 2013 after a tremendous run of growth and has been a major recipient of stimulus funding over the last 4 years. So Venture Capitalists are making a good return on some of their Smart Grid investments and this will be the main driver for continuing to invest in Smart Grids future.