What the corporate guys did not take into consideration was that they acquired a transient blue-collar work force, not a team of like-minded corporate professionals. These environments have vast differences in culture, something an Excel model cannot take into consideration. While these roll-ups failed, they taught the energy/residential service companies how to, and not go about consolidation.

Today’s Energy Services Consolidation Market
The industry matured a lot since then; EBITDA multiples paid were cut in half, and corporations and Private Equity firms began performing actual due diligence on their acquisition targets (shock!). There are a couple different groups of acquirers at the moment:

Long-term Corporate Growth with a High Emphasis on Market Disruption
With an enormous balance sheet to draw upon and tremendous group oversight from their seasoned management team (most came from the first consolidation period), these guys definitely know what they are doing. Think of them as wolf in sheep’s clothing. They enter markets disguised as residential service companies. Once they establish their local brand name, they begin to offer electricity at competitive rates to the local utility. Isn’t deregulation wonderful?

Oil Survivors
Their job is very simple, take oil from point A, deliver to point B, and repeat the process as many times as possible through long-term customer contracts into the future. This is a game of numbers, and when you have been in the business for many years, the acquisition model is very simple. Residential oil companies will value a target distributor based on a combination of:

• Number of distribution contracts
• Average contract duration
• Average contract renewal rate
• Average contract volume (gallons/year)
• Equipment service contracts (HVAC)

A target company can have poorly managed accounting books, or be skimming from all parts of the business, but the above mentioned facts cannot be altered, and thus make these types of acquisitions very easy. It is not strange for a residential oil company to have 10-20 acquisition candidates in the pipe at any given time.

Local Utilities
These are usually referred to as the “evil empire” by local, smaller competitors in the energy services space. It is extremely hard for even a large, local outfit to compete effectively with a utility company that owns larger customer lists than anyone else. Pushing energy services into the home is very easy for a utility. They continually add service contract options to their menu and give their customers the option to include it on their monthly utility bill. Offering financing options to every customer allows utilities to earn revenue on what a local competitor would call a “dead asset”. 100% market penetration never sounded so good.

Alternative Energy is the Next Logical Step in Energy Services Consolidation
Today a homeowner can now add alternative energy options to their home which allows for decreased monthly utility bills and many state and federal tax credits. The biggest hurdle to getting this technology in your home is service availability. Alternative Energy installers currently resemble the industry layout shown above for the residential HVAC companies.

There are many small installers out there with zero track-record. Searching the internet for “solar panel installations” for example will tell you about long waits, no-shows, and repeat visits to do the job right. This kind of feedback begs for a “gold standard”. After all what good is technology if we cannot acquire it easily?
Companies that do provide these kinds of services (wind, solar, hydro, etc…) will become prime acquisition candidates for consolidators mentioned above for a couple of reasons:

• Customers lists: a small-town or even regional operator cannot compete with a local utility for a service/product marketing campaign. Customers want the lowest prices available, and large companies achieve this with bulk orders. You have to be REALLY good to even attempt this. Utilities and other large established energy/residential service players have all the requisite permits/licenses necessary to install this equipment.
• Financing: big balance sheets definitely help. With solar hardware alone costing between $15K-$30k, the biggest decision in going green is financing. How do I pay for this? Are the terms good? Being able to draw upon credit facilities or cash-rich balance sheets to self-finance is a clear competitive advantage. If a client cannot pay the solar power financing portion of the bill a utility can always use the power generated as collateral.
• Man power: Plugged into the local union and vocational schools, utilities can draw top talent to scale an alternative energy installation arm, and use their current labor force in a full capacity.
• Warranty service: With minimum power production warranties of 25 years available on panels, industry consolidators have long-term potential cash flows. When something goes wrong with the system who do the customers call? Companies that already service a home want to be there as often as possible and will fight to become a homeowner’s new best friend.
• Service contracts: bi-annual visits to service the panels would be an easy sell. Another $1-$5 on the monthly bill for a customer’s home service or utility company to service their new alternative energy equipment seems like a bargain.

Unless these solar installation companies have a background in home installation/service work, there are hundreds of companies that have been doing this longer and can most likely provide better, more profitable service.

Consolidation Candidates
The industry is young, but there are many start-ups and subsequently VCs that believe in the idea of service oriented alternative energy companies providing green conscious consumers with infinite power:

• REC Solar: is an established solar installer since 1997, they have a presence on both coasts
• Solar City: is a new up and coming installer based in Foster City, CA. They provide an obvious but un-attempted strategy: interested clients sign up for solar installations, and when demand is high enough in a given geographic location, Solar City purchases all the hardware and arranges for installation providing comparatively low prices to customers. They raised an incredible amount of VC funding in a short time. They have not reinvented solar power, but they have tapped into a great marketing strategy to enable low-cost distribution and installation. Overall their idea is very promising; the only weakness I foresee is their ability to manage a “green-collar” workforce.
  An interesting fact about this company is that they share the same chairman, Elon Musk, as Tesla Motors. One of their projects is to install solar powered refueling stations for electric vehicles in cities.
• Sun Run: is another start-up that changes the premise of owning alternative energy technology. They own and install the panels on customers’ homes, and then charge customers a fixed rate for electricity through a long-term lease contract. The idea here being they can sell the excess production to the grid as well as receive the tax credits and incentives. Click here for their WSJ mention.
  This is a company that could easily snowball into a giant behemoth. As the energy efficiency of panels increases with a growing customer base, they could essentially become a mini “utility.

Asides from the established consolidators mentioned previously, there are very large solar focused corporations that can continue to build on their solar expertise through consolidation:

• Sun Power Corporation: this is a one-stop shop for solar energy needs on both a residential, commercial and infrastructure level. They are most known for their large commercial installations. Their acquisition of PowerLight last year for $333M provides a glimpse at the future the solar industry has.

Cash flows will continue to increase and investors will demand intelligent deployment of funds. Let’s see how the sun sets on this one.

The alternative energy scene has definitely gone through many changes. The early stages of the industry involved key pieces of technology being created, with a product being produced as a result of it. Much like new-media, these technologies will quickly become a commodity. If you want to create another MySpace or a Digg.com, all you need is $10,000 and developers in India or Eastern Europe to build the platform. As the technologies improve upon previous generations, their success relies solely on a differentiated and defendable execution strategy.

What VC’s Are Interested In

VC’s are interested in key pieces of unique/defensible/patentable technology/process. This past year saw a record number of VC investments due to the increase in IP-type of activity in the alt energy industry. That boat has sailed, and now the entrepreneurs who know how to really monetize on these technologies are appearing everywhere. Whether a technology is licensed or purchased outright, it is useless without a solid team and plan behind it. VC’s are foremost interested in the team. Regardless of how smart you are, or how great your technology is, if you don’t have a business savvy team that can take it to market and monetize it properly, you are out of luck. My guess is that there will be start-ups that will be able to monetize on those technologies better than the companies that created them. Software licensing meets alternative energy…

The Winning Team

Alternative energy products/services are all surrounded by an incestuous supply chain that everyone wants to and needs to be a part of. It seems that one person’s waste now is another person’s treasure. Securing the inputs of your supply chain is the first step a start-up should take. For the inputs of various energy technologies you have a couple of different input producers:

• Profitable Waste: the lumber industry creates a great deal of wood waste. The stumps, roots and random branches left over from logging are collected and sold to make downstream products such as mulch and construction material. Wood waste also has a lot of cellulose that can be transformed into cellulosic ethanol as well as methanol. Lumber companies already have buyers in place to purchase their waste.
• Expensive Waste Type 1: Chemical/power plants produce a great deal of pollution. One of the biggest waste products is CO2. It is an expensive proposition to produce these chemicals in today’s strict regulatory environment. Power plants also have to worry about the societal impact and future cost of their activities (Kyoto Protocol, etc…). Companies that require CO2 as an input such as algae producers can procure the rights to these gas streams at little or no cost. Power plants will be very willing to be part of this environmentally friendly solution.
• Expensive Waste Type 2: Other companies deal with waste as a normal part of their business environment. The food industry is a good example. There are 30 million tons of food waste a year that has to be discarded. They do not experience the back-lash that the Type 1 producers receive from their waste. While the trash expense is a normal line item of the P&L, biomass companies will soon create great demands for these goods and the food industry will become more profitable as a result.

Depending on your alternative energy production strategy, it is very important to align yourself with one of the above types of companies. Structuring a partnership or long-term supply agreement gives more solidity to your execution strategy. We will most likely see waste producers becoming more involved in the ownership of alternative energy companies. As the value of their waste becomes more visible and public, they will want to participate on any upside potential on the revenue and accordingly, the PR/social responsibility side.

Be the Romanian Gymnast

The same strategy applies to the outputs. Flexible alternative energy companies that are not tied to one input/feedstock or output will be the most successful. Currently there is a lot of hype around the “super” plants that will provide ethanol, etc…Whether or not these plants are great will be determined in the future, but it is not a good strategy to limit yourself to one input. Although that might seem like common sense from a business standpoint, we continue to see more companies that silo themselves within a very specific part of the industry. As commodity markets begin to evolve around these new inputs, be it plants (switchgrass), gas (CO2), garbage (food waste), companies that have the ability to hedge any pricing risk via a flexible production process will ultimately beat those who are one-track minded.

Banks Will Become the New Alternative Energy Partners (financially speaking)

Startups have this hard-headed attitude that the VC route is for them. As mentioned above, technology is becoming a commodity and the actual execution based on that technology will determine category winners. In the case of alternative energy producers (ethanol, methanol, biodiesel, electricity, etc…), the execution begins when the last brick is laid. I am seeing more of these alt. energy projects as construction projects.Does it make sense to bring on VCs in these instances? I would say not really, but it depends what VCs can bring beyond the money and what their long-term strategy is. I would say the majority of new startups should look into project financing. Align yourselves with partners that can source and issue the debt and equity necessary to finance the construction. I would hope the equity piece that companies give up in return for this type of financing would be considerably less than what a VC would require. Given the state of things, I think banks will become more involved in the evolution of alternative energy suppliers. The similarity between financing a condo project in NYC that will have years of fixed income in the future will be somewhat similar (not sure how fixed the income will be) to the construction and business operation of an energy supplier.

Bright Future For Entrepreneurs

I firmly believe you don’t have to be a scientist to excel in this industry. Making the production and distribution strategy more efficient and profitable will determine who wins here. Having all of these key points secured will create a compelling argument for future success, and as a result, financing today. I have seen too many bright technologists who don’t have a solid grounding in business to know there is a lot of opportunity to communicate and execute a competitive business strategy more effectively. The more partners that are committed on both the input and output side to a alt. energy production company, the more realistic future forecasts become. This reduces a lenders’ risk and gives the entrepreneur more leverage in sourcing financing.

Current Uses For Sugarcane Bagasse

Bagasse, the left over fibrous stalks from the ethanol production process, is currently used to produce a couple of green friendly products:

• primary fuel source for sugarcane plants: provides more than necessary to provide surplus electricity back on the grid
• Pulp source for tree-free paper products
• Synthetic plastics: for example used to create food containers that can replace polystyrene and styrafoam products

These are terrific products to promote sustainability, but there might be a more profitable area for the waste to be directed…
Brazil’s Ethanol Industry Will Now Enter Phase II

In March, I had commented that Brazil could become a net-importer of cellulosic enzyme to take advantage of the waste currently produced by the sugarcane-ethanol industry. It hadn’t occured to me that they would be developing their own technology as all of the hype surrounding cellulosic has remained within US-based companies/sites.

Brazil is currently the leader in global ethanol production, and can now increase production placing them far ahead of the US. Sugarcane bagasse based ethanol production would be a natural fit for the current ethanol plants. Currently, Brazil produces ethanol at around $.68/gallon. Dedini’s acid hydrolisis method can produce ethanol from bagasse at $1.20 a gallon, making it cost competitive when oil is at least $42/barrel.

What Should Dedini Do Now?

While the scientists at Dedini are probably still sipping champagne, there is much more lucrative work to be done. If they can use this process for other cellulose-rich material such as….oh I don’t know, corn stalks for example, Brazil will have found its way into the US ethanol market.

Much like software, Dedini could license the use of its process and acid to ADM for example, and their ethanol production could double without planting one more corn row. I know cellulosic enzymes have been the promise we have been waiting for, but if Brazil has produced a cheaper, economically viable method, by all means we should take advantage of it.

Another option would be for Dedini to cash out to a mid-large private equity firm, or a petrochem firm (BP, Texaco, etc…) to take this technology global. This would allow them increased funds and the platform for :

• R&D: decrease the per gallon cost of the process. At a $42/barrel threshold, ethanol seems very lucrative, and if the oil price threshold continues to decrease, ethanol might win
• Global ethanol sales force
• Global ethanol distribution/logistics

Something in Brazil is hot, and this time it isn’t the models.

Get your checkbooks out, Bill Clinton’s Climate Innitiative has garnered the support of 16 cities around the world to renovate city-owned buildings to make them for green/efficient.

The makeovers will include replacing heating, cooling and lighting systems with energy-efficient networks; making roofs white or reflective to deflect more of the sun’s heat; sealing windows and installing new models that let more light in; and setting up sensors to control more efficient use of lights and air conditioning.

$1 billion has been committed to finance this endeavour from a group of banks including: Citigroup, Deutsche Bank, JPMorgan Chase, UBS, and ABN Amro.

Commercial contractors and green product producers/manufacturers should see a nice bump in revenue as a result of this, which is a similar situation we can foresee as well in the residential sector. While this sounds altruistic in nature from these banks and governments, I would not be surprised at all if they are already lining up options/futures contracts for the RECs/Green Credits/Carbon Credits that they will earn throughout the construction and lifetime of the projects.

It seems we have finally figured out the magic formula: good for the consumer+good for the Earth+profitable for the banks+profitable for the markets=success! Governments getting involved, spurring business, that’s what I like to see! When will this happen in the US on a grand scale level? Spain has already mandated solar power to be used in all new buildings, both commercial and residential.

I see this as good for everyone, does anyone disagree?

In the everlasting quest to get residential consumers on the alternative energy bandwagon, consumers unfortunately suffer from a lack of information. Most people assume that anything related to alternative energy is expensive. True, the initial cash-outlay for solar panels, windmills, etc…is quite substantial, but the real benefits are repaid over the lifetime of the units. The following is a sample list of the benefits consumers can receive:

• Tax Credits
• Government Subsidies
• RECs /Green Tags
• Electricity sold to the grid

Consumers unfortunately do not see these things, and they are not highly-visible or easy to find. Solar Home, an online alternative energy product retailer, for example has an un-clickable ad from Key Bank explaining that they can offer tax-deductible financing for the purchase of a home solar-kit. While this is great, consumers, especially those using the internet are not interested in calling someone, waiting on hold to find out something. There should be transparency for the consumer.

The Solution

The perfect method someone should go about purchasing a solar home kit, or other alternative energy solutions for the home would be one that fully informs the consumer about the true price/value of the purchase. Consumers should know the REAL financial value of their investment…otherwise you will have many homeowners in sunny areas sitting on the fence.

Questions to Consider

While a 3kW system might cost $20-30K upfront, if financed, how much are the monthly payments? How much of that is tax-deductible? What are the financial savings per month for net-metering? How much can you expect to receive from the Federal/State/Local government? Whoever comes up with a one-stop solution for consumers from all 50 states in the US will provide a key competitive advantage in being able to dispel any myths about the true costs of alternative energy. While we all want to save the world, a lot of us are not willing to pay more for it, at least for now. If we are explained the true cost, our decision to purchase any type of system will be much easier. Clean Power Research, a firm based in Napa, California, provides integrated systems for retailers who wish to educate their customers.

Here are some online retailers you can check out for different types of systems:

Solar: Electricity/Heaters/RV

• Solar Home
• Solar Electric Supply
• Wholesale Solar
• Affordable Solar
• Alter Systems
• Wholesale Solar

Wind Power

• Wind Monkey
• ABS Alaskan

Clean Power Estimators (this is what should be tied into the online retail stores).

• New York
• Long Island
• New Jersey
• California
• Florida
• Ohio
• Grid Point

Residential Building

• Encourage builders to pursue LEED, Earthcraft, EnergyStar or other comparable certifications
• Assist developers in locating and applying for EnergyStar tax credits for energy efficient projects
• Offer, facilitate, and/or support green building training for builders and provide information on programs and organization

Sustainable Living/Regionalization of Alternative Energy

• Investigate and pursue the purchase of energy credits for renewable energy.
• Continue investigating aggressive and viable strategies for green building, energy efficiency and alternative energy

Overall Investor Impact

Charlottesville is well on its way to becoming “green”. Just from the summarized details above, you can see the strategies/recommendations translating into a lot of government assistance in the form of subsidies/credits/incentives and possibly special economic zones for efficiency/sustainability.

This kind of effort will definitely need the support of both local and national investors which should be welcomed by Albermarle County with open arms. In these kinds of situations, investors have a lot of leverage in demanding investment benefits from the local and state government to deploy capital there.

Impact on Builders

Builders like Blue Ridge Home will begin to see more interest from the local community in energy efficient new-construction. This will require a higher level of expertise not just on the design side, but on the finance side of the cost of these projects (or incremental cost), careful planning will be necessary to make the switching costs very visible, and as low as possible (as compared to traditional builders or old-construction homes).

Impact on Alternative Energy

With the plethora of new green/clean technologies, start-ups all over the country are looking for their first “big win”. Cities like Charlottesville and others around the country will provide the perfect partners with which promising technologies can be tested on a grand-scale and ultimately proven as crucial to the “sustainability” of a community/town.

I suggest if you do have a promising start-up or functioning technology in the alternative energy space, you begin to form a marketing/investors plan to show that it can be integrated into a sustainable community.

An example of this would be Babson College entrepreneur Shane Eten’s Feed Resource Recovery operating out of Boston, MA. Feed has an innovative proprietary process that converts traditional food waste into usable clean/green energy. The savings Feed’s technology will provide to its customers over time creates a very healthy and much sought after ROI, creating a company that is not only green for the earth, but for your pocket as well.

Big Picture

Local government does need to spearhead change in the way we live. Charlottesville is proving that citizens are also interested and willing to make changes to become green. As the alternative/clean/green energy market becomes more saturated with new/proven/start-up technologies and companies, local governments will need to become more competitive to attract the “big winners” to their town.
In this game, the price must always be right, and Charlottesville seems to be moving in this direction.

The fact remains that it is cheaper for builders to use traditional materials/designs to complete a real-estate project as opposed to implementing LEED/Energy Star/etc…Upfront incentives are necessary to reap the terrific future benefits “green building” methods provide:

• less water consumption
• less waste
• less electricity
• less carbon emissions

Nevada is Upset Over $90M in Lost Revenue

The reason this law is put on hold is because Nevada did not anticipate the subsidies/tax breaks would amount to such a high dollar figure. You have to wonder why they are arguing over $90M in lost tax-revenue…this is the gambling capital of the world! They are obviously lacking in the financial modelling department. Instead of putting the law on hold, they should figure out a way to capitalize on the future efficiencies gained from the projects. Between RECs and Carbon Credits, there is a lot of “green” ambiguity to play with that could pay dividends over the lifetime of the project.

Green Buildings Will Create “Green” Energy Securities

From a purely capitalistic perspective, if someone gives you a discount, you owe them. If developers are receiving discounts in the form of subsidies/tax breaks, why is the government (federal/state/local)not collecting and effectively leaving cash on the table? As mentioned in my previous LEED post , I am certain the individuals/groups that pay for this kind of construction will be able to receive some kind of credit in the future for the carbon-footprint/efficiency savings they paid to create.

I don’t see a problem with government owning the rights to these credits in return for handsome savings. To me this is a win-win. The government gets to play in the energy credit market, and builders/developers get to save on upfront costs for their projects.

Upcoming Trends:

• If they aren’t currently allowed to do so, governments (federal/state/local) will begin to lobby congress to allow them to acquire the rights to these energy credits in exchange for tax breaks/subsidies. This could create a very interesting muni-bond market.

• Builders/developers will begin to lobby congress to allow them to price their new “green” efficiencies and sell them on the open market, be it RECs, Carbon Credits, etc…

The differences in climates/topography/available feedstock etc…make every region/city of our country very different for optimal alternative energy production. The cornbelt already has its claim to fame. We will surely see more regions promoting their alternative energy expertise in the near future. Time to get the checkbooks ready, more state/city investment incentives to come!

If you are not participating in the venture but would like someone to help prep for your upcoming pitch, that is fine as well.

Let me know!

Cheers,
Francesco DeParis

I have written before about the power small-towns will have in the future as the alternative energy/efficiency landscape progresses, and we are now starting to see more “townie” initiative. Charlottesville, VA has put the gears in the motion on LEED requirements for new residential construction. The benefits to mandating this at the town level are many: lower heating/cooling costs, less pull on the local-grid, etc…

As much as I care about the consumer, I care more about the investors. So what is in it for us? Well if Charlottesville, the #1 small town in the USA , does it, more towns will surely follow. This puts an increased demand on all LEED certified products. Lets take a look at some of the companies that are pushing innovation and unique products to the public. These are the companies we will want to pay attention to and/or invest in if possible:

• Pella Corporation: Pella Designer Series windows and patio doors with triple-pane glass are #1 for energy efficiency among top national brands. Superior NFRC U-factors and SHGC ratings. Also, the windows have built-in blinds (they are in between the glass). I am no interior-design nut, but this is pretty dam cool.
• Sarnafil: These guys seem pretty competent for commercial “green” and LEED certified roofing systems. I cannot find any info regarding residential applications, but their experience and product offering speaks for itself. Builders securing high-volume contracts for roofing supplies could surely work together with LEED architects and Sarnafil to come up with a terrific design.
• BondedLogic: Commercial insulation made out of recycled denim and natural cotton fibers!? That is pretty neat. This is primarily used for sound/heat insulation, but the idea itself is pretty novel.
• BioBased Insulation: Home insulation that is in the form of an expanding spray/foam. The advantages? It expands to 100 times its size to fill in every nook and cranny in your home. The restriction of air movement between panels is what a good insulation system has, and here it is. Click on the “The BioBased Insulation System” link (javascript window) to see how exactly this works. It looks like something from the SciFi channel, but oh so wonderful.
• MeTecno-Benchmark Architectural Systems: Ok, another commercial supplier. They build exterior panels to “dress” up commercial buildings. Again, with a little cosmetic tweaking, you can make anything look like faux-brick/wood. They have the technology, why not?

I will try to look for more interesting companies later, but if any of you know of any companies that SHOULD be on this list, please comment and I will add them.

As a conclusion to this post, here are my trend forecasts:

1. Local-government incentives/regulations will spur more energy efficient/LEED certified construction, and will thus increase demand for LEED certified products.
2. As most LEED credits are given to commercial products, LEED products are commercial oriented. The expertise they are developing in this segment now will make it a win-win for them to sell into the residential channel as consumers and municipalities build more LEED buildings.
3. Could it be possible that LEED credits will create a REC/Carbon Credit like market for those companies/individuals that do not comply? Landlords/Developers/Homeowners could sell their LEED credits to entities that want to have “green” friendly building. Being green all of a sudden makes our wallets look very “green”.

The consumer benefits of building/owning this home are many. This case-study on a “Silver-level” home really shows you the power of where new building techniques will take us. I will definitely be on the look-out for more news/updates surrounding this energy push at the local level.