Authored by: Michael Kagan, Senior Vice President
Retail energy industry professionals recently discussed and debated the overall direction of energy markets, product trends, and the pace of M&A activity at the 2019 Annual TEPA meeting in Austin, TX, held on September 25-26, 2019. Most noticeable were the trends of broker consolidation, retailers acquiring or forming brokerage entities, and the growth of entities offering both energy efficiency and brokerage services.
Conference attendees widely recognized that these trends are being accelerated by specific market forces, which are increasing both the expectations of customers and the overall need for brokerage services. Interestingly, brokers now find themselves as the primary interface with most large commercial energy consumers in a time in which supply options are becoming increasingly more complex given the availability of renewable supply under long term contract.
The growth of renewables is also changing the generation mix, producing more volatile real-time electricity prices, creating a need for new ancillary service products, and increasing opportunities for battery storage. At the same time, anticipated changes to PURPA are leading more renewables developers to see commercial customers as the off-takers of choice for long term PPAs. Finally, the potential to reduce costs through energy efficiency is a high priority for many customers given rising distribution rates.
These market changes mean that brokers now need the capabilities to evaluate long term contract pricing, analyze the impact of future regulatory changes, and provide energy efficiency solutions to customers. Smaller brokers are thus looking to join forces with larger entities that have the sophistication to understand both power and distribution rates and can originate and structure financing solutions for customers.
In this environment, brokers are keenly interested in strategies that increase the attractiveness and value of their firm to potential acquirers. While brokers often assume that contracted backlog is the key value driver, many brokers interested in positioning their businesses for sale are surprised to learn that renewal rates and demonstrated new business growth can drive 40% to 50% of overall firm value. A TEPA Conference panel on M&A highlighted this situation with brokers that had recently received private equity investments describing how their firms were valued during the investment process. Overall, the takeaway for brokers was that regardless of whether a broker is positioning itself for growth or an eventual sale, owners need to understand how their investments and strategies are impact firm value. This can best be done through a valuation-based strategic planning process which first determines that value of the firm and then evaluates the likely impact of various growth strategies.
If you are interested in learning more about how Concentric uses valuation principles to assess various growth strategies, please contact Michael Kagan at 617.212.7494.