I am often asked my views about what will be required to meet the energy market and financial analytics needs for the period ahead. It is a fair question and many of the market consultants that grew and prospered in the last boom side of the market are gone, are shadows of their former selves in the energy vertical today, or morphed into something else to stay profitable.
Here are a few examples:
- Henwood became Global Energy Decisions; bought six others and grew to market leadership; was merged with New Energy Associates and morphed into Ventyx before being sold to ABB.
- RW Beck was acquired by SAIC and largely now resides in and around the SAIC critical infrastructure protection division pursuing large government and utility contracts.
- ICF remains much the same except more dependent on big scale government contracts not as likely in the deficit reducing future. It is unlikely to build market share in the energy vertical sufficient to make up the loss of those big government contracts given its policy and program management focus. Meanwhile competitors are building software, services and analytics expertise ICF possesses in its IPM model but can not leverage unless it moved its analytics services to the cloud.
- Pace Global, PA Consulting and Navigant bet the farm on power generation project finance and procurement and were big players, but then the backlash from the California energy crisis, the end of the boom period and recession cratered credit markets and capital access and they retrenched to safer surroundings in risk management, health care and other areas.
- WoodMac had a near death experience when its private equity firm suffered major losses in the recession and was sold to Charter House where it is back to growth—a good news story.
- CERA was sold to IHS in 2004 and is being digested in the integration of the IHS acquisitions along with Global Insight, Janes, JS Herold and a string of smaller product companies into one IHS Insight Business line.
I could go on but you see the point. The short list of major market consultants is shorter, the players weaker or more narrowly focused and none of them are likely to regain their former market leading roles. Meanwhile the driving forces of the energy industry such as renewable energy, emissions reduction, smart grid and the emerging focus on services on the customer side of the meter require new and different skills to scale their business—but they better hurry.
After the Bust Eventually Comes the Boom in Energy Markets
As surely as the sun rises in the East and sets in the West, after the bust in the energy business cycle eventually comes the built up and then recovery and finally the boom in energy markets. The energy industry has historically lived in a boom and bust market environment and that did not change.
The reasons for the cyclical nature of the industry have to do with the long regulatory lead times associated with getting project approvals. Some of it was the sheer size, scope and cost of such large infrastructure projects. Upstream was driven by capital investment in E&P while downstream was driven by power generation and transmission requirements. They often met in the muddled middle around global demand for oil and gas and fossil fuel demand for power generation.
For many years we tracked the status of power generation development from announcement to dismantling as an article of faith that the boom and bust cycle would repeat itself.
While recession has savaged power plant construction and project finance except for renewable energy projects demanded by state renewable portfolio standards and subsidized by Federal loan guarantees we have not repealed the laws of supply and demand and as a consequence we should expect to see a return to the boom and bust cycle.
Energy Financial Analytics Futures
Recession and market volatility adds pressure to grow utility earnings in the face of falling energy demand, weak credit access, and rising risk slow large scale projects but don’t change the essential requirement for power system reliability. Merchant players either sell out or, if they can obtain access to capital, begin shopping for good assets at great values to reposition their portfolios for the future.
Merchant energy players and developers have been building or buying renewable energy wind and solar projects because it offered deal flow, kept key talent working, and was about the only thing making any money in the worst of the market trough. But portfolios can only absorb so much volatility without the need for balance and backup. The absence of baseload power plant construction of either coal or nuclear except for the capacity creep additions from repowering, uprating and life extensions means that natural gas is more than ever the marginal fuel of choice and the likely source of the next wave of build-up, recovery and then boom in construction to assure reliability beyond meeting the RPS targets.
Focus on the Analytics that Matter
There are a range of consulting and advisory services that are ideally suited to meet these needs including, but not limited to the following:
- Integrated Resource Planning is still the accepted regulatory standard of practice. Creating a credible, least cost, best fit framework for analysis still requires independent, transparent, consistent third party forecasts and tools to provide high quality starting points for analysis, independent assumptions, a third party base case or reference case and the ability to perform advanced zonal or nodal market simulations.
- It’s All About the Data, Dummy! In a world of interoperability where we become increasingly agnostic about whether something is oracle, SAP, IBM, Ventyx or any other software because the analytics will happen in the cloud—high quality data still matter A LOT at the front end, and providing the tools to make sense of meter data and analytics data outputs at the back end will separate the winners and losers. Get the data analytics right!
- Scenario Analysis to Manage Uncertainty. Scenario analysis remains a powerful qualitative companion to quantitative analysis to rehearse alternative business strategy futures and critically assess portfolio options across alternative views of the energy future. Use it to enable senior management to put the detailed financial and strategy risks into perspective.
- Stochastic Analysis of Portfolio Financial Risk to assess the cash flow at risk from technology, fuels, emissions reduction, efficiency and demand response and other variables across portfolio options to discover the least cost, best fit choices among the many presented by stakeholders.
- Fuel Price Risk remains just as important as ever to assess the implications of erosion of coal market share, the risk of gas market share and the volatility of renewable market share given the back-up requirements and technology life.
- Demand Risk in markets where C&I customers adopt constant energy management strategies, net metering, residential customers adopt demand response, solar rooftop market penetration, energy efficiency and lower energy intensity from rising building and appliance code requirements estimating future demand is not getting easier.
- Smart Grid Risk looms large in the next energy business cycle driven by meter data management and its implications for information and operations technology inside the utility, among vendors, and for customers. The convergence of IT and OT brings new competitors but also means these new players lack the old skills still essential to energy financial analytics so expect consolidation as Oracle, SAP, IBM and others acquire more energy familiar names to beef up their expertise and capabilities.
So what should I do?
- Align Your Organization to Work as One Team eliminating silos that prevent collaboration, establishing best practices and enforcing them across teams for consistency.
- Pick your sweet spots and be the best in those areas. Monetize your intellectual property to create recurring revenue from advisory and data driven products that enable your firm to use speed to competitive advantage against the bigger players and to bulk up EBITDA by keeping your costs lower than the hulking giants looming to enter the energy vertical.
- End-to-End Solutions. Combining features and functionality to create end-to-end solutions is a good insurance policy near term and enhances the valuation of the firm long term. Product fragmentation adds cost for integration and risk so solve that problem for your customer to give your solutions more value-added appeal.
- Fast, Good or Cheap: Pick Two. If you are a high quality, experienced, independent energy consultant your clients will have a choice of fast, good or cheap. Give them fast and damn good every time by default—you will look cheap even at your full billable hour rates when they see the implementation and overhead costs of these hulking giants.
- Race to the Cloud. Legacy software players are likely to struggle and experience lower growth rates and tougher renewal rates as services are offered on many fronts without bringing software in-house and staffing up to operate it. Transforming desktop solutions or large enterprise solutions so that they are plug and play with SAP and Oracle is a good place to be but the best solution is to convert the products into cloud based services and build a parallel business model to create recurring revenue offering the commonly used services in the cloud.