E.ON’s split is validation and coming of age for new energy. Clean tech will face serious competitors with deep pockets, not only from utilities. Clean tech benefits from strong consumer and public brand equity. It may need to embark onto partnerships. I expect consolidation and M&A, including involving the private sector. Solar, heat pumps, storage and demand solutions grow in attractiveness. Oil is a negative, but even if price weakness is protracted, it will unlikely reverse the trend.
The gorilla has entered the room. The clean tech sector now faces a big competitor with desperation and deep pockets. E.ON has been active in the sector before, but now it is its main focus.
This is validation and coming of age for new energy. I have repeatedly stated my view that the sector is well under way towards a structure of limited clusters of large scale concentrated generation combined with a wide spread of distributed generation, smart features, new owners of generation assets and gas/networks as the backbone.
Integrated service and equipment offering is the new game in town. Clean tech stands at a disadvantage – to a point. The big utilities still have bigger customer account ownership. That can and in my view will change quickly as the competitive landscape changes.
Some clean tech companies have embarked on greater product packaging and services offering. I still see them struggling because of their lack of experience with long standing retail customer relations, billing and the tail end of customer accounts. They will struggle with aggressive competition from utilities, supermarkets and consumer goods manufacturers. The sector would need to embark onto consumer goods strategies, at least as a complement.
Consumer brand equity (not necessarily breadth of recognition, which I gage, is lower, but positive image perception) seems greater for the cleantech sector. The utilities are suffering from the negative image of perceived over-pricing, anti-renewables lobbying and coal and nuclear generation. Those issues are still – as a side note – not only consumer marketing, but also broader pr and financial markets communication challenges. The clean tech sector has got some tarnish from subsidies dependency and impact of bankruptcies. But, generally end market perception is strong. These points hold specifically for Germany, to a degree also for the UK.
There will be a demand boost from 2016. Solar, storage heating equipment and appliance management in the broader market in Germany from the pure change brought about by E.ON. I see no material impact on wind as the bigger change happens in the consumer driven market. That is the market of smaller scale technologies.
Manufacturers will lose pricing power. The market moves from retail to wholesale. The big actors looking to be intermediaries will tighten pricing. Changing ownership structures of equipment (see last week’s feature – Further musings on E.ON’s split) may contribute to that.
There may be consolidation and M&A, including involving the private sector. I would not be too surprised to see E.ON on the look for consumer brand equity. I would expect E.ON to avoid manufacturing operations. But, that could still entail split up of manufacturing businesses where manufacturing and downstream channels are sold separately or parts of businesses dismantled. Rapid technology obsolescence furthers the process.
Clean tech businesses that successfully build up partnerships to enter the E.ON bandwagon of change in the market can see a reduction of earnings volatility and, potentially share price volatility. Multiples will change to reflect new earnings patterns. I still see the sector trading at growth multiples for the near future.
I look for new solutions providers. Amongst the well positioned names, I see Solarworld despite its cling to manufacturing and negative pr impact from some of the CEO’s actions. Trina Solar (TSL US) also stands out, but will in my view not deviate from its core manufacturing. Conergy has achieved great recovery of its brand equity and is pursuing innovative business propositions, including new ownership models. Battery names should be of interest. ASTec, for example is expanding the storage business and has just launched an “electricity bank” with MVV. I can see more new energy features from its IT solutions. Vaillant, Viessmann, Stiebel Eltron, Danfoss and Bosch, the leaders in heat pumps, should benefit from the changing market.
Oil price weakness has taken some gloss of the clean tech sector, but even if protracted, I still see all the points above holding up.