As it has in years past, the Lazard Power, Energy & Infrastructure Group recently co-hosted the 12th annual Winter Fest alternative energy conference, along with Wilson Sonsini, a leading law firm based in Palo Alto focused on emerging companies, and Prelude Ventures, a venture capital firm focused on innovations that will have a positive impact on climate change. This year Winter Fest took place in Jackson Hole, Wyoming, where approximately 70 leading venture capital and private equity investors, energy technology companies, utilities, power producers, developers and other industry participants discussed a number of pressing issues related to Alternative Energy and emerging energy technologies over the course of two days of events.
Since the first Winter Fest conference in 2005, the world population has grown by nearly a billion people (primarily in the developing world), social and cultural life has become increasingly digital and energy intensive and scientists have recorded some of the warmest years in the global record. The challenges facing the Power & Energy Industry in this changing environment are immense and will, no doubt, unfold in a manner that cannot be predicted with any certainty today. Recent political and regulatory volatility has thrown these challenges and uncertainties into yet sharper relief.
However, the professionals in Lazard’s Power, Energy & Infrastructure Group also believe these challenging conditions provide tremendous opportunities for sensible innovation that balances the twin goals of progress and conservation. It is our distinct privilege to participate in impactful events like Winter Fest and to work alongside established and emerging companies aiming to shape the energy legacy of our times. To this end, and recognizing the business opportunity inherent in decarbonizing the world’s electric systems, Lazard has established a team solely dedicated to providing financial and strategic advice to clients in the renewable energy, energy technology and sustainable infrastructure industries.
During this year’s Winter Fest conference, the following themes emerged from the event’s discussions, panels and company presentations:
- Despite continued volatility in the global solar supply chain and challenging returns environments, participants at this year’s Winter Fest conference noted significant intermittent renewable capacity additions over the last several years and universally accepted that intermittency and low-to-negative marginal pricing driven by fuel-free renewables will be abiding features of modern electrical grids for years to come. These issues provide favorable market conditions for energy storage, but significant questions remain
- Investors (including both venture and project investors) noted the difficulty of overcoming technological and operating risks related to novel battery chemistries and early stage manufacturers that have not necessarily been tested in “real world” operating conditions over the long term
- Conference participants were focused on the multiplicity of uses and potential revenue streams of energy storage. For example, batteries may be deployed behind-the-meter to mitigate demand charges at a customer’s manufacturing facility or in-front-of-the-meter by a developer to provide frequency regulation services. But, somewhat confusingly, batteries may also be used to provide both services and many more in a number of locations on and off the grid, shifting among use cases according to complex, multivariate algorithms. The myriad uses of energy storage raise important questions related to how certain Industry participants might capture all available value streams, and whether certain grid-level values are necessarily able to be captured under prevailing market conditions. Some in attendance suggested that utilities are well positioned to deploy storage into ratebase for these reasons
- Many agreed that regulatory frameworks must evolve with technologies to further incentivize storage deployment and develop price signals for the full variety of energy storage value streams; FERC’s evolving policy statements on storage (and the Commission’s composition under the new Administration) will likely provide regulatory clarity in the months and years to come
- Nearly all categories of conference attendees agreed that financing storage assets and portfolios remains challenging given the complicated sources of potential revenues involved
Distributed Generation and Grid Flexibility
- As a result of changing customer preferences and progressive regulatory policies (e.g., New York, California, etc.), electric grids are increasingly distributed and “bi-directional.” Where once there were clear producers and consumers of energy, now customers are also generators
- Specifically, sophisticated customers (e.g., data center operators, hospitals, military bases, etc.) are focused on investing in distributed energy resources (e.g., rooftop solar, natural gas/diesel generators, energy storage, etc.) to ensure reliable service for “mission critical” facilities; where such distributed energy resources are required, in any case, for reliability purposes, some utility customers are currently utilizing such resources to optimize energy costs (through peak demand shaving or otherwise)
- While most distributed solutions remain unregulated, some utilities have responded to this customer demand by acquiring and/or developing distributed generation and energy efficiency platforms
- The distributed nature of modern electric grids raises not just familiar questions related to load shape (e.g., the “duck” curve), but also emerging questions related to power quality and predictability. Conference participants agreed that, to augment the innovative project finance structures that have helped facilitate the deployment of hard distributed assets (e.g., residential solar), additional development of “command and control” software and “virtual power plant” capabilities are necessary to fully realize the potential benefits of a more flexible and distributed grid
The "Cleantech Conundrum"
- Since its inception, Winter Fest has been widely attended by both venture capital firms and early stage energy companies seeking funding. Last year, participants identified an important potential disconnect in the flow of venture capital to early-stage energy hardware companies. These companies will likely drive important progress in Alternative Energy (through innovative battery chemistries, novel solar technologies, etc.) but are hard-pressed to attract the venture capital investment they require to scale because of their capital intensive, manufacturing-oriented business models
- In addition to its hardware intensity, the Alternative Energy sector suffers from its exposure to electrons—the “ultimate commodity.” This year, venture investors expressed skepticism in “kWh plays” (i.e., investments in companies seeking to incrementally decrease the cost of energy) vs. other opportunities within their fund mandates in potentially more scalable adjacencies (e.g., sustainable agriculture, etc.)
Lazard actively and continually monitors innovation in the energy sector, both through our dialogue with clients, as well as our independent development of intellectual capital in this area. Our objective remains to be a long-term thought leader and the most committed and independent advisor in the sector.
Relatedly, we continue to publish the Lazard Levelized Cost of Energy (“LCOE”) and Levelized Cost of Storage (“LCOS”) reports to help advance an appreciation for the cost profile of renewable energy and storage technologies among Industry participants and policymakers.