First-Hand Perspectives On JV Dealmaking In The Energy Storage Sector

   
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Remarks from Marek Wolek, Managing Director of Strategic Partnerships, Energy Storage at the AES Corporation. AES is a U.S.-based Fortune 200 company that operates in 17 countries and owns utility companies in the United States and Central and South America. 

GettyImages-473577504.jpgWATER STREET PARTNERS regularly convenes seasoned dealmakers to share their personal outlooks on the challenges and opportunities inherent to joint venture dealmaking.

The power sector in particular is in a state of substantial flux globally. Reacting to the rise of distributed electricity generation, new utility and customer business models, and mounting concerns about the consequences of global climate change, governments and regulatory bodies are compelling the sector to transition away from power generation dependent on fossil fuels to more sustainable and renewable alternatives.

Emerging technological advancements in energy storage are likely to transform the energy sector. Opportunities for partnering across the value chain on new technologies – as well as competitive pressures and the overall fast pace of industry change – are translating into a number of interesting deal possibilities. From his vantage point as Managing Director for Strategic Partnerships within the AES energy storage business, Marek Wolek offered a set of perspectives for navigating JVs and other partnerships in this dynamic space.

An edited transcript of his remarks follow.

TOPIC 1: INDUSTRY DYNAMICS

Reflecting on overall industry dynamics, Marek provided a quick primer on the energy storage space and recent changes making it a promising sector for deal activity in the present:

What do we mean by energy storage, and what does AES do in this space? Simply put, we take batteries that you often see or use driving in your cars, and put them into an energy storage solution that can be integrated into the grid. AES is focused not only on the strategy behind developing solutions to solve challenges pertaining to the grid, but also on developing and owning its own storage assets. Battery storage at AES started ten years ago and has grown very rapidly since then. More specifically, technology has a very disruptive nature in energy storage and is becoming ever more pervasive at a fast pace (Exhibit 1).


Exhibit 1: Battery Storage Partnerships

Exhibit 1 Energy Storage.png

Energy storage is not a new concept. As a society, we have historically developed and owned very large-scale energy storage assets, primarily in the form of pumped hydro when the United States was developing its nuclear capabilities. However, today there are a lot of geographical and financial limitations on building those types of assets.

At AES, we are focused on using batteries which can be deployed quickly in smaller assets distributed across the grid. We can effectively put assets into the ground and get them operating on a timeframe of six months, which is extremely fast compared to the usual four to ten years for traditional thermal generation or pumped hydro assets. This is thanks to the fact that technology is developing very rapidly, has a truly disruptive nature, and allows us to store energy on the grid for a longer time more economically, which has historically been very challenging.

The trends on the battery storage side have emulated trends in solar: The market has developed quickly, financing has become increasingly more available, and new business models are developing. It is very realistic to believe that this market will change drastically over the next 5 years. All of this has led stakeholders to ask themselves: How do we play in the market and stay ahead of everyone else? Strategic partnerships have been an important part of the answer, as they open the way for significant market penetration and go-to-market approaches to be developed, even before customers start procuring and demanding such systems.

AES itself has been doing active partner evaluation and strategy in that context. We have entered two strategic relationships in recent years in order to ensure access to new markets and are now shifting to evaluating opportunities to strengthen capabilities across our product market.

TOPIC 2: JV CHALLENGES IN ENERGY STORAGE

Marek also shared highlights from his personal experiences as a deal architect, highlighting the most difficult aspects of structuring, negotiating, and managing partnerships against the backdrop of the energy storage environment:

One of the main challenges in this space right now is making decisions. Historically, buyers and suppliers in the utility industry have been very conservative. Now that new technology has come in – and with it, a rapid development path that disrupts the industry and how things have been traditionally dealt with – it’s easy to end up in a situation with potential partners who have been embedded in the industry in very different ways. There is ambition and the urgency to explore interesting opportunities, but also the fear of being left out and making potentially irreversible mistakes. Leading a team and deciding what bets to make and how to best think about partnerships is difficult – and making commitments in this environment is no easy feat. As complete business models are being transformed thanks to technological advancements, players have to figure out how to identify the right stakeholders, build the right business case that makes sense for value creation, and get a deal approved despite potential obstacles and uncertainty.

When it comes to considering a joint venture structure as opposed to other transaction vehicles, the main factors to be considered are: Who owns what; how control over an asset should be structured; and identifying the best way to set up the right incentives for the venture to be successful. 

One must consider how important it is for certain capabilities to remain in your control going forward. If the business case for a particular transaction requires the parties involved to join their specific skillsets and continue to strengthen them together, then an equity-based JV may be more favorable – rather than an arrangement in which capabilities can be contracted out. Additionally, an equity-based JV may be preferred when it is valuable to set up a venture where all parties involved have true skin in the game to see it through and make it successful. For instance, at the Board level, in a JV context, you are more likely to get the engagement and leadership support needed to push the venture forward – this will in turn create a different dynamic not only internally but also between the partners.

Another important aspect to consider with respect to JVs specifically is that such a structure provides incentives for the partners involved to come together and build something that can survive a potential break-up point. That’s if, for instance, one of the partners were to decide that new strategic imperatives dictated that they no longer wanted to be a part of the segment the JV business operates in. This is especially salient in the battery storage space, where the dynamic is changing rapidly and where stakeholders want to have access to that type of flexibility that will allow them to be active participants in an exciting space but with the option to go in different strategic directions in the long run.

TOPIC 3: LESSONS FOR SUCCESSFUL PARTNERING

Finally, Marek closed by sharing lessons learned for successfully structuring partnerships:

Identifying the right sponsor within your company who can get behind the business case for a partnership or joint venture and who can best represent it internally is key. Joint ventures and partnerships in general end up involving a lot of people, which often leads to many voices and opinions. If you try to find consensus with everyone on everything, that could be a recipe for an untimely death for the venture. That is why having a strong deal sponsor who can frame and control the conversation and provide a good analysis of potential risks and ways to manage those risks is crucial.

When dealing with partnerships, it is important to go at the right pace. You hear a lot about speed in dealmaking, but finding the right consensus, the right people to bring along on the team, and the mindset and vision so that others can start socializing it within the organization is essential. We have a strong alliance with a Japanese partner despite the fact that it initially took a long time for us to get on the same page.

However, once you’ve put in the time to ensure you are looking at things in the same way, it is important to move fast and take advantage of the momentum – as getting too bogged down in detail could potentially kill the consensus you invested so much time and effort building.

The energy storage market has set the stage for many interesting partnerships and joint ventures. For more on Water Street’s perspectives and what we continue to learn about partnering in the power and alternative energy space, please be sure to frequently visit our website.

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