Over the past year, the U.S. has seen an unprecedented amount of federal support for energy infrastructure. In the wake of major investments, including from the Inflation Reduction Act and Bipartisan Infrastructure Law, states and municipalities have followed suit with their own sets of policies designed to spur electrification and decarbonization. Underpinning these clean energy promises is an unprecedented investment in generation, transmission, and distribution infrastructure. Energy services businesses are poised to benefit from this investment. However, choppy waters lie ahead as business models and market conditions evolve. The practices that made companies successful in the past will need to evolve for energy services businesses to land on the winning side of grid modernization.
Changes in the Market and How to Respond
In many parts of the U.S., the energy grid is unreliable, outdated, and significantly underfunded. Furthermore, clean energy is under threat from growing interconnection queues and poorly operating assets. A paradigm shift is underway whereby operators are challenging the status quo and accelerating the pace of change for services businesses. Owners and executives should be aware of several trends that are emerging. The Customer Base Is Fragmenting and Changing. Public utilities are no longer the dominant players they once were. Whereas large utilities used to have a stranglehold on energy provision, there has been a proliferation of commercial and industrial (C&I) and independent power producers backed by private owners in the market. These entrants are more focused on capital efficiency and cost effectiveness than their traditional public utility counterparts, which is reflected in their purchasing behaviors. In response, energy services companies need to fundamentally rethink their customer base. Doing so begins with recognizing the value proposition these new customers are seeking and adapting to their pace of work. As a business owner, you might consider:
Bolstering Your Network. Surround yourself with advisors and board members who understand the changing customer base and can provide strategic counsel—both to management and the field.
Listening to the Customer. Prioritize collecting feedback from field personnel, as they are closest to the customer. Do not assume that ways of doing business in the past will continue into the future.
Look for Co-creation and Partnership Opportunities. One way to de-risk the service business model is to partner with other companies across the value chain, turning customers into partners. For example, you might consider finding unique ways to go to market with a co-branded product or service.
Service Models Are Rapidly Evolving. As the customer base evolves, there are a number of new service models arising for energy services businesses in response to evolving buying behaviors. These include revenue sharing, pay-for-service, and uptime-based agreements, versus traditional “boots-on-the-ground” projects. Overall, customers are prioritizing outcomes, not effort. Some suggestions to adapt include:
Bundling Offerings Together into End-to-End Solutions. The future of the industry is combining disparate products and services into a single offering oriented toward the problem the customer is trying to solve. Rather than time and material–based services, customers are looking for a total asset management solution. A best-in-class provider will anticipate its customers’ needs.
Modernize Back-office Processes. To enable this shift, energy services businesses will need to rethink their back-office processes. For example, monitoring, advanced analytics, and new billing processes may be needed to deliver cost-sharing programs for utility customers.
Use Data Strategically. Leverage the data you collect as a strategic asset, creating a feedback loop between operations and strategic decision-makers. Pricing, staffing, and sourcing decisions should evolve over time, based on results and patterns observed across your customer base.
Technological Evolution Is Becoming Tablestakes. Like all businesses, energy services businesses must adapt to the demands of their evolving customer base. Utilities and other customers are looking for real-time insights powered by monitoring, analytics, and digitization. Energy services businesses are expected to have the knowledge and expertise to serve these elements of the grid or risk losing business to more technology-forward players. While many solutions exist, two stand out for companies looking to quickly upskill:
Engage in Targeted Mergers and Acquisition (M&A). Growing organically through hiring and bidding on new contracts can only move the needle so much in a rapidly changing landscape. To scale up quickly, consider acquiring smaller companies with unique tools and capabilities that leverage next-generation technologies.
Anticipate Future Needs. Being reactive will leave you one step behind. Consider partnering with innovative firms and try to bring products to market faster than your competitors. This will increase customer stickiness and establish your business as a technological leader.
What Role Can Private Equity Play in This Transition?
Private equity investment is an accelerant for energy services businesses looking to adapt to the changing market. At Clairvest, we partner with entrepreneurs to take advantage of these opportunities and build strategically significant businesses in their industries. Recently, we did so with NovaSource Power Services, which has grown to become the global leader in solar operations and maintenance (O&M). A rapid influx of capital into solar energy and an evolving customer base consisting of private owners led to an increasing focus on operational efficiency. We quickly realized these customers wanted to buy total asset management solutions with field services and remote monitoring bundled together. We responded to this need by creating a business model independent of the original equipment manufacturers (OEMs) and engineering, procurement, and construction (EPC) companies in the space, offering a long-term bundled service solution with the ability to cover all major panel, inverter, and balance-of-system types. The solar industry is also experiencing a technological shift today, with a rapidly growing base of energy storage assets co-located with plants. Clairvest has helped NovaSource respond by upskilling technicians and working alongside customers to be an early mover in O&M services. Ultimately, we brought our capital, experience from over 35 years of investing, and network of advisors to bear, responding to an underserved market segment in energy services. Private equity investment comes in all different shapes and sizes. When approached by one of these firms, it is worth asking the following questions:
Does the private equity firm have a view of the market that is aligned with that of my team?
Does the firm position themselves purely as a capital solution or do they offer something more—M&A support, expert network, or advice on how to position my organization for rapid growth?
How well does the private equity firm know my industry, invest in getting to know my business, and understand what I am trying to achieve?
With no shortage of interest or money being dedicated toward companies enabling grid modernization, finding the right equity partner is more important than ever. As the saying goes—if you want to go far, go together. —Angus Cole is a Managing Director with Clairvest, and Alexander Carbone is a Vice President with Clairvest, a private equity management firm with more than $4.4 billion of capital under management.
