Private equity investment in storage expected to increase as ECP buys Convergent

Dive Brief:

  • Private equity firm Energy Capital Partners (ECP) on Wednesday announced that it acquired energy storage developer Convergent Energy + Power for an undisclosed amount.
  • The deal could spur further investments into the growing energy storage sector, industry experts told Utility Dive. Venture capital funding — including private equity and corporate venture capital — raised by battery storage companies in the first quarter of 2019 was $78 million, down from $299 million in Q1 2018, according to data from Mercom Capital Group.
  • “For years, [the question has] been, when will the sector be big enough that private equity can care about it? And I think, maybe, the answer is now,” Chris Wedding, founder and managing director of IronOak Energy Capital, told Utility Dive.

Dive Insight:

Investments in the energy storage sector have been sluggish, with big investments coming primarily from corporate venture capital, such as big oil companies. Therefore, the investment of private equity fund ECP, which has about $19 billion in capital commitments, is a “pretty big step for the industry,” Wedding said.

Citing data from analytics website AngelList, Wedding said the average valuation for an early stage energy storage company is roughly $6.2 million as of Thursday morning.

“No private equity firm could possibly dip their toes in the water with a company with so little valuation,” he said. “Being at a private equity firm for about a decade [myself], big dollars means you have to do big deals, and given the state of the energy storage market, most of the deals are not big.”

While VC funding in the storage sector dropped in the first quarter from 2018 to 2019, Mercom Capital data shows funding for the solar sector in Q1 2019 totaled $176 million, up from $161 million in Q1 2018.

Even though the pace of investments in energy storage currently lag behind those in solar, the size of the energy storage market is expected to be significantly larger than the solar sector.

“When we talk about solar, you’re just talking about solar, but energy storage applies to solar, wind or any other source of energy, so it will definitely be much bigger compared to solar going forward,” Raj Prabhu, CEO and co-founder of Mercom Capital Group, told Utility Dive.

Another important distinction when it comes to the ECP-Convergent deal is that it is not an investment in technology but in projects, Wedding said.

“Anytime you get involved in funding projects, the dollar amounts get much larger,” he said.

The energy storage sector is a multi-billion, trillion dollar market going forward, and a deal like this catches the interest of other investors, Prabhu added.

“Nobody wants to be left out,” he said. “Anytime something like this comes out, it actually helps all other companies. And also, it peaks other investors’ attention that they should be looking at deals like this.”

While ECP and Convergent declined to disclose the sale price, the companies noted that upfront acquisition payments and ongoing funding for projects will amount to several hundred million dollars of investment, Greentech Media reported.

“Convergent’s strong track record and innovative development capabilities position the company well to capitalize on an enormous market opportunity in energy storage,” Andrew Gilbert principal partner at ECP, said in a statement.