The Lux Energy Team has previously examined venture capital (VC) investments and acquisition deals in startups from leading electric utilities in Asia-Pacific, Europe, and North America – see, for instance, our "Utility of the Future" report and 2018 VC investment analysis. This type of data is crucial for drawing trends, identifying key areas of interest for energy companies, and mapping the most active utilities and regions worldwide. However, recent VC transactions are likely affected by the COVID-19 pandemic, which has made 2020 an unprecedented year and impacted the energy sector significantly – causing a 20% drop in oil demand and a 5% reduction in electricity consumption. But what has been the actual trend in VC transactions throughout 2020?
Taking the same approach we have followed in the past, we look at the utility VC investments in 2020 and compare them to the ones closed in the two previous years to identify key trends, areas of interest from energy utilities worldwide, and potential disruptions. As in previous analyses, the results we present are based on the number of investment transactions per utility, meaning that a utility investing twice in the same company counts as two transactions. The same happens if two utilities participate in the same investment round.
The range of utilities considered for this study also remains the same and comprises the top five utilities from Asia-Pacific, Europe, and North America, as well as a number of "wild cards" from each region that we include based on their interesting innovation activities (see map below). We also include transactions made through subsidiaries or affiliated groups of the selected utilities (e.g., National Grid's venture arm, National Grid Partners).
When looking at the number of transactions made by these companies during the past three years (see figure below), it is clear that European utilities continue to be the most dynamic, while North American utilities account for the lowest number of total investments since 2018. The fact that European utilities have been more active and seeking innovative solutions is largely a consequence of the deregulated electricity market in Europe. On the contrary, the regulated market structure in most states across the U.S. has triggered minimal competition among utilities, which does not encourage them to invest in startups and has led to a reduced number of VC investments. It remains to be seen if the Biden administration will address these challenges or not, but as of now, North American utilities are likely to continue to center most of their efforts on growing their renewable energy portfolios.
On the other hand, utilities in Asia-Pacific (APAC) have progressively reduced their VC activity after the number of investments rose steadily between 2016 and 2018. Although the data from last year is likely affected by the COVID-19 pandemic, there are a number of factors influencing the recent ups and downs in the number of investments made by utilities in this region. First, the liberalization of electricity markets across Southeast Asia (e.g., Singapore) increased the momentum around innovative grid technologies and business models, prompting utilities like Tepco – the most active in Asia-Pacific during the past five years – to invest in startups like Electrify, a peer-to-peer energy trading developer.
However, these efforts are diminished by the fact that electricity markets in leading economies in Asia (e.g., China) are largely dominated by state-owned companies – which not only limits external market participation but also reduces the pressure on energy utilities to differentiate from their peers. Consequently, utilities are less incentivized to innovate their offerings and operations by investing in startups. Another factor that has likely influenced the total number of VC transactions in APAC is the growing focus on pilot projects (e.g., Power Ledger's demonstrator in Thailand) and in-house R&D activities instead of additional investments in startups.
However, APAC is not the only region that has reported decreasing VC investments; this outcome can also be seen in Europe. To better understand this trend, we look at the total number of investments made by utilities across key areas of innovation. At first glance, the leading area of innovation has not changed with respect to our previous analysis, as "IoT and connectivity" continues to lead in terms of the number of transaction deals.
The most notable difference in the past three years is that recent investments have not been as spread out across different innovation areas; instead, utilities focused their efforts on a smaller number of innovation areas throughout 2020. These include "transactions and billing," "mobility," and "commercial and industrial (C&I) energy management." On the contrary, areas like "blockchain" and "drones" have not captured VC attention since 2018, and technologies like "DERMS" have not seen any investments in 2020.
While this outcome is probably affected by the pandemic, it also signals a drop in interest toward certain technologies in recent years – either because they have reached maturity (e.g., solar and wind power systems) or because they have not been able to demonstrate commercial viability (e.g., blockchain). In fact, while the number of investment deals decreased in 2020, the total VC expenditure reported by utilities in 2018, 2019, and 2020 has been relatively similar (see left figure below), to the point that 2020 has actually been the year that registered the highest expenditure – a difference that is largely due to the approximately $330 million that Origin Energy invested in U.K.-based energy retailer Octopus Energy.
Looking at the innovation areas that continue to capture VC investments from utilities, "IoT and connectivity" and "other" remain the most popular categories. The latter includes investments in companies that do not match the general interest of energy utilities. Some recent examples include National Grid's $35 million investment in EdCast (a developer of personalized learning and knowledge management solutions) and Centrica's $8 million investment in Minut (a smart home developer focused on security).
As for "IoT and connectivity," this is a relatively broad category that includes sensors, machine-to-machine communications, smart metering, and data analytics. This innovation area has been the most popular – in terms of the number of transactions – since the Lux Energy Team started to categorize startup acquisition deals in 2016, but recent investments point toward rising diversification in the digital technologies that utilities are interested in. The right figure above shows that subcategories like smart sensors and meters captured utility VC investments between 2016 and 2018 but have not registered any investments during the past two years. In the case of smart cities, the uptick in momentum was even shorter – with the most recent VC transaction dating back to 2016.
On the contrary, utilities have switched their focus from data collection to data management and analytics. This trend is well-aligned with the growing adoption of digital technologies in the energy space, which spurred significant startup activity around 2015 and led to a crowded landscape of digital developers. To differentiate from their peers, most of these developers added a layer of complexity to their offerings – resulting in more sophisticated software platforms and data analytics.
Another area that has been featured in increasingly more transactions is cybersecurity. While 2020 saw fewer investments in cybersecurity than 2019, incidents like the 2021 Colonial Pipeline attack will likely cause utilities to review their security posture and upgrade their IT threat detection and defenses. These investments will likely take their share of funding in 2021 and beyond.
All in all, recent VC transactions made by the top utilities across the globe reveal two main trends. First, utilities are becoming more strategic when investing in startups, concentrating their efforts on a reduced number of innovations that have the greatest potential to contribute to the power grid of the future. These decisions have been partly affected by the COVID-19 pandemic but not to the point that it caused an inflection point – if anything, the pandemic has just accelerated the trend. Second, digital solutions are at the forefront of power grid innovation – with IoT and connectivity technologies becoming increasingly more attractive among utilities as well as more complex. Companies should expect digital technologies to continue leading the utility VC space and follow up on parallel developments like novel connectivity options – for instance, 5G, which has been massively rolled out over the past couple of years and has the potential to contribute to data transmission savings for energy utilities.