An imaginative new report from the international accountancy and business services group BDO suggests that one of the most rapidly growing areas of the M&A market at present is the highly specialist market of artificial intelligence as applied to the energy market.
BDO’s research shows that the number of deals in the sector in the first half of 2017 was nearly three times as great as in the first half of 2016. Even more strikingly the value of the deals, while often still small, is seven times higher than it was a year ago.
Some of these deals, such as Itrom buying Comverge and Wildam’s purchase Integral Analytics have given the market a profile and a momentum which it would be unwise to ignore. BDO says that we are witnessing the early stages of what will become an M&A trend for years to come.
As BDO explains, behind much the trend lie the issues raised by the growth of renewables as a proportion of electricity generated. Investment in renewable capacity has outstripped investment in fossil fuels for five years running. In 2016 55% of the new capacity added to the global market came from renewable sources, the highest proportion seen to date. On a rolling annual basis, new renewables capacity continues to grow at around 10% per annum.
This creates many unfamiliar challenges, chiefly because by their very nature renewable sources such as wind and solar are weather dependent and less predictable than fossil fuels. Yet with demand rising inexorably in most places the need for reliable capacity is becoming more acute, not less so.
This is where advances in artificial intelligence are becoming increasingly vital for electricity distributors. Artificial intelligence can screen large stacks of data for a wide range of factors that may impact performance. These include layout and location of a site, contractual offtake agreements, type of equipment, grid connection, weather, and operation and maintenance costs.
Behind both the Itrom and Wildam deals was the need to forecast the supply and demand for power, with new techniques both able to add value to the prediction of demand from customers and to the supply that is likely to be available. In the foreseeable future this market is likely to develop further, to enable distributors to lower the cost of production by estimating more accurately both demand and the sources available to them, using blockchain and other technologies, more widely. It will also enable companies to respond to a rapidly changing competitive landscape, including through the use of M&A.
As BDO puts it, artificial intelligence has an important role to play in managing a transition to an energy portfolio with increased renewable production and minimal disruption from natural intermittency. Thus, when renewables are operating above a certain threshold due to favourable weather, AI powered software would automatically reduce production from fossil fuels. The opposite would be true during times of below-peak renewable power generation, thus allowing all sources of energy to be used as efficiently and cheaply as possible and only relying on fossil fuels when necessary. Moreover producers will be able to manage the output from multiple sources to match variations in demand in real-time.
Making the demand for electricity ‘intelligent’ means that capacity can be provided when and where it is needed and pave the way for a cleaner, more affordable, and more secure energy system. But this cannot be done without skills that do not naturally exist within many standalone energy companies, especially small ones. So the surge in M&A that has been seen of late is likely to be only the start of an important new market trend.