More private investors bet on growth of energy-as-a-service

Uttar Pradesh and Andhra Pradesh are two states in which power cuts exceed 10-12 hours a day and face the worst energy crisis which will further deepen in the absence of corrective measures. Photo: Ramesh Pathania/Mint
Uttar Pradesh and Andhra Pradesh are two states in which power cuts exceed 10-12 hours a day and face the worst energy crisis which will further deepen in the absence of corrective measures. Photo: Ramesh Pathania/Mint

Summary

Private-equity firms are backing companies that help clients reduce energy consumption by covering upfront costs of improvements

A small but growing number of private-equity firms are backing businesses that help clients better manage their energy consumption, betting that pressure to reduce carbon emissions will expand demand for their services.

So-called energy-as-a-service providers use various methods to help their customers reduce energy consumption, from upgrading lighting and heating systems to installing solar panels or electric vehicle charging stations.

The businesses typically offer to pay the upfront costs of the improvements they make in exchange for a service fee or a share of the money clients save in energy costs. Arrangements like this by companies like Partners Group Holding AG-backed Budderfly Inc. enable customers to treat as operating expenses what otherwise could be significant capital investments that divert funds from core operations.

“To become more energy efficient, you have to have capital and knowledge. That’s what they bring," said banker Spencer Hart, who owns five Sonic Corp. fast-food restaurants on New York’s Long Island. He says his restaurants burn through roughly $300,000 worth of electricity annually.

Mr. Hart, who is also a senior managing director at investment bank Guggenheim Securities LLC, last year signed a 10-year agreement with Budderfly covering his Sonic franchises. The agreement calls for Budderfly to offset a certain portion of the stores’ energy bill while helping them reduce their electricity usage, he said. Any cost savings beyond the offset is allotted to Budderfly up to a predetermined limit, after which additional savings would be split 50-50 with the stores.

Partners Group last year invested about $500 million in Budderfly, making it one of several energy-as-a-service companies to attract private-capital backers in the past few years.

Energy Capital Partners, or ECP, last year acquired Metrus Energy Inc. and Generate Capital in 2020 committed $600 million to Alturus LLC.

Private-capital firms are attracted to energy-as-a-service companies’ recurring revenue and the various types of projects they can handle, as well as their ability to use technology to measure and reduce energy consumption, fund managers have said.

“Energy efficiency is playing a key role in helping businesses, municipalities and schools and universities reach their net-zero objectives and represents one of the most cost efficient ways to decarbonize," ECP Partner Schuyler Coppedge said in an email.

Overall, private-capital firms invested $31.79 billion globally across 280 deals in the energy-efficiency sector, including energy storage, last year through mid-November, according to data provider S&P Global Market Intelligence. The total was nearly double the $16.36 billion deployed in all of 2021 across 307 similar transactions.

Other significant deals in the energy-as-a-service market in recent years include Calibrant Energy, a joint venture formed in 2020 by Macquarie Group Ltd. and Siemens AG as well as Blackstone Inc.’s purchase of Therma Holdings LLC that same year. The global private-markets firm expanded Therma through acquisitions and rebranded it as Legence Holdings LLC last year.

Energy-as-a-service companies often target different sets of clients. Alturus, for one, focuses on Fortune 1000 companies as it sees opportunities in new climate-disclosure rules proposed by the Securities and Exchange Commission. The company has developed systems to help clients measure and report their emissions and those of their suppliers in accordance with the anticipated regulations, said Alturus Managing Partner Charles Esdaile.

“We’re tackling the largest problem in the market," he said of the company’s focus on big businesses. “When you have a large operation with complex processes, there’s more to decarbonize."

Budderfly, meanwhile, specializes in retail and restaurant chains as similar operations make it easier for the company to replicate its services, said founder and Chief Executive Al Subbloie. The company added nearly 900 new customer locations from brands such as Burger King, Wendy’s, McDonald’s, KFC and Subway last year through late September, Mr. Subbloie said. He added that fast-food restaurants consume high amounts of energy per square foot—as much as 10- times more than an office building.

“You got this huge density of energy that nobody really thinks about," he said.

Budderfly looks at its clients’ entire operations and even deals with the utilities on their behalf. Other energy-as-a-service companies, such as Macquaire-backed Calibrant, take a more traditional infrastructure-investing approach, concentrating on individual projects that can cost as much as $100 million, said Thomas Biddinger, Calibrant’s director of business development and partnerships.

For example, New York-based Calibrant operates a solar installation atop Manhattan’s vast Jacob K. Javits Convention Center that includes 1,400 rooftop solar panels across a structure that occupies several city blocks.

“I think the biggest difference is really the return threshold that the investor is looking for," Mr. Biddinger said of the choice between seeking to generate most of the returns from projects’ cash flow or the sale of a business down the road. “What we’re really trying to do is deploy capital into the projects that Calibrant is developing."

Given the relative newness of private capital’s push into energy-as-a-services deals, it remains to be seen how these investments perform in the long run. However, company executives and the investors who back them share a conviction that continued pressure to reduce emissions and improve energy efficiency will translate into more customer demand and ultimately high profits.

“Do I think this business model works? The answer is yes," said Mr. Hart. “I think that the whole world should become way more energy efficient."

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