Lack of access to real-time, accurate data is hindering power producer’s ability to make investment decisions and limiting their chances of achieving profitable growth.

 

In today’s highly competitive global energy market, the ability to make accurate and timely investment decisions is an essential part of maintaining business growth. However, with dropping technology prices, evolving procurement practices and changing regulatory environments all in play, the ability to do so becomes both challenging and risky. In light of this, power producers today have to be extra diligent when deciding which technologies to invest in or which regions to diversify into that offer the highest returns. However, it takes a high level of certainty in order to make these types of decisions not only accurately, but also in a timely manner. As the competitive bar raises higher, the race is on to become the lowest bidder, sell the cheapest power or own the largest portfolio. With so much at stake, power producers need to be able to make a decision at any given moment. The question is, can they do so with confidence?

Data Drives Decisions

Confident decision making requires having access to high-quality information and accurate data of project pipelines and investment portfolios. These elements are essential to having a complete understanding of the risks at hand.

However, not having enough information to make investment decisions with certainty will turn out in one of three ways:

  1. Either you will make the wrong decisions,
  2. Delay until they are made too late, or;
  3. Hesitate to come to any conclusions at all

Decision paralysis is a major consequence of insufficient information. Lack of historical data, incomprehensive portfolio or pipeline visibility and inherent deal complexity are all contributing to a convoluted investment process. The result of an incomplete or incorrect proposal creates significant risk, leading to further hesitation and delay in making decisions– or doing so based on intuition rather than fact.

Take Building Energy for example. When the Italian independent power producer (IPP) began to expand its global portfolio into new regions, their investment processes became increasingly complicated. Since they were now dealing with risky investments in unfamiliar regions, the lack of information and understanding of the risk factors for each project under consideration made it difficult to decide which projects to invest in. Their reliance on local developers further complicated matters as the flow of information between teams was not transparent enough. Due to their lack of complete portfolio visibility and insufficient business intelligence, Building Energy found themselves making decisions based more on feeling rather than fact.

Utilities Suffer from Lack of Visibility

Making decisions based on an incomplete picture or on gut instinct has resulted in paramount repercussions. As we’ve seen in the past, too many wrong decisions and even indecisions can negatively impact a business. RWE and E.ON are two poignant examples. When the German government ordered the decommissioning of all of the country’s nuclear power plants by 2017, German utilities RWE and E.ON began increasing their lignite coal generation. However, as the state continued to move forward with ambitions to reduce carbon emissions and further incentivised wind and solar, political conditions for lignite coal deteriorated. As a result, both companies suffered heavily; profits were lost, stock value plummeted, and shareholder dividends went unpaid. The utilities were forced to cut costs with large layoffs and divested to ensure financial viability.

In retrospect, the mistakes are now apparent. Both utilities were deficient in their understanding of the political risks as evidenced by their dependency on favourable conditions for lignite coal. RWE lacked visibility into market trends on a high level and fell victim to the pricing conditions of the German power market. Lastly, they continued to focus on conventional power generations while other European utilities made significant advances in renewable energy and invested in emerging markets. By the time they entered into the renewable market, which RWE’s CEO, Peter Terium acknowledged was “possibly too late”, RWE had already lost significant market share before they had the chance to enter. If RWE had more visibility into the market and more flexibility in their business structure, they would not have suffered from the extreme market dynamic changes so heavily.

Total Returns for E.ON and RWE (2010-2016)

Financial Returns RWE & E.ON - investment decisions

“RWE no longer pays a dividend, and its stock price has plunged by more than 85 percent since early 2010. E.On has cut its payout by about two-thirds and has plummeted 82 percent over the same period.” (Seeking Alpha)

Repercussions of Hasty, Uninformed Decision Making

In the United States, the story of SunEdison’s downfall tells the most profound lesson in hasty, uninformed decision making. The company made a series of poor financial choices, including debt-fuelled acquisitions, financial engineering through its two yieldcos and relentless growth at all costs. After its failed acquisition of Vivint Solar, SunEdison’s shares plummeted, followed by employee layoffs, board restructuring and delays in annual reports. With a hole-patched data infrastructure, SunEdison had grown too fast and failed to establish the checks and balances needed for proper data management and sharing. They lacked the tools and business processes needed to take their own internal data and illuminate it into meaningful information- information that would have allowed them to make smarter, more conservative investment decisions. Essentially, they were caught ‘flying blind’. The culmination of this resulted in one of the biggest corporate implosions in U.S. Solar history, with the company’s market capitalization shrinking by over 98% and subsequential bankruptcy filing. Today, nearly all of SunEdison’s assets have been sold or are on the market, serving as reminders of the consequences of making decisions that were not backed by real-time, accurate data.

SunEdison Inc’s Quarterly Cash from Operation and Stock Price (2012-2016)

SunEdison Share Prices - investment decisions
This image shows a sharp decline of SunEdison Inc’s stock prices. By mid-2015, the stock price of SunEdison was trading at $31.56 per share, and as of April 2016, it is trading at $0.34 per share, representing nearly a 99% decline within less than a year.

 

If the mishaps of major energy players have taught us anything, it’s that the ability to make strategic investment decisions, and quickly, is key. However, the ability to do so with confidence is the difference between failure and profitable growth. Growth, however, depends on how fast decisions can be made, while profitability relies on how accurate they are. Neither of these can be achieved without the confidence that comes from having access to accurate, real-time data. However, due to lack of sufficient IT infrastructure, data becomes silo’ed across different business functions. The quality of the data is suboptimal, or at times missing entirely, with little traceability and single record of truth. New financially savvy market entrants understand the importance of a robust IT platform to help support their financial decision making and risk mitigation, and that growth and profitability are rooted in their ability to make these choices. In the future, the companies that have the ability to make smart, accurate investment decisions will be in the best position to weather changing market dynamics and remain competitive.