The Energy Inflection Points Driving Change at Private Equity Firms, REITS, Investment Banks, and Fortune 1000 CompaniesOctober 05, 2022
by Paul Shagawat, Co-Founder and Managing Partner,
I believe 2022 will go down as a year of “inflection points” in the energy industry. For those of you who have read my articles, and those of my colleagues, over the last few years, you’d be right in guessing that one of those inflection points has to do with price – natural gas prices have more than doubled this year, and we could be looking at high volatility this winter – but there’s more to the story, and that’s what I want to delve into here.
But we should start with price. Natural gas prices have soared in 2022 for a number of reasons, and with them electricity prices. So many bullish factors: high post-pandemic demand as businesses kicked back into gear; a growing global thirst for liquid natural gas (LNG); the war in Ukraine; low supply in storage (though that, thankfully, is changing). God forbid we have a cold winter.
Yet, what I’d like to suggest here is that the rapid shift from historically low energy prices just two short years ago to the very high and volatile pricing environment we find ourselves in today is changing minds and behaviors among many of the largest energy users in the world, including PE firms (think of their many holdings) and REITs (think of their many buildings), as well as investment banks and the broader Fortune 1000.
How do I know this?
My company, Transparent Energy, procured 373% more energy in the first half of 2022 than it did the previous year, which was also a record year for our business. This hit-the-accelerator growth was spurred by PE firms and REITs, major industries turning to Transparent Energy as they reach an inflection point in how they think about, manage, and buy energy for their portfolios.
Think about it. Where was “energy” on the strategic priority list of PE firms and REITs prior to 2021? Due to fracking, the U.S. was awash in natural gas. The boom produced a glut, and for 10 years, aside from the odd polar vortex or hurricane, the cost of energy was nominal. And that pricing environment directly impacted how large portfolio holders ran their businesses.
For example, REITs left energy decisions, including procurement, in the hands of building- management companies. Were these firms and their building managers “good” at buying energy? Not particularly – but it didn’t matter! Tenants paid the electricity bills, and for many years these bills were relatively low. Same goes for PE. The companies they acquired had someone who purchased their energy, perhaps a facilities manager, and energy costs were low enough to cover any inefficiencies in their procurement methodology, if they even had one.
So much has changed. Today, skyrocketing energy prices have captured the attention of every REIT and PE firm, and with that procurement methods are now under the microscope. Suddenly, leaving 6-, 7-, and 8-figure annual natural gas and electricity purchases up to non-specialists lacking advanced market intelligence, process, and technology didn’t seem like the right risk-management approach.
Now, PE firms and REITs are taking a portfolio approach to energy, looking for ways to manage energy risk and cost across hundreds of buildings across regulated and deregulated states. And with this shift has come another realization: these companies do not have the expertise in-house to manage it.
That’s why they are turning to Transparent Energy in record numbers. Simply put, we’re built to manage large, complex portfolios. We do business in every state, monitor energy markets across the U.S. and around the world every minute of every day, and have developed a process and technology that keeps our clients informed and positioned to be proactive to extract the best price available in the market.
But something else has changed. Not only does the new energy pricing environment require a different level of engagement from PEs, REITs, and other large energy users, so, too, do new sustainability demands. The tea leaves were present in 2020 and 2021 as the idea of ESG commitments and net-zero carbon pledges began to go mainstream, but in 2022 they have fully taken root, especially with the passing of the Inflation Reduction Act.
PE firms and REITs needed to act. They could no longer solely focus on what they do best – in the case of PE firms acquiring underperforming assets, fixing them, and selling them for a large profit; REITs buying buildings, filling them with paying tenants, and selling them for a large profit – nor could they simply raise capital whenever needed as they had done in the past.
Now they were responsible for their portfolio’s carbon footprint and executing a sustainability plan. Again, that has been a boon for us. First, because no matter how ambitious a portfolio’s carbon reduction goals, the path to realizing those goals will have to go through the procurement of both brown and green power – with the majority of that green power coming from offsite renewables.
Why brown power? Because there simply isn’t enough renewable power available now to meet demand. And why “offsite” renewables? Because there aren’t enough rooftops, parking lots, and lawns for onsite solar to meet all energy needs – not even close.
This is shaping up to be the greatest one-two punch in Transparent Energy history. First, REITs and PE firms need an expertly run procurement process to help them make their energy transitions (i.e., they still need brown power to get to green). Second, they need an expertly run procurement process to buy offsite renewables, whether that’s through a PPA or VPPA, or RECs or carbon offsets.
Transparent Energy has both waterfronts covered.
Not only do we have the best process for buying electricity, natural gas, and RECs through our online auctions – check out what we just did for a major school district in Illinois – but we also just wrote the book, literally, on how to procure offsite renewables with none other than the Urban Land Institute (ULI), the largest member-driven real estate organization in the world (check out the article here). And we’re putting those insights into action, recently helping a customer procure 1.5 million MWh (that’s 1.5 billion kWh) of renewable energy certificates, one of the largest renewable energy transactions in the U.S. this year.
And more inflection points are coming. Take your cue from REITs and PE firms. The boundaries between traditional and renewable energy are falling. A unified, portfolio approach to buying and managing energy with all its incumbent risk is needed now and in the future. Your business will depend upon it. Transparent Energy is your one-stop shop.
To put a unified, portfolio approach to buying and managing energy to work at your company, reach out to us today. Contact Jonathan Le at email@example.com