Demand Side Response (DSR) markets are at varying stages of development across Europe. Typically, market access and value streams are characterised by uncertainties inherent to policies and market volatility. The aggregation business has been around for more than 10 years, and everybody has asked the same question: Are aggregators profitable businesses today? Aggregators will definitely be needed at scale – but can they survive financially until it happens?
While researching for our report on Aggregator Profitability and Investment, we found that none of the aggregators whose accounts are made public were profitable up to the year 2017. Yes, profitability is a vague term. Are we talking here about Gross Profit, Operating Profit or Net Profit? Looking at Gross Profit (Revenue - Cost of Goods Sold), the most established of the aggregators are showing some positive pictures, with margins around 35% on average. But when looking at the Operating Profit (Gross profit - Operating Expenses), numbers depict a sobering reality, with losses reaching sometimes the tens of millions.
The truth is the aggregation market of today is highly competitive and increasingly fragmented, with three classes of players racing in an attempt to grab the biggest piece of the pie, or at least enough market shares to survive. Early movers, new entrants, and traditional incumbents are coming in all forms and shapes, proposing more or less innovative solutions to unconvinced customers. Apart from energy geeks, who really understands barbaric terms such as DSR, flexible loads, or Artificial Intelligence platforms optimising consumption?
Considering the heavily competitive markets of today, it is hard enough for a company to stay afloat, even when the product is completely understood/needed/wanted by well segmented customers, in growing or mature markets. In light of this, I think that as long as the market remains stranded by uncertainties, and as long as consumers will not have fully understood the benefits of the product, overcoming the challenge of keeping OPEX and CAPEX to profitable levels may seem like chasing a Chimera.
Meanwhile, aggregators are carving their path to financial sustainability, with the daunting task of educating and acquiring customers. CEOs might be right to be as optimistic as they are – it makes good economic sense to think that their company will soon take off. Indeed, to keep carbon levels in line with the Paris Agreement, more renewable energies are entering the energy mix, which, by their intermittent and non-flexible nature, build the case for flexibility behind-the-meter. Investors decided to go along with the same wager.
To support the capture of value stream with new products, businesses need capital. Investors are the people to turn to and investing is a vote of confidence, where the stakes being placed are carefully pondered between potential return and risk. By analysing 17 aggregators, we found a total of 113 investors, of which more than a third are Venture Capitalists, illustrating the fact that the market is still largely dominated by players at the start-up phase.
Looking further, only five aggregators, such as Restore, acquired by Centrica for $81M and Enernoc, acquired by Enel for $250M, exited with a Merger & Acquisition (M&A) strategy. As the market develops, we can expect more M&A in the coming years. Those who have not yet exited keep going through financing rounds. If a start-up goes through many investment rounds this could mean two things: the start-up is going through new developments and therefore needs more capital or, mostly, it is a sign that the investment hasn’t managed to transform the start-up into a financially sustainable business.
In May 2018, we ran an online survey with aggregators, trying to capture their mood, opinion and strategy for future growth. It turns out aggregators are painting a rosy picture of the future, with projected net profitability in the short-term. Indeed, some even say they reached profitability this year. This confidence reflects well on the entrepreneurs’ nature: “But I wouldn’t be here if I wasn’t an optimist”. However, one could wonder: is this spirit, the same that led aggregators to create new products on a new market in the first place, taking high risks, or are we near a tipping point where at last, efforts and investment are about to pay off?
As canny business developers, aggregators gave a wide consensus regarding factors that would enable profitability. At the company level these include growth strategies, and the need for more partnerships and scale in customers; and at the market level, market openness, market value and certainty.
No one knows for sure what the future holds, but I could imagine that in the race for space, not all aggregators will make it. As the market grows and matures, partnerships and games of Mergers & Acquisitions could lead to less numerous and bigger players. Those wanting the lion’s share should offer proved technologies and clear customer value proposition, for resilient and financially sustainable business models.