Outsourced electric utility service providers are the benefactors of the above secular trends, but what are the implications for the middle market?
A majority of market share within the outsourced utility services space is centered around a handful of public players. However, outside this arena, the space is highly fragmented and many regional, niche, and emerging companies are competing for the remaining market share. Below are our thoughts on how the trends mentioned in this piece will shake out for middle market subsegments within the industry:
Construction: Investment in renewable energy will drive demand for transmission infrastructure to connect the newly sourced power to the grid, however many of these projects will likely be awarded to larger public players. Increased opportunity exists for middle market companies located in regions where renewable energy is produced (such as the West, Midwest, and Northeast). Additionally, innovations in smart and micro grids as well as distribution infrastructure buildout will provide supplementary opportunities for middle market utility construction companies.
Maintenance & repair: Although many construction projects may be awarded to larger industry players, regional electrical contractors can capitalize on repair and maintenance opportunities presented by the nations aging infrastructure. These companies are more likely to be insulated from economic uncertainty due to a high degree of recurring revenue.
Engineering & consulting: Opportunity exists for engineering and consulting companies throughout the supply chain. Upstream, as more renewable energy capacity is coming online, utilities are enlisting engineering firms as connection to the grid remains a top priority. Downstream, as many regions transition to “smart cities”, consulting companies will be an essential partner for both utilities and municipalities to ensure seamless technology implementation.
Test & inspection: Most utilities need to be inspected every five years and many utility companies are turning to outsourced test and inspection providers. Most inspections take place on foot leading to longer timelines and increased human error. Companies that adopt higher levels of technology such as the use of drones for aerial inspections of electric utilities or augmented reality for insight into underground utilities will more likely be able to usher their services into the next generation of infrastructure buildout.
Emerging technology: As new infrastructure gets built, the industry will be presented with an inflection point, focus will shift to creating efficiency, capturing data, and digitally connecting the power generator to the end user. As demonstrated in other legacy industries, companies with technologies that focus on data analytics, AI, and machine learning will emerge as the winners in the next wave of innovation in the sector. Furthermore, these companies will drive future sector consolidation as utilities seek to rely less on outsourced services and bring technology in-house.