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Case Studies, PPA Transaction, Risk Management

Encavis – the transformation to a next generation IPP

The client

Encavis AG is a pan-European Independent Power Producer (IPP) and asset manager. Based in Hamburg, the SDAX-listed solar and wind operator’s own portfolio currently comprises more than 210 renewable energy plants with a total capacity of 1.97 GW.

Most of Encavis’ portfolio generates stable yields through Feed-in-Tariffs (FiTs) and Power Purchase Agreements (PPA). But this will change moving forward. As the subsidy route is increasingly unavailable and often offers fewer opportunities, Encavis has been targeting the post-subsidy business model for its future growth. This strategic decision required a series of changes and adaptations.

The opportunity

Encavis had a goal: to develop a competitive edge in the changing renewables market. For an IPP to enter the next growth phase in the new era, scalability is key. And Encavis knew that.

As a guiding principle, the company set a target to grow its operational portfolio to at least 3.4 GW by 2025. Shifting from an opportunistic single-assets acquisition model, the company took matters into its own hands regarding developing its portfolio. Following the sentiment that soon the M&A market would become a seller’s one, Encavis embarked on a plethora of strategic development partnerships as the basis of the growth journey. Starting with Solarcentury in 2017, Encavis currently counts more than 12 similar partnerships across Europe.

The key idea behind the strategy is optimising portfolio effects to increase margins. “Economies of scale and economies of scope are much more important than in the past,” says Dierk Paskert, CEO at Encavis. “In the past, we were focusing on margins for every single asset, but in the future, we believe that we will achieve a significant outperformance through active management of our portfolio as a whole,” he adds.

The challenge

The renewables industry has a unique oxymoron: over the past 20 years, it has generated a massive turnover by selling energy without ever needing a sales department. Of course, that’s because state subsidies were doing the trick. But not anymore. For energy players, this change requires an entire mindset shift.

“We knew that our internal structures and procedures had to change in order to cope with the new challenges in the market,” says Dierk Paskert. “We started strategising more than 18 months before implementation,” he adds.

The new shift required a complete re-engineering of the firm’s operating model, and the transition had some challenges to overcome. In the past, revenue estimations, production monitoring and marketing of the power were not of concern. But now, these moving parts need to be handled with new capabilities.

Shareholder engagement

Communicating a new business model to existing shareholders is always very delicate.

“When we started the transformation journey, we could still acquire projects with FiTs, and PPAs were only a fairly small part of the market. Convincing the entire board that this change is now necessary was a first hurdle to overcome,” Paskert says.

The firm’s business model performed a 180o turn. Initially, Encavis’ model was a purely financially-driven one focussed on energy yield, where energy was merely a product but there was no managing of its value. Now, it is completely geared towards energy sales management.

“We aimed to educate our shareholders and inform them of the new risks and how we handle them. With Pexapark’s help, we did this successfully. Overall, we are running our business with the same shareholder base we had 2-3 years ago, and we are proud of this achievement,” he continues.

New departments and internal re-organisation

When a firm targets a new operating model, it needs to change internal structures and set new procedures. Encavis needed to redefine how new and old departments interact.

The new departments that were clearly established after the re-organisation are:

PPA Origination – A dedicated team to handle energy sales through bi-lateral PPA contracts.

Energy Portfolio Management – The team managing the merchant exposure of the power plants. Not all the expected output is contracted through long-term contracts such as PPAs. This remaining part of each power plant needs to be actively managed in the market, because it could provide a significant upside.

Energy Risk Management – When operating in merchant markets, there are certain risks associated that were not present before. Encavis needed to identify and analyse how volatility in the electricity markets, regulatory changes or any contractual element beyond its control can affect the overall strategy and expected revenues at any time. In short, what the risk exposure is at any time.

How we helped

Encavis successfully completed a 2-year long organisational transformation. Pexapark not only provided the enterprise software solutions as necessary tools for this change, but also offered hand-in-hand advisory services along every step of the way.

“Pexapark was our navigator and guide in that journey,” Paskert says. “The company brought competence to the table that we were still missing by navigating us through different tasks, challenged us, and gave us a good view of what lies ahead of us.”

The scope of services provided to Encavis included:

The Energy Risk Management desk was build-up from scratch, and was the most strategically important to implement. Because it involved moving Encavis’ entire portfolio to PexaOS – our enterprise software solution which provides real-time insights on changing risk exposure, combining pricing intelligence and physical operational data in a single view.

“In order to ensure that our revenue targets will be achieved, we have to monitor our risk exposure at any time, set our limits and make sure these are adhered to in the organisation,” Paskert says. “And when those limits are about to be reached, we now have someone raising red flags to have adequate time to act accordingly,” he adds.

The future

Now that the new target operating model has been implemented at its fundamentals, the aim is to increase efficiency and scale up. Pexapark is still supporting Encavis on day-to-day adventures that come after the implementation phase, providing continued support.

“Pexapark is a very valued partner for us in running our new operation model,” Paskert says. “I haven’t come across a day where we didn’t have any learnings,” he adds.

We are looking forward to seeing Encavis reach its milestones, and we will continue to support the firm’s bold targets through the unique Pexapark way. Such transformations constitute only the beginning, and we will be there to tackle new challenges over the journey.

If you’re looking for the next phase of growth, reach out for a coffee chat to our sales team to discuss your needs.

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