CCE: Fixed price, distributed renewable power: can towercos deliver?

In the opinion of Cambridge Clean Energy (CCE); a specialised powerco optimises value creation by maximising long-term energy efficiency, as opposed to a towerco, who may look no further than the quick wins that yield 15-20% improvements. As such, CCE believes that African towercos will eventually follow a similar path to those in India, who ultimately realised that they could only achieve their target valuation multiples by partnering with powercos. CCE advocate a fixed price Energy Management Solution as a Service (EMSaaS) proposition with guaranteed 99.9% uptime that MNOs find appealing.

TowerXchange: Please introduce CCE – where do you fit in the telecom infrastructure ecosystem?

Cambridge Clean Energy (CCE), is a London based distributed renewable energy company, founded with the vision to take forward the leading Clean Power/Renewable Energy companies in the emerging markets of the world in an effort aimed at displacing over 1.76 billion liters of diesel in the next few years, while providing the most competitive per kWh price to our customers.

Cambridge Clean Energy (CCE), is in the process of finalising a merger between CER and CPS.  CER has partnered with every major operator and towerco in India to provide its Energy Management Solution as a Service (EMSaaS).

In parallel, Clean Power Systems (CPS) has deployed a significant number of clean power solutions in Africa, with expected EMSaaS contracts on the continent in 2015.  We also are also targeting acquisitions in Latin America for 2015/16.

CCE’s proprietary technology, combined with our local services and workforce development program, allows us to provide EMSaaS on a fixed cost, guaranteed availability basis, complying with MNO and towerco SLAs requiring 99.9% uptime.  The fixed price model typically provides a long-term discount as compared to the customers existing opex, and requires zero capex from the customer over the life of the ten year contract.

TowerXchange: How would you contrast the EMSaaS markets in India and Africa?

The merger with CPS is intended to bridge these two key markets.

We view India and Africa as parallel markets, with India approximately three years ahead of Africa in terms of market adoption.  Therefore, we believe the India EMSaaS market is also three years ahead of Africa.  As such, there are parallels in terms of adoption of EMSaaS, and most of the same incremental steps can be taken at the same time just three years trailing. Effectively India is our crystal ball for where Africa is heading, and we are well positioned to introduce EMSaaS to Africa in line with market demand and lessons learned in India.

TowerXchange: How would you characterise the current attitude of African towercos toward energy management services?

We’ve had conversations with the management teams and the private equity firms behind two of Africa’s leading towercos, and their view is that power remains a key part of the towerco’s core expertise, with the idea that investments to reduce energy opex will yield better multiples on exit. This was not surprising to us, as in India the towercos believed the same three years ago, and started with a similar integrated business model. However, despite their efforts, keeping energy management in-house ultimately proved unsuccessful, leading to deep partnerships with firms like CCE. We believe Africa will follow a similar path separating energy management from the towercos in the coming two to three years.

That being said, while the towercos move forward with their objectives, CCE is positioned to support them through supply of power systems and management of those systems on a guaranteed performance basis.  We have worked with the towercos over the past three years and they purchase intelligent, clean power hardware but rarely achieve the desired results in-house.  CCE is well positioned to provide the solutions and include performance guarantees, which is not something that most companies would sign up for.

Towercos fall into three categories; pure real estate businesses that focus on co-location sales; towercos that “pass through” energy costs plus a markup, as one towerco still does in Africa; and the other three large towercos, who provide a blended portfolio based on a fixed price or cost plus energy service model.

Investors in towercos might typically buy Tower Cash Flow at a six to seven times EBITDA multiple, figuring on expanding the multiple by adding new revenues through co-location sales, with energy management improvements yielding a further 20-30% uplift in performance. But towerco management teams often have a more sober expectation of the cash flow expansion that is possible, and CCE feel we can bridge the gap between the reality and private equity investors’ expectations.

We saw a similar evolution three years ago in India, where Indus Towers and Bharti Infratel were created to strengthen the balance sheets of their MNO owners, to release capital to acquire licenses and subscribers, and to build toward an IPO of the new tower businesses.

When towercos take the plunge into energy management and energy logistics, I strongly believe they are taking on too much complexity; it is difficult to have core competencies in creating tower cash flow through long-term contracts AND in achieving the lowest possible unit cost per kWh of energy. Over the next 18-24 months, analysts might start to feel that maximising both the cash flow expansion and the multiple expansion in-house within the towerco is a pipe dream.

TowerXchange: What pushed the Indian market over to EMSaaS rather than the power pass through business model?

In the early days of the tower industry in India, whatever towercos spent on power, they passed it through to the tenant, with an X percent markup. As a result, there was no incentive for towercos to disrupt their low-risk, pass through, cost-plus model and replace it with a fixed pricing model, so we went direct to the MNOs to offer fixed pricing. In turn, the MNOs went to their towercos and demanded fixed pricing, as it was a better deal for them than the power pass through.

In India we reached a tipping point around 2010-11. There was growing pressure on the costs and profitability of MNOs as competition led to declining ARPU, whilst spectrum costs continued to rise. The cost of diesel increased by 19%, while the cost of renewable energy fell from US$1.50 to US$0.75-80 cents.

One of our key MNO customers had kept 10,000 of its towers out of its partner towerco portfolio, and they successfully implemented a good renewable energy solution, reducing diesel consumption significantly.  So they could see there was the opportunity to reduce costs below what they were paying under the power pass through model, which led to pressure on the towercos to offer a fixed price model.

Once the market moved toward a fixed price model, the question became “who has a track record of achieving 99.9% uptime SLAs?” This brought CCE to the forefront.

TowerXchange: What do you feel were the lessons learned in India that are transferrable to the African tower industry?

The main lesson we learned was that towercos are good asset managers, but there is a difference between how towercos and powercos think about energy management.

A towerco may feel that reducing diesel consumption at a typical dual DG site from 2,000L to 1,800L by reducing fuel theft represents a good result, but perhaps they needn’t burn more than 300L of diesel.  The towerco just looks for ANY energy efficiency, but the powerco looks for the MAXIMUM energy efficiency. My feeling is that towercos are putting lipstick on a pig; implementing quick wins to improve energy efficiency by 15-20% within a couple of years, but thereafter they feel the law of diminishing returns on investment apply.

TowerXchange: If the powerco business model is to invest beyond the point where towercos see diminishing returns on investment, how do powercos invest differently in energy management? And how do you raise capital for powercos?

Towercos initially think they are going to get a better return on their investment in power management assets. After one or two years they start to realise investments such as upgrading battery banks won’t deliver the results suggested by the lab specifications, and that their combined investments in power assets aren’t going to enable them to achieve the uplift in valuation multiple they are seeking.

Powercos like CCE design energy assets with a Total Cost of Ownership (TCO) over 10+ years in mind. We can achieve a 99.9% SLA and still come in way below towerco’s energy cost per kWh over that period. While a towerco might invest around US$15,000-20,000 per site to yield those quick wins in energy efficiency, a powerco might spend US$40,000-50,000 per site, investing in grid connections and line conditioning units at sites on or near the grid, upgrading DGs and switching to renewables where possible at off grid sites, investing in batteries, sophisticated controllers and in the rolling costs of O&M.

Where a towerco’s investment of “improvement capex” might reduce rolling energy and maintenance costs from US$22,000 to US$20,000 per year, our deeper, more capitally intensive approach might reduce rolling costs from US$22,000 to US$10,000. So as long as our cost of capital isn’t prohibitive, you can see that we can recover the difference in two to three years.

Proven powercos represent an attractive investment opportunity. Investors like long-term contracts with a good return on capex in static infrastructure.

TowerXchange: In TowerXchange’s experience of talking to the African towercos, one of the reasons they have not bought into the powerco or ESCO proposition is that they won’t accept a long term fixed price energy contract – they know energy efficiency programmes will reduce costs, so they want a stepped rather than a straight line price.

Powercos have to be able to attract and generate returns for investors, and have to be able to recover that initial capital outlay.  So in CCE’s case, we have a five to seven year lock-in provision in our 10-year contract to protect us.

Towercos, powercos and our respective investors share the intent to acquire and add value to telecom infrastructure assets, and then get sold at a premium.

TowerXchange: Further