Oracle's $532 million acquisition of Opower has created the largest cloud services company in the utility sector, and at a time when scale is of growing importance. Consolidation among investor-owned utilities has shrunk the number of potential customers and ratcheted up the size of deals, as regulatory barriers in a number of states slow the spread of demand management solutions.

Officials at the companies say the merger's primary goal was to create an end-to-end solution for energy management, joining Oracle's operational systems with Opower's customer solutions. And in the process, created a larger enterprise capable of handling bigger customers.

"Trying to find a significant acquisition in the utility space, in the cloud, was key for us," said Rodger Smith, Oracle Senior Vice President and General Manager of Oracle Utilities.

The combined entity now boasts almost 1,000 engineers, according to Opower CEO and Founder Dan Yates, and has a clearer path to achieving growth and product goals.

"From our perspective, it was an equally compelling marriage, and one that was easy for our board and investors to get behind," said Yates.

From the beginning, the executives said there were obvious parallels between the companies. 

"It was clear to us and our investors, earlier this year and over the last couple of years as we’ve evolved, that merging with Oracle was a faster way to reach our product vision and was going to be right for our customers and shareholders," said Yates.

Oracle agreed to pay $10.30 per share in cash for Opower, representing about a 30% premium on Opower's stock. But the company had its initial public offering in April 2014, debuting at $25, and never getting much higher before high marketing and research and development costs dragged down earnings.

The actual merger has been a smooth process, both executives said, with few positions eliminated — though Opower laid off 7.5% of its workforce after announcing a quarterly earnings loss — and a number of senior Opower officials in positions of responsibility.

"The product sets are complimentary," said Yates. "We haven't had to do any hard work of shutting things down people are attached to, where you pick one person’s baby over another. It's pretty unusual."

Bigger deals, fewer customers

Mergers and acquisitions in the utility space have been strong this year, fueled by several factors including cheap natural gas. But with stagnant load growth, utilities are also seeking higher revenues and ways to cut costs, and have been turning to consolidation. 

Southern Co. and AGL Resources merged earlier this year, combining 11 regulated electric and natural gas distribution companies providing service to approximately 9 million customers. Duke Energy's $4.9 billion bid for Piedmont Natural Gas would add a million customers, and Duke already serves 7.4 million. Exelon became the largest utility in the nation earlier this year when it completed a merger with Pepco Holdings. 

"This industry in North American is going through a huge amount of consolidation," said Smith. "Frankly, there are just fewer customers. ... there just aren’t going to be as many customers globally in the utility space as there used to be. That’s why we’re seeing so much vertical integration. There's a real consolidation of customers. It’s making us look at the industry differently. You have to have something really intriguing to make them want to buy, and when they do buy the deals are larger as a result."

The efficiencies and economies of scale gained by Opower joining Oracle are not so much on the customer acquisition or marketing side. Energy management customers are looking for a one-stop shop capable of handling everything from environmental rule changes to customer engagement. "It's the financial horsepower to do portfolio deals," said Smith. 

"Utilities are seeing that the long-term, financially-solvent play for the centralized distribution business and large scale generation business has to include some of these advanced technologies," Yates said. "Or it’s not going to be cost-competitive."

Regulators behind the 8-ball

As energy management companies develop new solutions, from customer apps to billing systems and demand response programs, utilities are entering a period of rapid change. They see what customers want, and are either developing their own systems or are contracting for them.

"From a utility perspective, they’re getting a lot of pressure from their customers to do things differently," said Smith. "They can’t really build it themselves fast enough. They’d love to. A lot of utilities would still would like to do this on their own, but the speed of the industry means they really can’t."

But how software systems are paid for is a key - and current rules in most states do not allow cloud-based software to be capitalized.

Navigant Associate Director Aida Hakirevic said the shift, from utilities building to buying their IT solutions, has been growing. "It's a trend that has become noticeable over the last few years," she said. But if utilities cannot earn a return on that investment, it acts as a disincentive.

"The inability to capitalize tends to drive them away from adoption," Hakirevic said. 

New York, as part of its Reforming the Energy Vision proceeding, has made changes to allow utilities to earn a return on investments in software services. But reforms like that are still rare nationwide, and there and in California are already reforming their utility business models, Smith said he would not anticipate all others to follow suit right away.

"I think everyone is watching New York and California carefully to see what they can glean, but the regulators in general have to catch up," Smith said. "The regulators in this country are behind the eight ball, in terms of not moving as fast as utilities want to move. The regulations are getting further and further behind, in terms of keeping up with what utilities can do with technology and how they are allowed to recoup that investment."