Last week I joined 800 participants for the Bloomberg New Energy Finance Summit in New York where the theme was: THE NEW ENERGY ROI: RESILIENCE // OPTIONALITY // INTELLIGENCE. The BNEF blog provides an excellent summary of the theme: Link.

Though the conference was set-up along three themes (Resilience, Intelligence and Optionality), it was the discussion around optionality that lingered with me. Barclays’ Jeremy Wilson’s made a compelling argument that traditional Discounted Cash Flow overlooks flexibility and as such, energy companies are not being valued correctly because there is no optionality involved for those with flexibility. The silver lining is that, while investors may not yet be correctly valuing companies, rating agencies are. Evidence of this is the large majority of utilities that have recently seen their credit ratings drop, which according to Wilson, is due to the lack of diversification of energy sources because optionality is most important from a portfolio level.

The premise for this is simple:

The takeaway? In valuing energy companies, there should be a premium for optionality.

The fact that this is a topic of discussion amongst thought leaders is certainly a step in the right direction, but Wilson finished his talk by saying the next step would be to get the group together again at next year’s BNEF conference! Not exactly a fast-moving train.

My real “a-ha” moment came in thinking about how optionality translates to the micro-level specific to the way individual companies do business in the solar sector.  Having optionality isn’t necessarily related to having a diversified fuel source, but more in the way that the company runs its operations. Given the immature nature of the solar industry, the status quo method for scaling is to simply hire more people. However, given the unpredictable nature of the market, forecasting is a challenge which in turn makes resource allocation a challenge. As such, conservative hiring often leaves companies with an inability to take advantage of “stretch” opportunities if the market turns out to be more promising than expected.

Valuing these opportunities is a challenge and as such, very few companies seem to do it. That said, a progressive entity focused on growth most certainly should make it a focus. At SCS, the Mercatus platform we have developed is focused on allowing entities to scale without adding headcount, and in turn, providing them with the flexibility (or optionality) to react to the market and take advantage of opportunities they normally wouldn’t be able to address. Translating the value of this is challenging, though, and requires a sea change in the way that company leaders plan for growth.  Managers are often risk averse and a change from the status quo is something many of them are not willing to make unless they have certain job security or are incentivized appropriately. As such, it is up to the company execs to be the progressive leaders needed to change the way their companies plan and begin to look at best practices that have worked in other industries. By starting at the company level and building optionality into operations, perhaps the value of flexibility will naturally start to impact the holistic valuation and we won’t have to wait for a “brain-trust” to lead the way.