Tariq Siddiqui
In this article, we will look at the emerging trends in mergers & acquisition (M&A) in the renewable sector of energy and what it means for the fossil fuel industry. We will especially look at:
1. The drivers for increase in M&A in renewables
2. Renewable trends in Europe, America and China
3. The type of investors in renewables and their strategy
4. The elements of successful M&A in renewable sector?
5. The key risks and challenges in the sector?
6. The impact of M&A on the fossil fuel industry?
1. The drivers for increasing interest in M&A in renewables
The Paris agreement on climate change stipulates maintaining a global temperatures 2.0 oC below pre-industrial level. The change in fuel mix from consumers has resulted I traditional energy firms seeing their profits slump. Transition to a low carbon energy framework has proven to be a catalyst for deal-making. Some of the drivers are
The drive by governments worldwide to promote renewables is attracting investors
Deal makers, shifted their focus to renewable assets driven by long-term de-carbonization goals in 2020, rather than short-term reactionary plans
The growing confidence in renewables is evident in higher valuations for renewables
Companies are looking for M&A in renewables to reduce their carbon footprint
Government incentives and escalating environmental issues are key enablers
Companies are also looking for other drivers like; start-up companies with emerging technologies in renewables, regional consolidation of energy services, and renewable energy service providers
The adoption of legislation by some states requiring electric utilities serve their retail customers with only renewable or other non-carbon emitting generation resources has spurred demand for new renewable energy projects in various regions of the US.
The increasing cost effectiveness of energy storage technologies has created heightened demand for projects involving the combination of solar generation and energy storage, and that demand will rise.
Offshore wind projects, distributed renewable energy generation and micro-grids are garnering interest from a variety of investors, including investors from Asia and elsewhere outside the US.
2. Renewable trends in Europe, America and China
The transition and transformation to cleaner energy trends are shaping up the deal-making
Companies are selling their legacy assets and cycling the capital into renewables
US is seeing one the largest (cross border) international investments in renewables
Convergence with oil and gas companies that are investing more in renewables.
The EU, has set aside 30% of its €750 billion COVID-19 recovery package for investment in a green economy.
European Commission’s plan to make Europe carbon neutral by 2050. As part of the deal, the EC has set a target for renewables to generate 32% of the bloc’s total energy production by 2030.
The German Government announced plans to shut all of its 84 coal-powered plants by 2038 and replace them with renewable energy plants.
France, for example, said last year that it will increase its renewable energy capacity by almost 50% by 2023 and more than double it by 2028,
In the US, despite the high-profile commitment of the outgoing Trump administration to traditional power, many states are pushing ahead with ambitious commitments to renewables
US, more than 300 of the country’s largest companies, from Google and Facebook to Walmart and Disney, have launched the Renewable Energy Buyers Alliance, which aims to bring more than 60 gigawatts of new renewables online in by 2025, almost equivalent to the total solar capacity currently installed in the US.
Electricity generation from renewable energy sources in the US has steadily increased over recent years—from 17% in 2019 to 20% in 2020, and is set to reach 22% in 2021.
3. The type of investors in renewable and their strategy
Variety of investors are interested in renewables, from tactical investors to strategic investors. According to Earnest & Young (EY)1, there are four types of investors:
I. Strategic investors,
II. Financial sponsors,
III. Corporations and
IV. Governments.
Strategic investors: This comprises mostly of utility companies spending in renewables-capacity and behind-the-meter solutions.
Financial sponsors: Private equity and pension funds (Ex: KKR) to make a US$900m equity investment in NextEra Energy Partners to facilitate the acquisition of a 611 MW renewables portfolio.
Governments: In Europe, Greece and France announced new energy plans promoting renewables growth, while in the US, local government continues to drive renewables progress with New Mexico joining California, Hawaii, Washington, DC and Puerto Rico with 100% carbon-free goals. In Asia-Pacific, India has set a target of 100 GW of solar power by 2022.
Corporations: In the US, over 200 companies, including Google and Facebook, launched the Renewable Energy Buyers Alliance with the goal to bring 60 GW of new renewables online in the US by 2025.
INVESTOR SRATEGY IN RENEWABLES
Renewable energy M&A transactions are increasingly involving the acquisition of portfolios of projects rather than individual projects,
The acquisition of ongoing renewable businesses, so that the buyer can obtain the benefit of the development and operating personnel of the target.
Acquiring renewable business that are in development, i.e. already permitted, approved and in construction to avoid uncertainty and risk of approval.
4. The key risks and challenges in renewables M&A?
Despite seeing a meteoric rise, there remains a serious challenge though not surmountable;
Governments increasingly feel able to reduce the subsidies they have given the sector.
Changes in consumer demand, can affect the nature and volume of M&A transactions in the renewable energy industry over the coming years.
Potential increases in tariffs on imported solar or wind project equipment may curb renewable project development and therefore opportunities for renewable energy M&A transactions.
Considerations that are entirely unrelated to the industry can undermine the momentum behind renewable energy M&A transactions; Corona virus impacting supply chain
The intermittency of renewable energy makes it more challenging for energy suppliers to match supply and demand, requiring significant investment in new technologies in areas such as battery storage, flexible generation and transmission.
Can the power sector advance quickly enough with grid balancing initiatives to accommodate, shift toward renewables over the next few years?
5.The elements of successful M&A in renewable sector?
Laws and regulations at state and local levels, especially in US can vary significantly from one jurisdiction to the next, and each project or transaction requires its own independent analysis based on its unique facts
How an investor’s cost of capital compares to returns in a particular market segment?
It is critical that sellers prepare for the transaction (due diligence) before going to market.
The involvement of experienced professionals (Legal, technical, commercial etc.)
Consider; the eligibility for federal tax credits and ‘start of construction’ issues.
6. The impact of M&A on fossil fuel industry?
The growth in clean energy has created investment challenges for the legacy fossil fuel industry, globally. The portfolios of supermajor oil companies are at great threat. They are taking venture capital approach to diversify their renewable vulnerability, a tactical interest rather than strategic investment.
The growth of renewables has impacted oil and gas valuations that continue to decline
The oil & gas companies are using three strategies using M&A and becoming
Pure Resource Specialist: Divesting non-core assets and consolidating in core areas
Integrated Energy players: Major oil companies acquiring key renewable assets
Low-Carbon Pure Players: Divesting completely all oil & gas assets (EX: Orsted)
Super-majors (Shell, BP, Total) are looking at several renewable technologies that could be; commercially scalable, have the most opportunity for cost reductions, and will see the fastest adoption by clients.
Since regulatory coverage matters in a successful deal for renewables, a diversified strategy should make it easier for these companies to expand quickly in regions that receive favorable regulatory treatment
ExxonMobil, and Chevron’s are behind their European competitors, their alternative energy portfolio includes investments in CCS, geothermal, biofuels, and renewable diesel.
The Norwegian Government has proposed the phase out oil and gas exploration and production companies from its US$1.0 trillion sovereign wealth fund.