Key Elements To M&A Within Renewables

An indicator of sectoral strength has often been the quantity and value of M&A activity over an annual period, providing a sense of capital inflows and corporate interest in the markets. To this end, the renewable energy sector has enjoyed year-on-year growth in M&A deals for the past decade, albeit with a minor (and expected) dip in early 2020.

Prior to the global pandemic, there was a slight reticence by energy players to proactively engage with decarbonisation and portfolio diversification

As such, the sector can expect a continued rise in M&A activity as nations embrace the necessary shifts towards cleaner, lower carbon processes. The Climate Council has examined some of the key elements driving M&A across the globe, as well as the barriers limiting sectoral growth.

The push for more progressive policies

There has been no greater catalyst for climate action than the Paris Climate Agreement. It has been central to nations devising and constructing their domestic legislation that informs the regulatory landscape of the energy sector, industrial and commercial actors – but these states each have unique challenges on how to affect change in relation to their national energy security.

While the uptake of renewables has been increasingly positive over the last five years, there remains a strong demand for hydrocarbons to sustain growing electricity demand. States have therefore implemented policy incentives to encourage a more rapid shift to renewables. The success of subsidies and subsequent growth of renewables in Europe (accounting for 54% of global renewable subsdies in 2017), should act as the framework for other regions to accelerate their transitions.

Subsidies have proven a successful route to more widespread uptake of renewables, however the rapid market growth, falling costs of renewable generation at scale and the price of materials has policy makers reassessing the value of subsidies. Tax credits for renewable developers are similarly being reconsidered. However, it is these tax benefits that have been a core driver of renewables uptake.

This represents a double-edged sword as high M&A deal volume signals market strength and a falling need for subsidies, which have assisted the market to grow. Finding the right time to remove subsidies is a crucial decision for power brokers. Regional and national policy shifts have been driving the growth of renewables but the covid growth declines have made financial commitments difficult to up hold.

Consolidation & the Cost of Capital

A key factor to investors when approaching M&A, is the cost of capital to the available returns. The falling costs of commercial and industrial solar are still some way behind utility-scale onshore/offshore wind or solar. As such, for individual renewables projects the risks involved may outweigh the overall returns. however, many of the year’s acquisitions have involved the purchase of entire renewables portfolios that can absorb development and operational costs across the portfolio.

This has made the valuation and due diligence stages of these transactions of central importance, as they will be big determinants to the return on investment. Renewables risks are largely a known quantity in Western markets at this stage, leading to more deals in the early or development phase of projects. Yet to allay some of these concerns, there is a suggestion that sellers could improve their due diligence of project risk (a common cause for deals falling through) or use tools such as; third-party guarantees, credit assurances or seller indemnities.

These risks are further complicated by the location and domestic regulatory barriers, type of generation, the scale of the project (utility/industrial/commercial/residential) and access to both storage and transmission.

Emerging Technologies, Fueling the Change

One avenue that has enjoyed sustained capital inflows, is the market for emerging renewable and clean technologies that can hasten the energy transition. The attention lies in the crossover between technology and energy-focused start-ups, and interest from integrated energy players looking for innovative decarbonisation solutions is behind much of the M&A.

Some of the areas that have attracted the greatest investments are energy storage, biofuels, micro-grids, micro-solar or wind technologies and carbon offset technologies. Those companies finding cost effective solutions to improving efficiencies and sustainability in a manner that can be measured and reported on, will find themselves the belle of the ball.

Financial and investment mandates want to see genuine and effective attempts at emissions mitigation, whether it be through process efficiencies or carbon offsets.

If these solutions can be found, they can be disseminated throughout the global industry that is crying out for solutions to their ESG concerns. Behind much of this M&A activity are integrated energy players, many of the actors derided for their emissions impacts are channeling significant time and energy to solve their emissions – and in turn, solve solutions for the wider industry.

Conclusion

The landscape for M&A is heating up as the Covid restrictions begin to be lowered across some countries, and the energy transition continues to pick up its pace, especially considering the extent of updated ‘Nationally Determined Contributions’ (NDCs) after the upcoming COP26 summit.

A vibrant M&A sector reflects a broad interest in developing renewables projects, creating more efficient and sustainable ecosystems and by investing in emerging technologies that can leapfrog our previous technologies.

How this will manifest over the next few years could prove crucial in the fight against climate catastrophe. From this perspective, it may be necessary to engage across the aisle to traditional energy players and seek their investments and cooperation in order to achieve pervasive successes.