Renewable Energy M&A Overview and Outlook

As the global capacity of renewable energy grows hastily in the effort to decarbonize power generation to meet net-zero targets. Acquisitions for renewables have been rising substantially and have become ever more critical to the long-term goals of major players in rebalancing their carbon portfolios, strengthening ESG assets, and greening their operations. With competition for deals increasing, successful M&A has become more difficult to achieve. Strong M&A activity within the sector has helped make renewables a highly contested industry. The number of players active in renewables development and the diversity of the competition has increased significantly in recent years.

Importantly, many competitors have shown that M&A is a core part of their strategy, albeit for different strategic reasons. While many independent renewables developers and utilities have acquired players primarily to increase their scale, add pipelines, and enter new markets. Such as capitalising on opportunities in smart grid technologies and distributed storage. New market entrants such as oil and gas majors, mining houses and financial institutions have also used acquisitions to expand capabilities and enhance their value chain positions, leading to a huge demand for renewable energy platforms and projects. This has seen a gradual transition of renewable energy asset ownership away from integrated utilities towards many different investors willing to take on the risk and rewards of privately owned renewable energy projects.

Oil and gas companies have been refocusing dealmaking activity from building resilience amid COVID-related uncertainty to building a new core of clean energy technologies and initiatives away from traditional hydrocarbon-focused investments. Such as Occidental Petroleum acquiring solar generation assets through its subsidiary Oxy Low Carbon Ventures to directly power an enhanced oil recovery field operation in the Permian Basin, and Suncor Energy investing in carbon capture technology company Svante completing one of the largest single private investments into point source carbon capture technology globally.

Repositioning portfolios for the energy transition also entails the divestments of non-core and high-carbon assets. Divestures are a key part of portfolio strategy to put returns towards core business and future growth. Such as Shell which sold acreage in the Permian Basin to ConocoPhillips in a move to help accelerate the company’s portfolio shift driven by the energy transition, and BP’s divesture of its approximate 20% stake in Russian oil producer Rosneft in response to the conflict in Ukraine and resulting sanctions.

With realizing acceptable risk-adjusted returns becoming more challenging. As investors seek to optimize returns, they will consider new business models, sub-sectors, emerging technologies, and approaches that go beyond traditional norms. More and more companies are carving out new growth assets that take advantage of the energy transition opportunities. There are now many substantial active acquirers among financial institutions, utilities, and independent renewables developers, as well as a considerable number of acquirers that are not part of any of these sectors and a large share of the oil and gas majors.

Above is an illustration of the recent publicly known global and regional M&A Activity within the renewable energy space. Including asset transactions, more than 4,500 M&A transactions have been completed between 2018 and the first half of 2023 in the renewables space globally. Although there has been a downward trend in terms of volume year-on-year, this has been accompanied by a steep increase in deal value per transaction. The upward trend in M&A deal value is occurring in multiple regions. Europe has experienced the bulk of global activity with approximately 43% of transactions involving a European based target. North America is the second-largest market followed by Asia-Pacific then Africa.

Robust demand for renewable energy assets, portfolios and platforms was supported by ESG considerations and aggressive decarbonization objectives. While deal value grew, 2022 was the first year where the industry had not experienced growth in installations. Both solar and wind project deployment falling in 2022 compared to 2021. With only battery storage seeing increases in deployment, project valuation and transactions compared to the prior year as significant pre-construction storage entered the market in Q3 and Q4. This was primarily due to project delays and margin pressure from industry headwinds that included disruptions to supply chains, trade developments, interconnection queue bottlenecks, skyrocketing interest rates, labour shortages, and policy uncertainty. The introduction of the Inflation Reduction Act in the US spurred several sales at the end of 2022. Additionally, renewable investors not only continued to move up the value chain in search of financial returns but also diversified into emerging subsectors, such as Renewable Natural Gas (“RNG”), alternative fuels and standalone storage. Notably, RNG transaction volume more than doubled in 2022

Although there is some uncertainty due to increasing cost of capital, the Russia–Ukraine conflict, and market volatility. The world will continue to add as much renewable energy capacity in the next five years as it did over the last two decades with the International Energy Agency expecting 2,400 GW of renewables to come online through 2027. Africa’s contribution to this increased capacity is expected to accelerate, driven heavily by South Africa through both government and private funded initiatives and projects. For example –

• The US, the UK, France, Germany, and the European Union have committed $8,5 billion to help South Africa finance a quicker transition from coal as the world’s 12th biggest emitter of climate warming gases and heavily reliant on ageing coal-fired power stations for its electricity, providing a model for other countries.

• South Africa renewable energy developer Red Rocket has raised R3 billion ($160 million) in funding for renewable energy expansion and addressing South Africa’s electricity demand challenges.

• South African Banks, Standard Bank and Nedbank, have arranged R5.7 billion ($297 million) and R2 billion ($105 million) worth of sustainable financing deals in the first six months of 2023 respectively. Accounting for a combined 20% of the total value on the continent, eclipsing international institutions like Bank Of America, Bank of China, and Barclays.

The involvement of prominent investors reflects a growing confidence in African renewable energy projects, acting as a catalyst for more M&A activity on the continent.  With this market evolution comes the opportunity for significant M&A activity albeit with a shifting transaction profile. Indications are for deal flow to remain strong as developers look to monetize opportunities and benefits driven by favourable legislation. While incentives have provided unprecedented financial certainty for developers and investors in the long term, it has caused some short-term delays that contributed to the drop in installations. These new incentives required many developers to pause and evaluate their impacts on project economics, including reassessing project pricing and valuations for in-progress transactions. We expect to see an uptick in installations for the remainder of this year as these delayed projects come online and additional guidance is released