Valuations are up as utilities and other larger players strive to keep up with new entrants and the pace of technological change. Corporate and financial buyers alike are searching for new opportunities while keeping a close eye on the potential risks.
Much of the M&A activity in renewables is being driven by traditional energy businesses scrambling to acquire new capabilities and institutional investors looking for stable and predictable returns. In addition, we see diversification of the landscape with new players like oil and gas companies coming into the game.
Utilities are also racing to keep pace with public demands to tackle climate change.
Another deal driver is renewable energy integration. Australia, for example, is facing some of the most complex integration of renewables in the world, with coal down 20 percent since 2008 and wind power up 325 percent in the same time period1 according to the Australian Energy Market Operator (AEMO). There is also the “potential for an annual energy shortfall in the domestic gas market” in eastern and southeastern Australia.2 Solar and wind power, while on the rise, are dealing with a fragile and stretched energy grid in many areas.
While integrating such a complex energy mix can cause headaches for end users and government policy-makers, it gives investors opportunities.
Valuation is a factor in investment decisions, with investors anticipating major shifts in value for some renewables sub-sectors. Among the deal-specific factors influencing the valuation of individual renewable assets are asset quality, cost of finance, regulatory stability, the state of the wholesale energy market, evolution of the competitive environment, the lifecycle stage of the asset relative to the prevailing subsidy regime, and curtailment risks that lie beyond the control of the asset owner.
All of these factors vary markedly between geographies and across sub-sectors. Eighty-two percent of respondents expect valuations to rise over the next 24 months for offshore renewables, closely followed by photovoltaic solar (81 percent). Majorities also expect increases in the hydropower (68 percent) and thermal solar (51 percent) sub-sectors.
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Looking to the bigger picture, two macro factors are likely to account for these anticipated increases. One is the decline of fixed income from traditional sources, e.g. bond markets, which has driven an increasing number of financial investors into the renewable arena in search of returns, and intensified competition for assets. Another factor is the commodification and relative maturity of renewable technologies -- particularly offshore wind -- which now makes renewables a far more appealing bet for traditionally cautious investors.
Investors looking for their next big opportunity in this relatively nascent industry face multiple obstacles, from planning permits and licenses to uncertainty around incentives, feed-in tariffs (FITs) and regulations, as well as the ongoing disruption and pace of technological change, and the perennial challenges involved in financing such projects.
Main investment blockers:
“Events like Brexit, the US walking out of the Paris Agreement and Spain opting for a sun tax show how governments can really turn a profitable opportunity into a loss for an investor. Regulations, laws and policies mean a lot to investors and are considered extreme obstacles.” - Managing director of an Australian bank