M&A activity in the global power and renewables sectors is expected to pick up this year, after the value of deals fell by 10 percent in 2013, according to a new research report from PriceWaterhouseCoopers.
Total worldwide power and renewables 2013 deal value was down 10% year on year, reported PWC. But the Asia Pacific region and the renewables sector bucked the trend. Renewables deal value rose 25% the value of Asia Pacific deals was up 6%.
The search by investors for yield is a major deal driver in the sector. Andrew McCrosson, partner, UK power and utilities, PwC, said: “The thirst of investors for yield continues unabated. We see no let-up in 2014. But it is a crowded market with a shortage of the right kind of power utility assets becoming available with long-term regulated or contracted returns. The focus has been mainly on network assets and renewables but we are seeing signs that a few investors are willing to take on more risk by looking at thermal generation.”
In the year ahead, the report expects a potential return of mega-mergers in the US power sector to be a key factor driving worldwide power and renewables M&A value upward.
Commenting on the PWC report, John Deacon, Partner at Hogan Lovells, notes that “this uptick in M&A activity in the energy sector will be driven by distressed opportunities, consolidation and the need for incumbents to increase market share in existing markets.”
“The biggest challenge facing companies in the renewable energy space is the challenge to green subsidies across the world, which are depicted as unaffordable in the current climate and as having an unfair impact on household bills”, says Deacon. “Most renewable energy projects are not sustainable without some sort of government support, making instability in the subsidies arena a big issue, particularly as some governments have retrospectively acted to change generous subsidy regimes. At the same time there are challenges in markets like the UK where changes to planning guidelines will make onshore wind farm projects in England and Wales very difficult to get off the ground. As a result, we see developments of large-scale offshore wind projects in countries like the UK, Germany, France, the Netherlands and Belgium as the most active part of the renewables market in Europe in the foreseeable future. These benefit from both certainty of supply and government support in that they are seen as representing good job creation opportunities. There will also be more small-scale renewable projects at local level onshore.”
Deacon also says that “internationally, we expect to see significant new markets opening up, such as Turkey where there is a big need for power; Saudi Arabia, where the government has set out plans to generate a significant proportion of its power from solar rather than oil, as the latter can be sold for a better price to international buyers; and Africa, where there is a preference for developing in-country resources in place of importing expensive foreign oil and gas. There are also ongoing plans to develop substantial solar projects in North Africa and transport the power to Western Europe.”
From an M&A perspective, “there is growing activity in the secondary renewables space as developers seek to liquidate assets where they have taken the development risk and are ready to exit. There are a number of new infrastructure funds being set up with a focus on renewables assets, and they are attracted to established UK and European assets by reliable revenues, as are a growing number of insurance companies, hedge funds, venture capitalists and private equity firms. Beyond the mature markets of Europe and the US, however, the focus is on primary development.”