Going into 2017, there was a level of uncertainty in the renewables sector. Despite this uncertainty, the year ended with some of the strongest wind and solar mergers and acquisitions (M&A) activity to date, primarily driven by solid fundamentals and strong momentum. Will this trend continue through 2018 and 2019? Will demand from strategic buyers and financial investors remain strong, and could we see an emergence of new players?
While the renewables sector is always unpredictable, we offer our expectations for 2018 and beyond based on recent marketplace trends highlighted below.
Over the past several years, there has been an increase in the number of new entrants into the U.S. renewables market. Infrastructure funds and independent power producers from Canada have shifted focus south, while international strategic and institutional capital have also begun to concentrate on U.S. renewables. This coincided with the emergence of more U.S.-based infrastructure and impact investors that raised funds with the mandate to deploy capital into renewables.
Along with these trends, several international energy companies, such as Engie and Ørsted (formerly DONG Energy), made public announcements about their strategic decisions to shift away from coal and other brown power generation toward green power initiatives.
Corporate involvement in renewable energy increased, as well, with 125 companies joining RE100, pledging to be 100% renewable. These commitments have spanned from procuring renewable energy via power purchase agreements to tax equity investments and asset ownership. IKEA, for example, owns 777.9 MW of operating wind capacity, according to the company’s 2016 sustainability report.
Supply Versus Demand Imbalance
While increased participation in the marketplace has been overwhelmingly positive for the growth of renewables, it has also highlighted the need for a greater supply of attractive projects to fill the growing demand.
This imbalance resulted in highly competitive auction processes and evolving perspectives on project life and merchant pricing in order to maintain competitiveness. As the market for mature development assets and operating projects became more competitive, a substantial portion of the market began to focus on earlier-stage opportunities to find volume and stronger margins.
Over the last several years, we have seen margins for NTP (financed but pre-construction) assets compress to where many investors in the market are not differentiating pricing between pre-construction and constructed assets.
Opportunities for Quality Project Teams
With the expanding universe of renewable project owners and increasing competition to acquire projects, market participants quickly realized that, while quality projects were a valuable and scarce resource in the market, quality teams that could develop these projects and get them to the point where they are ready for financing and construction were even scarcer. Renewable project development takes years. The number of quality teams with a proven track record of performance – and that weren’t already affiliated with an institutional parent company – was limited.
At the same time, developers saw 2017 as the optimal time to sell and maximize value, allowing for build-out of their pipelines prior to the production tax credit (PTC) step-down. Given this, we saw a boom in platform company trades in 2017. Market participants moved quickly to secure both development teams and project pipelines as a means toward their goals of long-term renewable project ownership and value creation.
Deals Dynamics and Lessons Learned
In 2017, we saw several landmark renewable deals, such as sPower’s sale to AES and AimCo, Innogy’s acquisition of Everpower, and Innergex’s acquisition of Alterra. In addition to these deals, there were several other companies and large portfolios rumored to be for sale in the market, with many of these transactions still in various stages of completion.
In examining these transactions, we have identified various trends that emerged and that should be considered for M&A success in the year ahead:
1. Developers that demonstrate recent successes, impressive track records and diversified business lines, will fare better.
2. Geographically diversified development portfolios are attractive, with an emphasis not just on projects located in key growth markets such as PJM or MISO, but also proven expertise in these markets with well-thought off-take and transmission strategies.
3. Strong management teams are critical. Acquirers will seek to align incentives with these management teams, as the acquirer will largely be investing in the team and their experience.
4. A track record of secured off-take – including utility, commercial and industrial, hedges, and insurance products – is key, as power marketing and contracting power has quickly become the most challenging step in renewable energy development.
5. Owned portfolios of operating assets are not always a focus for some acquirers. We’ve seen financial buyers or proven U.S. strategics take a very different view on this point versus major international strategic investors.
As we set our expectations for the renewables M&A market for 2018 and beyond, we anticipate the encouraging trends experienced in 2017 to continue. The year 2018 should show a dip in new project construction because many developers shifted timelines for solar projects to alleviate concerns around the Section 201 trade case. In addition, a handful of renewable projects were delayed as tax equity investors evaluated the effects of tax reform. However, the dip in new project construction should not impact the level of M&A activity.
We expect the number of investors entering the renewable energy space to continue to increase. We also anticipate new entrants into the tax equity market to mitigate financing constraints for new projects, and corporate energy procurement from renewables should boost the number of off-take agreements available to the market. We also envision corporates having an increasing role in direct investments and project acquisitions with the potential to even move toward platform acquisitions. Technology companies are leading the charge of ensuring America shifts to clean energy and are doing so in a diversified approach, but we believe it will expand far beyond the technology sector in relatively short order.
Finally, as many coal and nuclear plants are expected to be retired and large fleets of natural gas-fired power plants are no longer economically viable, energy companies will be focused on renewable energy to fill their customers’ energy demand.
As we look to 2018 and 2019, all signs point toward strong levels of M&A activity. Major transactions have already been announced this year, including GIP’s acquisition of NRG’s renewable portfolio and development platform, Shell’s investment in Silicon Ranch Corp., and Engie’s acquisition of Infinity Renewables. And more rumored transactions are expected to be announced in the second and third quarters of this year.
Based on the trends discussed above – and considering the overwhelmingly positive momentum clearly in the market today – it’s no surprise that we expect to see market participants continue to leverage M&A activity as the ideal tool to meet their growing demand for renewable energy investments.
Frank Palladino is director of investment bank CohnReznick Capital, located in New York, Baltimore and San Francisco. Since joining CohnReznick Capital in 2014, Palladino has assisted clients in acquiring and financing over 2 GW of power, including leading J.P. Morgan Asset Management’s $650 million strategic partnership with SunEdison in 2015. He can be reached at frank.palladino@