Renewable M&A led the way in the global power and utilities (P&U) market in Q1 2019, making up 61 per cent of total deal value and increasing by $3.7 billion from Q4 2018, said professional services firm Ernst & Young (EY) in a new report.
This was in spite of overall M&A headwinds as global deal value declined 33 per cent from Q4 2018 to $20.6 billion in Q1 2019, according to the EY report Power Transactions and Trends: Q1 2019 (PTT).
While total deal value declined, P&U executives still feel positive about the deal making environment as reflected in the 20th EY Power & Utilities Global Capital Confidence Barometer (CCB), which finds a growing confidence in the P&U economy.
This has resulted in a record high number of companies (63 per cent, highest ever since the start of CCB in 2010) saying they will seek M&A in the next 12 months. P&U executives are confident of economic growth, with 94 per cent of CCB respondents expecting global economic growth to improve and 92 per cent anticipating growth within the utilities sector, a remarkable improvement from this time last year where results were 76 per cent and 61 per cent, respectively.
Almost all respondents (97 per cent) say they plan to make significant investments in technology this year. Eighty-four percent of respondents indicated technological innovation would have a very influential impact on their companies’ deal strategy.
Miles Huq, EY Global Transaction Advisory Services Power & Utilities leader said: “The outlook for renewable energy transactions looks very positive, because we expect the clean energy market to continue to expand and attract investment from a variety of stakeholders, including strategic investors, financial sponsors, corporations and governments. In addition, convergence with other sectors, particularly oil and gas, should generate new capital flows into the sector.
“The 20th CCB survey reveals greater confidence and a healthy appetite for transactions in the sector driven by improving macro-economic parameters, increasing use of technology and increasing competition.”
While the outlook for renewable energy is bright, governments continue to put pressure on traditional fossil fuel investment. In Europe, Greece and France announced new energy plans promoting renewable growth, Germany announced plans to close all of its 84 coal-powered plants by 2038 and the Norwegian Government has proposed phasing out oil and gas exploration and production companies from its $1t sovereign wealth fund. In the US, local government continues to drive renewable progress with New Mexico joining California, Hawaii, Washington D.C. and Puerto Rico with 100 per cent carbon-free goals.
Corporations are also setting their own renewable targets, with more than 150 companies pledging to use 100 per cent renewable energy by 2050 through the global leadership initiative RE100. Indeed, corporations are now entering into power purchase agreements (PPAs) directly with renewable developers, bypassing local utilities. In March, more than 200 companies launched the Renewable Energy Buyers Alliance with the goal to bring 65 gigawatts of new renewable energy online by 2025.
Huq said: “There is continued pressure on generation assets in the Americas, with a number of coal and nuclear generators in financial distress. These developments play out against a backdrop of certain utilities changing their thinking, to ensure they are not getting left behind, and focusing on renewable and emerging technology investment”
“Utilities do need to ensure new investments align with corporate strategy as we have seen a number of divestments to restructure portfolios due to corporate distress or shareholder activism,” he added.
Activity in the Asia-Pacific lead by China
Total deal value in the region cooled to $4.1 billion, a 45 per cent decline from Q4 2018. The renewables segment was the only segment to increase in deal value from Q4 2018, more than doubling to reach $3.6 billion and forming 88 per cent of deal value. The report reveals that much of the increase was due to the privatization of CP Clean Energy by China Power New Energy’s (80 per cent of all renewables deal value).
Huq said: “China remains the growth story in Asia-Pacific, with both domestic and outbound deals and a large focus on greenfield investment. Asia-Pacific is feeling the pressure of the slowing Chinese economic growth. This, coupled with continuing geopolitical tensions, weighed heavily on investors this quarter. Indeed, 92 per cent of global respondents to the 20th Global Capital Confidence Barometer expect the changing geopolitical landscape to influence their deal strategy.”