Q&A: M&A in the renewable energy sector
April 2020 | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE
Financier Worldwide Magazine
April 2020 Issue
FW moderates a discussion on M&A in the renewable energy sector between Elisabeth Yandell McNeil at K&L Gates LLP and Marius Griskonis at White & Case LLP.
FW: How would you characterise recent M&A activity levels in the renewable energy sector? What factors are driving deals in this space?
McNeil: Although some industry observers projected that M&A activity in the renewable energy sector would taper off in 2020, the market has remained strong so far. Tax benefits are still important drivers in the purchase and sale of renewable energy project portfolios, but prospective purchasers are increasingly finding value in other attributes of the renewable energy industry. Areas such as the acquisition of start-up companies developing emerging technologies for use in, or in connection with, renewable energy projects, acquisitions involving regional consolidation of energy services, and acquisitions of renewable energy services providers are increasingly attractive. As new technologies become more cost effective and consumers continue to expect and demand more in the way of sustainability initiatives, strategic and financial buyers alike are still finding renewable energy projects and services to be attractive investments.
Griskonis: While the number and value of deals in the energy and utility industry fell globally last year, the renewables sector accounts for a growing share of this activity. The drive by governments worldwide to promote renewables growth is attracting investors. In the US, despite the high-profile commitment of the Trump administration to traditional power, many states are pushing ahead with ambitious commitments to renewables. For instance, New York committed to generate 70 percent of its power from renewable energy by 2030, and zero-emission generation fleet by 2040. France said last year that it will increase its renewable energy capacity by almost 50 percent by 2023 and more than double it by 2028, with wind and solar particular focuses.
FW: How are valuations, multiples and other dynamics influencing the size and complexity of renewables M&A?
Griskonis: Higher returns are available in more complex transactions, such as commercial and industrial, as well as residential solar. Investors with lower cost of capital will be more successful in a very competitive marketplace, including contracted utility scale wind and solar. Alternatively, investors should be prepared to accept more risk, such as early stage development, merchant or partially merchant projects.
McNeil: Although valuations remain a core focus of investors in renewable energy M&A transactions, a variety of other considerations also play an important part in investment decisions. The promise of significant emerging technologies such as energy storage, the impact of policy and regulatory incentives, and growing corporate and public support for investment in renewables and sustainability generally, for example, contribute importantly to investor enthusiasm for renewable M&A deals.
“While the broader M&A market faces headwinds, including the slowing global economy, there is every reason to be optimistic about dealmaking activity in the renewables sector.”
FW: Could you highlight any recent, high-profile M&A deals in this sector which exemplify the vibrancy of the market? What do these deals tell us about the underlying motivations of buyers and sellers?
McNeil: We are seeing a wide range of transactions in the renewable energy M&A marketplace, prompted by a broad spectrum of drivers. Although recent changes in the laws and regulations governing filings with the Committee on Foreign Investment in the United States (CFIUS) have increased the complexity and timelines for some cross-border renewable energy transactions, non-US investors continue to show keen interest in US renewable assets. The number and variety of prospective purchasers has heightened competition for good renewable energy projects, with the result that buyers are increasingly willing to acquire projects during development and construction, and thereby to prioritise the project’s prospects over the risks presented by the development process. Renewable energy M&A transactions are increasingly involving the acquisition of portfolios of projects rather than individual projects, and the acquisition of renewable energy companies as ongoing businesses, so that the buyer can obtain the benefit of the development and operating personnel of the target.
Griskonis: In Europe, French energy giant ENGIE is one example of a major utility seeking to grow its renewables business through M&A. In December, it joined a consortium of investors to pay $2.4bn for six hydroelectric assets owned by Energias de Portugal (EDP). Italy’s ENEL is also making a big push into renewables, developing new capacity and making acquisitions, including last year’s $644m purchase of a 50 percent stake in seven US renewables assets from GE Energy Financial Services. Shell and Total were among the bidders in the sale process last year for Danish power and utility firm Eneco. The asset, which is primarily focused on renewables, was ultimately sold to Mitsubishi for $4.8bn, but the interest from Shell and Total demonstrates the increasing willingness of oil majors to venture into power generation and renewables. Strategic investors are also increasing their activity in the US. American Electric Power’s $894m purchase of the wind generation and battery group Sempra Renewables was just one example of such a deal last year. Elsewhere, the US’s TerraForm Power paid $720m for Canada’s AltaGas power, a specialist in solar power and fuel cells.
FW: What key legal and regulatory considerations do renewable energy companies need to make when undertaking transactions?
Griskonis: In the US, among other things, eligibility for federal tax credits and ‘start of construction’ issues need to be considered. Also, the viability of renewables projects in certain regulatory markets, such as ERCOT in Texas, depends on their location and transmission curtailment risks.
McNeil: Consummating a successful transaction in the renewable energy space requires the involvement of experienced professionals. Laws and regulations at state and local levels can vary significantly from one jurisdiction to the next, and each project or transaction requires its own independent analysis based on its unique facts. A similarly fact-specific review is required in the federal regulatory context. Cross-border transactions introduce even greater regulatory complexity, in part because of the need to consider the CFIUS filing process. In addition, each separate component of any transaction, such as real estate, tax and environmental matters, can present a host of potential risks that should be carefully and pragmatically considered in any decision regarding whether and how to move forward with a deal.
“The increasing cost effectiveness of energy storage technologies has created heightened demand for projects involving the combination of solar generation and energy storage, and that demand will rise.”
FW: How important is it to perform robust due diligence and deploy effective transactional risk management practices?
McNeil: The key to risk management in the context of a renewable energy M&A transaction, as in the context of any transaction, is identifying the potential risks involved, understanding how those risks may affect the transaction and taking appropriate measures to mitigate those risks. A robust due diligence process is an essential ingredient in ensuring that potential risks have been properly identified, carefully considered and appropriately addressed in a transaction. A number of risk mitigation strategies can be deployed in the context of any given transaction, including express allocation of risks in the transaction documents, the use of third-party guarantees or other credit assurances or escrow accounts to provide greater assurances of payment, and the supplementation or replacement of seller indemnities with representations and warranties insurance, the market for which is evolving quickly in renewables M&A transactions as in M&A transactions generally.
Griskonis: The importance of robust due diligence and transactional risk management cannot be overemphasised. Even projects that have been in operation for a number of years sometimes involve certain legal risks that have been overlooked by investors, such as the absence of adequate access easements. More complex transactions, such as commercial and industrial or residential solar, are very different from utility scale onshore or offshore wind and solar.
FW: What essential advice would you offer to renewable energy companies on approaching a deal to capture its full value-creation potential? Fundamentally, what elements are key to M&A success in this sector?
Griskonis: It is critical to know how an investor’s cost of capital compares to available returns in a particular segment of the market.
McNeil: In order to maximise the likelihood of success of a transaction, it is critical that sellers prepare fully for the transaction before going to market. We have seen several promising transactions fall through because the seller did not take adequate time to prepare. In each of these cases, the unfortunate result of the seller’s lack of preparation was that prospective buyers uncovered previously unknown material problems with the target during due diligence. When a seller, in preparing for a transaction, takes the time to assemble a complete and accurate due diligence data room, the seller inevitably saves substantial transaction costs and enables prospective buyers to gain comfort that they have an appropriate understanding of the target and its potential risks, with the result that buyers will be more confident in offering, and holding to, a premium purchase price.
FW: How do you expect M&A in the renewable energy sector to unfold in the months ahead? Are any trends and developments likely to impact transaction levels?
McNeil: Many factors, such as changes in laws and regulations, advances in technology and changes in consumer demand, can affect the nature and volume of M&A transactions in the renewable energy industry over the coming year. The adoption by some states of legislation requiring that electric utilities serve their retail customers with only renewable or other non-carbon emitting generation resources has spurred demand for new renewable energy projects in various regions of the US. The increasing cost effectiveness of energy storage technologies has created heightened demand for projects involving the combination of solar generation and energy storage, and that demand will rise. Offshore wind projects, distributed renewable energy generation and microgrids are garnering interest from a variety of investors, including investors from Asia and elsewhere outside the US. On the other hand, potential increases in tariffs on imported solar or wind project equipment may curb renewable project development and therefore opportunities for renewable energy M&A transactions. Considerations that are entirely unrelated to the industry can undermine the momentum behind renewable energy M&A transactions. It is possible, for example, that the effects of coronavirus on the supply chain for solar panels and other renewable energy project equipment may have a detrimental effect on M&A transactions in the renewable energy industry over the coming months.
Griskonis: Competition for the best renewables assets will remain intense. While the broader M&A market faces headwinds, including the slowing global economy, there is every reason to be optimistic about dealmaking activity in the renewables sector. However, there are some concerns. One issue is that amid the falling cost of renewable power generation, as scale increases and the price of materials falls, governments increasingly feel able to reduce the subsidies they have given the sector. For instance, federal tax credits in the US are being phased out and are set to expire in the next couple years. In one sense, the reduction of subsidies is a sign of the renewables sector’s strength, with policymakers no longer feeling the need to incentivise investment so generously. Still, removing support too rapidly could undermine the viability of some areas of the industry. The intermittency of renewable energy makes it more challenging for energy suppliers to match supply and demand, requiring significant investment in new technologies in areas such as battery storage, flexible generation and transmission. However, the climate emergency will inevitably drive continued support for renewable energy, from policymakers and customers.
Elisabeth Yandell McNeil represents a variety of US and international clients. Her practice focuses on energy and infrastructure transactions, including mergers and acquisitions, joint ventures and investments in wind, solar, biomass and other energy projects and services. She also advises clients in transactions involving clean energy and energy efficiency technologies. She can be contacted on +1 (206) 370 7824 or by email: elisabeth.mcneil@klgates.com.
Marius Griskonis advises domestic and international clients on corporate and financing transactions, with a particular focus on project M&A, development, financing and tax equity. He has represented developers, sponsors, commercial banks, export credit agencies and other multilateral agencies across an array of industries, including renewable energy (offshore and onshore wind and solar), conventional power generation and transmission, alternative fuel, oil and gas, petrochemical, infrastructure and telecommunications. He can be contacted on +1 (212) 819 8575 or by email: mgriskonis@whitecase.com.
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