Energy sector proves resilient in a challenging year

In the energy sector, we are organised as a global infrastructure finance team with ongoing mandates including the disposal of a biogas portfolio in Poland, the acquisition of a wind and solar portfolio in the UK, a wind acquisition in Uruguay and a project bid in the South African capacity auction. Below we point to some of the themes and trends we have been seeing across the renewable energy space over the past 12 months.

The sector has proved resilient through Covid-19

Renewable energy transaction volumes in 2020 compare closely to 2019 overall, adding up to more than $150bn globally (Inframation). In the UK, although the number of closed M&A transactions reduced year-on-year, the market remains active across sub-sectors.

The resilience of the sector can be seen in other trends through 2020. Fundraising has continued, and the successful listing of the Downing Renewables & Infrastructure Trust (DORE) fund is just the latest example of continuing appetite for listed renewable energy vehicles. Yieldcos are trading at share prices not far off pre-Covid levels and at a premium to net asset value (NAV) in line with previous years, quickly recovering from a period of market disruption in March.

New project development, mostly subsidy free, is picking up across markets and this has increasingly been driving M&A activity

Despite the power price trends noted below (and similar reductions in corporate PPA pricing), continuing falls in capital expenditure for new projects combined with lower cost of capital has made new projects economically viable. In many markets, regular auction processes are also providing a framework for this.

Greenfield development is an important driver of M&A activity. Partly this is about a supply of new projects that can be sold once operating. But increasingly investors – including some who historically did not take development risk - are also looking at earlier greenfield opportunities in order to achieve higher returns. Some are also looking for partnerships with developers rather than simple project sales.

The cost of capital in the sector is lower than ever, although project valuations have been hit by power price falls

Despite Covid-19, transactional discount rates at the end of 2020 were at historic lows, especially in the wind and solar sectors.

A number of M&A processes were hit in 2020 by reduced power price forecasts – not just in the short-term (reflecting lower Covid-related demand) but also in the longer-term, reflecting broader structural shifts. This led to deal disruption as buyers and sellers were forced to readjust. Power price forecasting remains a significant valuation issue in deals.

Wind and solar continue to provide the bulk of opportunities but some newer sectors are starting to see a pick up in investment activity

The renewable energy market

This sector remains dominated by onshore and offshore wind and solar. However, we have also seen a pick-up of activity in other sectors during 2020:

• Battery storage. Even in markets like the UK (which have been hampered historically by the lack of long-term fixed revenue streams), we have started to see an increase in both project development and M&A activity. This includes both stand-alone projects and integrated hybrid projects.
• Anaerobic digestion. 2020 saw a significant level of deal activity across markets, as well as new dedicated funds raised.
• Other. 2020 has seen a number of hydro and geothermal deals, plus transactions in sectors linked to renewables such as EV-charging.