Renewable energy M&A: competition, consolidation and the inflation reduction act

Aaron Klein, Managing Director, KeyBanc Capital Markets, October 2022

<p>Renewable energy M&amp;A: competition, consolidation and the inflation reduction act</p>

Renewable energy M&A stakeholders discuss how emerging trends have shaped recent deals and how the IRA will influence the future.

Deal volume in renewable energy continues to grow, even though the low interest rates that have fueled this sector’s M&A activity are a thing of the past. M&A deals and private equity buyouts in renewables hit a record high1 in the first half of 2022 — as companies seized the moment to strengthen their ESG bona fides and advance energy transition initiatives. Now, tax and spending provisions outlined in the Inflation Reduction Act (IRA) promise to spur even more interest and activity in the sector.

At the recent REFF Wall Street 2022 conference in NYC, Aaron Klein, managing director at KeyBanc Capital Markets (KBCM), joined a panel of other renewable energy M&A stakeholders to discuss how emerging trends have shaped recent deals and how the IRA will influence the landscape going forward. Klein was joined on the panel by Goran Arya, senior director of business development at Lightsource BP; Josh Lanning, executive director at CIBC; Nate McMurry, chief commercial officer at PowerFlex; and Cindy Tindell, managing director, head of U.S. at Matrix Renewables. The panel was moderated by Izzet Bensusan, founder of Captona.

Here are four key takeaways from the panel:

Oil and gas companies are acquiring their way through energy transition2

Traditional energy and natural resources companies have a voracious appetite for renewable energy deals. These “energy transition” deals accounted for 20% of all energy sector deals over $1 billion in 2021, according to Dealogic3. Notable recent examples include Occidental Petroleum’s purchase of solar generation assets to power drilling operations and BP’s acquisition of Chargemaster, the UK’s largest electric vehicle charging company4.

Goran Arya of Lightsource acknowledged that the spike in involvement of nonrenewable energy companies has introduced more competition for renewables deals, raising both valuations and development fees. But Matrix Renewables’ Cindy Tindell said that it’s not just oil and gas companies driving increased competition. She pointed to the heavy flow of money coming into the sector “from everywhere,” including private equity.


Interest has shifted to platforms with development

Right now, acquirers are searching for investment opportunities with the potential for higher returns, which makes de-risked, established renewable energy projects less attractive5. The panelists commented on this reorientation of acquirers’ interest toward developer platforms and away from operating assets.

“When you think of asset versus platform, with an asset, you can only pull a lever so far and stretch the box so much,” said Aaron Klein of KeyBanc Capital Markets (KBCM). “But if you bring a platform into the equation, there are a lot of things you can do to extract value that weren’t originally there.”

CIBC’s Josh Lanning noted that four years ago, acquirers bidding on a portfolio of assets would put all of the value in operating assets. Any pipeline attached to those deals was considered inconsequential. Now, he says that operating portfolios attached to a platform can sometimes be a hindrance to getting a deal done. Nate McMurry of PowerFlex agreed, adding that he’s seen much more aggressive valuations for platforms in the last few years.


The market is shrugging off higher interest rates… for now

Bensusan, the panel’s moderator, sees rising interest rates as a nonfactor for renewables M&A. He noted that there is ample room for the sector to grow, with the U.S. representing 25% of world energy consumption and M&A volumes still at record highs despite challenges facing many other industries.

Lanning agreed, adding that he hasn’t seen discount rates for operating assets tick up materially in the face of rising interest rates. With larger acquirers picking over a dwindling pool of quality targets, pricing has remained steady, but he does expect the higher interest rates to impact discount rates at some point.

McMurry offered a seller’s-side view of what that might look like, noting that his preferred strategy has been to sign buyers 12 to 18 months in advance. But in today’s financial climate, he acknowledged that buyers would be unlikely to lock in a cost of capital a year or more in advance at a rate that he would find acceptable.


The Inflation Reduction Act will help, but not as much as it could have

The Inflation Reduction Act includes a slew of extensions and enhancements to existing tax credits to spur development of renewable energy projects. Theoretically, these incentives should be a boon to stakeholders in the space. But the panelists cautioned that it’s not that simple, as tax credits may not have been the best way for the federal government to encourage the advancement of renewable energy.

“From where we sit looking to the capital side, we consider tax equity to be the most inefficient form of capital there is for the space,” explained Klein. “We liken it to pushing a rope. We’d like to see it become a more efficient market: lower the cost of capital, ease up on the stranglehold on the industry, and hopefully that'll flow through to the projects.”

McMurry noted that, while the IRA is certainly helpful, it does nothing to address transmission permitting, which the panel agreed is one of the biggest constraints holding the industry back. Lanning mentioned that he was particularly disappointed the IRA didn’t include a transmission tax credit.

“Transmission has always been a problem. It can be solved through either siting on the other side of the constraint, adding storage or building more transmission,” said Klein. “Transmission is extremely attractive, but the problem is the permitting, deciding the right way to build it out. It just seems to take way too long.”

Arya agreed that adding transmission capacity is going a lot slower than stakeholders would like. Tindell noted that she doubts more ambitious projects, like offshore wind farms, will be able to get off the ground until the industry solves its transmission issues.


Conclusion: M&A is the catalyst for the continuing maturation of the renewables sector

Renewables M&A volumes are already at record highs. With interest – and capital – flowing in from a broader range of sources, the IRA can only help propel the consolidation, higher valuations and increased competition that are the hallmarks of any evolving industry.

“Our team has seen that ebb and flow over the years with some of the headwinds in the space, some of the tariff issues,” said Klein. “We're happy that the market continues to be robust, because there's just too much money that needs to be put to work in this sector.”

KeyBanc Capital Markets Utilities, Power & Renewable Energy group is a leading financial advisor and lender in the North American marketplace. As one of the first investment banks to embrace renewable energy, we bring together deep experience in both traditional investor-owned utilities and the renewable energy sector that is powering the future.


To learn more or to discuss more on M&A, reach out to Aaron Klein or Andy Redinger.


The original report is inaccessible.

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