Renewable Energy M&A: a Sustainable Growth Story

M&A Top Trends 2015

We believe that 2015 will be a significant year for mergers and acquisitions in the renewable energy space. There are a number of factors that will continue to drive deals in this sector, but a key factor—projects reaching operational readiness amid a growing pool of acquirors seeking sustainable long-term assets—positions the sector well for ongoing M&A activity.

Canadian Renewable Energy M&A - Deal Value by Sector 2010-2014 (C$ billion)

While there can be shifting sentiments from time to time in various countries regarding the use of renewable energy, as the world as a whole increasingly focuses on climate issues, the overall trend tilts strongly toward a rising use of renewable energy. According to the Global Wind Energy Council, from 2003 through 2013, total worldwide installed electricity generation from wind power grew from 8,133 MW to 35,289 MW. In addition, according to the World Energy Outlook 2013 Factsheet,1 renewable energy generation is expected to supply nearly half the growth in global electricity generation from 2012 to 2035. Continued development of renewable energy will be supported partly by governments and utilities providing stable and attractive long-term pricing to encourage renewable energy developers.

The long-term trend in the development of the renewable energy market will support the growth of ancillary activities, including mergers and acquisitions. Some of the following factors will drive M&A activity in this space.

Factors Driving Renewable Energy M&A

Operational projects reach critical mass

In many jurisdictions, a number of renewable projects have now reached, or are close to reaching, commercial operation. The development risk is now out of the equation for many projects, and entities with a lower cost of capital are the more natural homes for these assets.

Long-term returns

The long-term power purchase agreements (20-year terms are not unusual) often attached to renewable energy projects provide revenue sustainability and this, combined with cost-side predictability, matches the investment objectives and return expectations of infrastructure funds, pension funds, yieldcos (described below) and international entities with a renewable or “green” focus.

Development of yieldcos in the sector

Yieldcos are publicly traded entities formed to acquire and hold portfolios of renewable energy generating assets. Yieldcos allow developers to monetize their interests in operating projects and use the funds to finance new projects. As yieldcos hold assets that generate steady and consistent returns, they are able to pay out attractive dividends, making them popular with investors. The popularity of yieldcos will support acquisitions in the renewable energy space, both as new yieldcos form and acquire assets and as existing yieldcos seek to add to their existing portfolios.

Increased investor demand

Investors with corporate social responsibility mandates and investing criteria will increasingly call for renewable projects. In particular, we expect that institutional investors will increasingly focus on projects with a positive environmental footprint, including through reallocation of existing investments towards those projects.

The trend of growth in renewable energy M&A will continue to mirror the momentum gaining in the renewable energy market, as assets supporting the long-term development of electricity generation will yield related mergers and acquisitions activity for many years to come.

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1 Published by the International Energy Agency, <http://www.worldenergyoutlook.org/publications/weo-2013>.

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