Australian battery M&A activity has accelerated but actually closing deals is getting harder, according to deal advisers.

“I wouldn’t say M&A activity is slowing down. I’d say it’s quite the opposite, David Fair, Partner in the EY energy advisory team in Sydney told the Battery Asset Management Summit in Sydney last week.

“There are a lot of processes out in the market, all different shapes and sizes of different projects at different stages of development,” he added. “[But] we’re not seeing many transactions reach close.”

This was because earnings had been hit by low volatility in the wholesale power market. This meant investors were keen to see projects with power purchase agreements. But the low volatility was now also making it harder to get PPAs.

“The offtake is becoming increasingly the issue for these M&A processes to reach [financial] close. They need an offtake to give the ultimate sponsor confidence to acquire the project at an attractive premium that gives the developer reason to transact,” he said.

While the mild winter in Australia this year has hit battery revenues and strained offtake agreement talks, Fair said quality projects will continue to stand out to potential buyers and are more likely to reach financial close compared to the abundance of troubled assets.

Matt Baumgurtel, who leads the new energy team at law firm Hamilton Locke, agrees, saying that assets can sell at a premium when they fit a buyer’s portfolio.

“Success in your M&A processes is knowing the buyers and knowing what gaps they have in their portfolio. That’s certainly how we go about it,” he said.

A project will have five potential buyers, not 150 like some expect, he said, adding that success in closing a deal depends on the nature of the project and its difficulties.

“Projects are like children; they’re good at some things, they’re not good at other things,” he said.

“Be honest with yourself, because as soon as you engage a sophisticated advisor to help you, they will look under the hood and know pretty quick where the problems are,” Matt said.

New capital sources

Andy Powell, head of energy and infrastructure advisory for Australia and New Zealand at JLL, told the panel that widening the scope of potential investors to include private credit has helped some battery projects transact.

He said over the last 18 to 24 months several battery plays have taken up private credit as the pool of available capital expands, adding that locked-in offtakes on attractive terms is still the most attractive quality to buyers.

“If you go to the market with a long-duration offtake, 10 years plus would be ideal – but the reality is it’s probably going to be somewhere closer to seven at the moment,” Powell said.

“But if you can do that with an investment grade counterparty at a price that’s, if you could say, AUD 150,000 [per year] a megawatt, obviously a four-hour BESS, that will have very strong appeal to a lot of investors,” he said.

Baumgurtel said private credit can finance single assets, but they are not asset owners. They instead want a return on their money in a relatively short timeframe.

“Fundamentally, you’ve got to return their money to them within two years, maybe three, if you’re lucky, and they’re going to want three times their money, so you understand where you’re getting that capital from,” he said.

“I think the biggest trend is the infra-plus investors, and they are typically taking money from the large pension funds, the large superannuation funds, and it’s another form of asset for those pension funds,” he said.

Fair said riskier greenfield development or fully merchant projects are a “sweet spot” for private credit lenders and the returns they want.

He said energy traders have started to support battery projects but after the lack of performance over the last six months, they have likely gotten spooked on the future.

“Now you’re seeing it pivot to more linking it up with solar hybrid, linking it with green generation to be able to offer up a firmed profile, and that’s where you’re getting more liquidity,” he said.

Gentailers and data centre providers are also interested in owning battery projects. This helps source generation via green electrons they can then manage, which is where the liquidity is, Fair said.

Baumgurtel says the increase in battery storage will level the energy market once solar input drops around dusk and millions of people arrive home to use their appliances, also known as the duck curve.

But he says the next question is how the market will perform once firming has made its stake in the grid.

“It’s green electrons that people will be buying and will be valuable. The duck curve will flatten because every large storage asset will flatten out the curve. The question is not ‘will the duck curve flatten?’, but ‘at what height will the flat duck fly?’”

What do offtakers want?

The panelists agreed that understanding what offtakers consider a good or bad project is crucial to getting a deal over the line.

Fair says it depends on location, development approval, social licence and grid location with enough capacity in the lines to avoid thermal curtailment.

Powell noted the importance of a sponsor’s track record of getting projects to close, as offtakers do not want to sign a contract with a developer who takes too long to deliver a project.

Baumgurtel said engaging with stakeholders, indigenous bodies, the local community and local and federal government are key, as data centre plays and software customers “will not associate themselves with a project that has steamrolled community,” he said.

“There’s always a strong market for good projects, and there’s always a shit market for shit projects,” Baumgurtel said.