Interconnection challenges driving uptick in M&A market for mid-stage projects

In an interview with NPM, LevelTen’s VP of M&A Solutions Patrick Worrall discussed a recent uptick in M&A activity for projects as smaller developers seek to sell earlier stage projects as interconnection challenges force their hand.

Worrall says M&A activity across the board is up so far in 2024 compared to the back half of 2023 thanks in large part to smaller developers selling projects earlier than they otherwise would thanks to rising interconnection costs and timelines. Worrall says many of the projects up for sale have site control and queue applications submitted but are being gated by high deposit requirements in markets like MISO and PJM up to USD 1,000/MW.

“That’s a tall stack of bills for a small developer to come up with, so they put these projects on the market,” Worrall said. “Some will get bought and others will simply remove themselves from the queue, put themselves at the back of the line and make another run in a couple of years.”

Worrall says the projects most likely to be picked up are those with CODs on or before 2027 as investors prefer more de-risked, later-stage projects over earlier stage projects with a longer tail. He says this timeline is also attractive for larger IPPs that have had projects slated for construction from 2025 to 2027 slip outside that timeline and are looking to fill gaps through acquisitions.

“It’s more of a focus on portfolio and capital recycling from these larger players,” Worrall said.

If this trend continues, Worrall predicts a barbell-like curve where IPPs are seeking to buy from smaller regional developers “that are going to be experts in their region and will be flipping at a relatively early stage.”

Along these lines, he says he is seeing alliances form between larger developers “excellent at signing PPAs, procuring equipment and managing the last mile of development” and these smaller regional firms that are being signed on as development partners creating a “catcher’s mitt” for the project sellers.

While Worrall says LevelTen is tracking “general interest in all of the markets,” he calls out PJM and CAISO specifically with the former seeing the highest concentration of data center growth. He says it is mostly solar moving in these areas with few wind assets getting flipped mid-development.

“Development timelines and the scale of land positions for wind projects mean they are typically greenfielded by developers that intend to build them,” Worrall said.

On the storage side, Worrall says interest in ERCOT has diminished somewhat this year thanks to a “relatively cool summer” in the state driving down volatility and therefore storage revenues. On the other hand, he says there is a growing desire from larger storage developers to get footholds in other regions.

Of these new areas, Worrall says SPP is “probably the most active” thanks to the ISO’s regional capacity market “that provides an underpinning to the revenue similar to CAISO.” He says developers are less aggressive so far in MISO and PJM where they are mostly “poking around and looking to get a position.” He does call out Michigan as the most active state thanks to the legislature’s passage of a statewide mandate, a push echoed by a panel of storage developers at last week’s Midcontinent Clean Energy conference in Indianapolis.

But while Worrall says M&A activity overall is higher this year than last, he says it’s nowhere near the levels of the “heady days of 2019 and 2021” and says he doesn’t expect that level to return.

“The industry has matured,” Worrall said. “Large developers are no longer going after land grabs to build pipelines. They’re being much more strategic, looking to add projects in limited fashion to specific target regions.”

With this more limited buyer interest than the massive appetite of three to five years ago, Worrall predicts most projects currently in interconnection queues across the nation (roughly 1.2 TW across solar, wind and storage) will be left out.

“The run rate is going to probably be a quarter of that,” Worrall said. “You’ve got a rat in a snake that’s got to get beaten down to a much more reasonable run rate throughput through the interconnection queues. I don’t know what that number is, but it is substantially less than 1.2 TW.”

Tax Transferability and Direct Pay

In addition to relatively higher M&A interest this year, Worrall says he has seen an influx of investors entering the tax transfer market from across the board encompassing a wide swath of sectors from consumer products companies and electronics companies to clothing manufacturers. He says even smaller enterprises are getting into the market through brokerages geared toward bringing them in.

“This is really being driven by company CEOs and CFOs that see this as a tax mitigation opportunity,” Worrall says. “That’s how ESG groups are promoting it to tax departments.”

On the other hand, Worrall says Direct Pay deals haven’t had the same level of interest, in part thanks to the additional hoop of requiring recipients to own the projects themselves. However, he says LevelTen is being approached by parties that have that ability like Native American tribes that are interested and could drive deals in 2025 and beyond.

“These parties are saying they want to go out and buy projects and are setting up renewable energy companies to go out and do that,” Worrall said.

*This story was originally published exclusively for NPM subscribers in August.

NPM US (New Project Media) is a leading data, intelligence and events company dedicated to providing origination led coverage of the renewable energy market for the development, finance, advisory & corporate community.

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