M&A rebound predicted in 2024, but platform and project exits unlikely to mimic 2021-22

Renewable industry observers expect a rebound in M&A deal flow in 2024 on expectations of interest rates stabilizing, helping to free up investor capital to flow back into the sector.

One of the more promising drivers behind the bullish take on next year is that interest from foreign investors in the sector continues to remain high. That interest is partially due to favorable tax regimes under the Inflation Reduction Act, energy storage gaining more traction as an investable industry and further consolidation expected amongst industry participants.

However, sources are still hesitant to forecast a return to some of the valuations and structures seen during the robust deal periods in 2021 and 2022.

“I do not see the bid-ask spread on platforms going away anytime soon,” said Eli Katz, a partner at Latham & Watkins and chair of the firm’s Energy & Infrastructure Industry Group, adding that this in spite of the impact of the IRA being fully baked into these platforms.

Katz does think a material benefit of the IRA is that there might be more trading activity amongst battery storage platforms given that there is a standalone storage credit now included in the IRA where there was none in 2021 and 2022.

However, Katz doesn’t expect a ton of M&A activity amongst solar and wind developers, given the large amount of exits which already transpired in 2021 and 2022, where development platforms such as Cypress Creek Renewables, Origis and Savion, and the former unregulated renewables platforms of Duke Energy and Consolidated Edison (ConEd) traded at attractive valuations.

What is expected to occur is consolidation amongst different asset classes, particularly with continued demand from foreign corporates and/or investors, such as Repsol Renewable’s recent purchase of grid-scale renewable developer ConnectGen earlier this fall.

“We continue to see ongoing demand from international platforms looking to do more deals,” said Matt Eastwick, managing director of boutique Javelin Capital, adding that he expects deals overall to take different shapes and sizes.

“We expect there to be further consolidation amongst companies with platforms across different asset classes, some of those re-trading, and others to be more small tuck-in acquisitions,” added Eastwick.

As M&A flow slowed in 2023, developers increased their use of private market solutions providers to help raise corporate loans, structured finance deals and/or attract interest from investors willing to participate at a minority equity level. This was due to a number of factors, which besides slower growth, included higher costs and delays associated with interconnection, increased funding costs and supply chain bottlenecks in the project lifecycle.

“This certainly favors lesser capitalized players to get involved in consolidation, but the math doesn’t support it to be so widespread,” added Ankit Vanjara, managing director of Macquarie Capital Infrastructure Advisory.

Asset sales were transacted at a relatively healthy clip in 2023 and this is expected to continue in the new year, but valuations may differ in different markets, said Jason Segal, a managing director at Javelin.

“An uncontracted asset is going to have a broad range of value considerations and a higher cost of capital, such as merchant batteries in ERCOT,” said Segal, but he added overall that developers have collected juicy premiums in ERCOT and CAISO if they have batteries that are in late-stage development and/or under construction soon.

Eastwick adds that you also might see a lot of activity in WECC, MISO South and ERCOT in general as interest becomes more heavily “driven by investor considerations.”

Katz adds that while valuations for assets are not currently quite where they were relative to 2021 and 2022, select buyers are still looking to get involved in specific markets in one way or the other.

There does remain an overhang of sorts in the past year from larger IPPs such as Enel Green Power, Apex Clean Energy and Lightsource bp doing large portfolio asset recyclings. But Katz adds that the class of buyers who would have normally chased those assets, such as infrastructure funds, have a lot more options they could chase for similar returns with less risk.

“And its not like some of these bigger, well-capitalized developers necessarily have to do these deals as their capital plans would like to incorporate the recyclings, but they are not necessarily forced sellers either,” noted Katz.

*This story was originally published exclusively for NPM subscribers last month.


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