Shifting economics favor deal flow in 2023, platforms continue to seek M&A opportunities

There might be less renewable developer platforms expected to be shopped in 2023 then previous years, but that is not expected to slow down overall deal flow.

The Inflation Reduction Act of 2022 has enabled investors to get more comfortable with newer technologies such as green hydrogen and previously cost prohibitive verticals such as storage in some markets. At the same time, the pool of interested investors has continued to increase as foreign developers and investors continue to the enter the US market, while funds committed to clean energy investments continued to accelerate.

Globally deal value for renewable energy resources increased to USD 10.4bn for the 1H22 compared to USD 7.0bn for all of 2020, even as average acquisition multiples (EV/EBITDA) were slightly softer at 11x compared to 13x in 2020 for acquisitions of developers of wind or solar assets, according to Dealogic.

“As a result of the IRA, coupled with increasing development and construction costs, there is a nearly insatiable need for capital. These dynamics are expected to create significant M&A and capital raise activity, with a disproportionate shift to the project-level side as there is relatively more cost certainty and numerous projects have renegotiated PPAs,” said Derek Bentley, managing director and co-head of low carbon infrastructure at Nomura Greentech.

Inflationary pressures have pushed both labor costs higher as well as the components that go into a project, added market observers.

In recent weeks, Danish-based renewables developer European Energy and UK-based fund manager Glenmont Partners established JVs with US-based developers to accelerate their respective pipelines. Two Spanish developers, Greenalia and ACCIONA, also bought a portfolio of solar and storage projects and Scottish-based developer Renewco Power acquired early stage solar and storage projects from Virginia developer Beaufort Rosemary.

“It’s come to a point where Europe and Canada are starting to ask themselves if we should be doing something similar,” said Conor McKenna, a senior managing director at CohnReznick Capital.

The IRA not only establishes a 10-year runaway for the ITC and PTC tax credits for solar and wind developers, but also establishes a standalone ITC tax credit for energy storage and enhanced tax credits in green hydrogen and carbon capture. The package also includes adders based in areas such as domestic content and building in energy communities, essentially brownfield re-development of old coal and fossil fuel sites.

This helped enable deals to get across the finish line in the back half of the year such as Blackrock’s acquisition of Jupiter Power in November after the energy storage systems developer had been up for sale for the better part of 2022. Other clean technologies were pursued as well, including BP plc’s acquisition of RNG developer Archaea in October, and NextEra’s USD 1.5bn investment to buy landfill assets and convert them to RNG.

There is expected to be a continued spike in storage deals in the new year, particularly as its capex needs keep rising and the asset class keeps evolving. Separately hydrogen and even electric vehicle (EV) infrastructure are also cited as categories for increased deal flow.

CLICK HERE for NPM’s transactions database for full details of recent deal flow.

Platforms in play

With the economy in a relatively better spot a year ago, multiple platforms sought partners coming off attractive valuations given to the likes of Origis, Savion, Cypress Creek Renewables and Apex Clean Energy. However, deal flow slowed to a crawl in the 1H22, as valuations dropped and the developer space was hit with an ongoing supply chain crisis and the launch of the Auxin anticircumvention inquiry which threatened tariffs on their existing solar supply chain. The August passage of the IRA2022 then kicked off a flurry of deals which saw Brookfield Renewables acquire Standard Solar and Scout Clean Energy, RWE Renewables purchase of ConEd’s Clean Energy Business and Blackrock’s purchase of Jupiter Power separated by only a matter of weeks.

Looking forward, the conclusion of Duke Energy’s commercial renewables business is expected in the coming months as bidders have been shortlisted and the process advanced to a second round. However, some of the complexities of the process are expected to delay a deal from getting firmed up until early 2023. The second round of the auction for Terra-Gen is also expected to begin in earnest in 2023 as indicative bids were due in mid-December.

However, CohnReznick’s McKenna notes that that IRA2022 has made it more attractive for developers to sell projects and recycle capital into the next pipeline, as opposed to a platform valuation. So, the capital formation trend might revert to capital raises or joint venture structures in reference to the foreign-led JVs earlier as opposed to a flat out M&A sale.

“If you factor in the ITC, at a baseline, and include adders, then maybe 40%-50% or some of the project costs accrete to the developer’s margins as opposed to 24% under the old tax regime,” said McKenna adding that it “makes it worth it for developer to sell assets, re-load and then seek a sale later when the market becomes more favorable.”

The energy storage market, particularly with attractive characteristics in ERCOT and CAISO, took center stage in 2022 and is expected to continue. Aside from the Jupiter Power deal, ENGIE and ACCIONA Energia bought BESS portfolios from Belltown Power and Q Cells post-IRA approval. Stem’s director of product marketing Neat Clark told NPM in an interview this past July that ERCOT is a lot more focused on shorter duration, two-hour systems that are paired with renewables and can easily respond as different resources come online and offline throughout the day.

While separate from the ongoing supply chain crisis for solar cells, heavily used lithium-ion battery cells are also in the midst of supply chain crisis with BESS developers vying for access alongside EV manufacturers. At the same time, as attractive as ERCOT is and while CAISO continues to ramp up its storage demand both for short and long-duration storage, the economics of other markets are still not as clear.

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


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