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Looking beyond — KPMG’s perspective on the market
As highlighted in this report, M&A activity in the renewable energy sector is extremely strong and, in some jurisdictions, it has become almost feverish. Renewables — particularly operating renewable assets — have become a very attractive investment proposition for many different investors including, institutional investors such as life and pension funds, utilities, corporates, infrastructure and energy funds, and family offices. Indeed, the significant growth in renewable energy funds in the alternative asset management sector is noteworthy in itself. We have seen both the levered and unlevered cost to capital fall dramatically in numerous markets over the past 24 months. This has led to record high prices for operating assets prompting many existing holders to consider selling to take advantage of the strong market, particularly as demand far outstrips supply. This is a trend we expect to continue well into 2018 with unparalleled levels of capital chasing renewable assets globally. Also as a subsidy free market begins to develop, this will raise new challenges for investors as this trend ultimately increases exposure to volatile market dynamics.
There are a number of particular trends in renewable M&A activity we would highlight, as follows:
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Institutional investment — attractiveness of alternative asset classes
Over the past 20 years, institutional investors have survived many volatile market swings. To counter the peaks and valleys, pension funds, in particular, are seeking higher returns to satisfy specific retirement funding levels. As a result, they are shifting investments away from low-risk, fixed income government and corporate bonds in favor of alternative investments such as renewables. Renewable assets offer many advantages to institutional investors including annual yield, long-term investment horizon, scale and long-term income protection, especially where FITs or similar arrangements are in place. Furthermore, some institutional investors are now pursuing a model whereby they invest directly into alternative assets such as renewables and have developed in-house capabilities to directly and actively manage these portfolios. This increases net investment returns because of the lower costs involved. This model is particularly prevalent in Canada, in Australia and in Europe in places like Scandinavia and Germany. However, it is important these institutional investors recognize that external managers provide investors with services and often have significant expertise and infrastructure to support their activities, which direct investors might not have.
Development platforms
Because of the wall of capital chasing limited operational asset opportunities, investors are seeking more innovative solutions to access operating assets. As a result, investors are increasingly seeking to enter into framework and platform agreements with developers. Under these agreements, they would provide financial support during the development phase in the form of equity or debt with an option to acquire the assets either at pre-construction or post-construction, broadly at market price. This is helped by the fact that many successful developers are cash constrained while the costs of development continue to rise due to planning and grid complexities in many jurisdictions.
Other trends Various other trends that have become prevalent in the marketplace include:
Battery storage There have been remarkable developments in the area of battery storage in recent years as the technology improves. As a consequence, we see this becoming a significant new area for investment for 2018 and beyond.
Emerging economies As accessing investable renewable assets in major developed jurisdictions is proving more and more difficult, investors are now looking elsewhere more frequently. In particular, institutional investors are focusing on emerging economies including Mexico, India, Vietnam, South Africa and Chile for renewable assets. Affordable solar energy also offers a potential solution to emerging economies in Africa and elsewhere. The deployment of affordable solar energy can unleash further economic development, while at the same time providing clean, affordable and sustainable power.
Offshore wind As discussed elsewhere in this report, we expect offshore wind to continue expanding in the coming years. In the past, this would not always have been the asset of choice for institutional investors because it was regarded as riskier than onshore wind and solar. However, sentiment from institutional investors has clearly changed and this has been evidenced through numerous transactions in the offshore wind markets in northern Europe.
Responsible investment The whole area of responsible investment is becoming a key factor in driving investment policy from the institutional world into the broad area of sustainability, particularly in renewables. This is prevalent among pension fund managers who are actively adopting responsible/environmental, social and governance (ESG) principles into their investment strategy.
