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Chapter 2: Hotspots for renewable M&A
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China, Germany, the UK, India and France are all expected to see the biggest increases in renewable energy M&A activity over the next 12 months, as deal activity in the sector continues to heat up.
Key messages
01 China and Germany are the top spots for renewable energy deals in the near future. China’s appeal is being driven largely by government spending — it announced it would invest 2.5 trillion Yuan (US$377 billion) in renewable power generation by 2020. Germany is the top western European country for investment in the next 12 months.
02 In France, the election of Emmanuel Macron as president has increased the appetite for investment, according to 62 percent of respondents. Macron has promised he would continue efforts to simplify planning procedures, phase out coal, and double wind and solar capacity by 2022. EDF plans to install 30GW of solar capacity between 2020 and 2035 in France.
03 The UK and India are both attracting attention from investors. According to 26 percent and 21 percent of respondents, respectively, both countries will see increased M&A activity in the next 12 months.
A global perspective While three of the top 10 renewable energy deals in 2017 targeted US-based companies, and four of those deals featured Canada-based bidder companies, investors are now looking to EMA and ASPAC for big rises in M&A in the next 12 months.
“M&A activity in Europe is going to rise because of the region’s take on renewable energy,” says the CFO of a US-based renewable developer. “For example, Germany has one of the most developed renewable energy industries and its execution has been amazing, while France has taken up responsibility for the advancement of renewable energy [through, for example, the Paris Agreement on climate change]. The policies that countries in Europe have are essential for uplifting this sector and that’s what investors want to see: a bright future for their investment.”
China and Germany are expected to see the biggest rise in M&A activity over the next 12 months compared with the previous year. This should come as no surprise, given the focus given to renewables by both countries.
Just over a quarter of respondents (26 percent) expect the UK to see the biggest rise in M&A activity over the next 12 months, followed by India (21 percent). “Foreign investors and companies will expand in the UK because the cost of assets is low and there are plenty of initiatives by the government which allow companies to do business,” says the M&A director of an Argentinian oil and gas firm.
Despite having an overall renewable power capacity exceeded only by China, the US is expected to see the biggest rise in M&A activity by only 10 percent of respondents. One reason for this may be the growing expectations gap between buyers and sellers, as Henry Berling, KPMG in the US, explains: “A lot of generators believe that their renewable power is going to be worth more than traditional power in the future. But buyers have no way of knowing what renewable power capacity in this country will be worth 5 to 7 years from now and therefore they’re not willing to pay a premium.”
North America 5% Latin America 8% EMA 47% ASPAC 40%
China
Germany
UK
India
France
US 10%
Brazil 8%
Canada 7%
Japan 6%
Australia 5%
Other
Source: KPMG and Acuris survey 15% 21% 26%
22% 40%
Visit kpmg.com/energy to read the Global Power & Utilities CEO Outlook report to learn more about industry trends.
Europe
Germany Progressive energy policies are the key to Germany’s highly anticipated M&A activity — it takes the top spot as the western European country most respondents (43 percent) are likely to invest in over the next 12 months.
Germany’s approach, as stated by the Federal Ministry for Economic Affairs and Energy, is to “fundamentally alter Germany’s energy supply: away from nuclear energy and fossil fuels and towards renewable energy. By 2025, at least 40 to 45 percent of our energy is to be sourced from renewable energy, and we want to raise this to at least 80 percent by 2050.” 7
This Energiewende or ‘energy transition’ is ongoing and government policies — such as the Renewable Energy Sources Act from 2000, which originally encouraged renewable energy through FITs — have been implemented to maintain this momentum.
“Germany has always been a winner in renewable energy in Europe and I am sure the trend will continue as the support for renewable energy has grown stronger,” says the managing director of a US-based fund.
“Policies have been framed in the best possible manner, making it an attractive region for investors to target. The government has provided a lot of alternatives to raise capital for companies investing in energy, taxes are a lot lower than they were and ROI in the German market is very strong because of the lack of pricing caps enforced by the government.”
The UK
The UK is also seen as an appealing target, as government policy aligns with business opportunities in the sector, particularly offshore wind (see Chapter 4). Public approval for renewables also remains high: according to the government‘s quarterly survey published in November 2017, 82 percent of respondents support renewable energy. 8 And the ongoing governmentsanctioned roll-out of smart meters, in which every household will be offered one by 2020, will prompt many consumers to re-evaluate their energy choices, leaving the door open to new opportunities for utilities.
Smart energy technologies such as these, coupled with greater availability of renewable energy sources, are already generating M&A in the UK.
EDF Energy Renewables is among the latest to make a move, announcing plans to sell its majority stake in five wind farms to Greencoat UK Wind. It will retain a 20 percent share and continue to run the sites.
According to Matthieu Hue, CEO of EDF Energy Renewables, this deal allows the company to invest in other UK renewables projects, per the group’s larger strategy. 9
As the CFO of a Hong Kong-based independent power producer explains: “The falling value of the pound, along with high debt levels, allows us to invest in the UK with ease. The infrastructure is well developed and we want to expand in the UK to take advantage of the low costs
There is no doubt that the French government wants to make a big step in renewables. France has the second-largest offshore wind farm capacity in Europe and opportunities are huge.
Éric Jacquet KPMG in France
and the changes that we expect the government to make, as well as to get access to the market to acquire new technologies.”
France
The election of Macron has increased the appetite for investment in France, according to 62 percent of respondents. In his election manifesto, Macron said he would continue efforts initiated by the previous governments to reduce France’s reliance on nuclear generation, phase out coal, and double wind and solar capacity.
7 “Ready for the next phase of the energy transition“. German Federal Ministry for Economic Affairs and Energy. bmwi.de/Redaktion/EN/Dossier/ energy-transition.html 8 Energy and Climate Change Public Attitude Tracker Wave 23. UK Department for Business, Energy and Industrial Strategy. November 2017. https:// www.gov.uk/government/uploads/system/uploads/attachment_data/file/656549/Wave_23_Summary_Report.pdf 9 “EDF Energy Renewables sells majority stake in five UK wind farms.“ EDF Energy press release. 1 Nov 2017. media.edfenergy.com/r/1309/edf_ energy_renewables_sells_majority_stake_in_five_uk_wind
“From a business perspective, Macron’s election sends out the right signals,” says Charles Abbey at KPMG in France. “He supports renewables, which means change is to be expected that will support the sector, such as simplifying the authorization permits process, for example.”
This view echoes an interview with French Prime Minister Edouard Philippe — newly installed by President Macron — on France Inter radio in May 2017, in which he argued that the country needs “an approach founded on the secure base of nuclear and a rapid, massive and visible development of renewables”.
This approach will need to align with France’s ‘Plan de programmation pluriannuelle de l’Energie’, or PPE, published in 2016, which called for at least 70GW of renewables capacity, generating between 150 and 167TWh of renewables-sourced electricity per year by 2023. 10 The PPE anticipates significant leaps in onshore and solar photovoltaic (PV) capacity (to reach at least 21GW and 18GM by 2023, respectively) while also proposing targets for offshore, marine energy (floating wind, tidal and wave), wood and biogas power.
In November 2017, Environment Minister Nicolas Hulot announced that the French government needs to set a more ‘realistic’ target to reduce the share of nuclear energy in France’s power mix. Reducing nuclear from 75 percent to 50 percent by 2025 would not be possible without increasing carbon emissions, according to the environment minister. The French government has committed to providing a clear transitional roadmap with new targets a year from now. “Renewable energies have a bright future in France, even though the measures announced by Macron during the election campaign will not happen at the expected pace. There is no doubt that the French government wants to make a big step in renewables, one signal being administrative authorizations granted more easily and the continuation of offshore tenders. France has the second-largest offshore wind farm capacity in Europe and the opportunities are huge,” says Eric Jacquet, KPMG in France.
Half of respondents say that offshore wind is the sub-sector attracting the most investment interest in France, in part because its potential has not yet been exploited: “France has more than 3,000km of coastline, which could easily be used to generate energy,” notes the head of investments at a Singapore-based fund. “Hydroelectricity power, on the other hand, is already well established in France, with most resources already tapped.”
The executive vice president of finance with an independent power producer in France adds that “The development of grids will further enable companies to invest in wind as well as solar energies, and will push for the development of these technologies.”
Just over a quarter of respondents (26 percent) believe photovoltaic solar is the sub-sector in the country that is attracting the most attention from investors. “Solar energy is the most abundant source of energy,” says the director of investment for a fund based in France. “Although restricted to certain times of day, it is capable of producing energy on a large scale to supply cities as well as sustaining individual homes.”
Has France’s election of Macron and his support for renewable energy increased your appetite to invest in the French market?
No impact on appetite Greatly increased appetite
38% 40%
22%
Moderately increased appetite
Source: KPMG and Acuris survey
For 18 percent of respondents, thermal solar is the most appealing. And while biogas was not cited specifically by survey respondents, it could attract more investment in future, following the recent announcement by the French energy ministry that it is cutting the grid connection costs of renewable and biogas installations by 40 percent.
Nearly a third (30 percent) of respondents based in France say improved incentives/FITs would be most likely to increase their appetite to invest in the country’s renewable sector — the top choice among French respondents. Among non-French respondents, 36 percent say a “more business-friendly regulatory regime” would influence their decision.
Within France, which sub-sector of renewable energy is currently the most attractive for investment?
50%
26%
18%
Offshore wind Photovoltaic solar Thermal solar
Source: KPMG and Acuris survey 4%
Onshore wind 1% 1%
Hydropower Geothermal
Which of the following would be most likely to increase your appetite to invest in the renewable sector in France? (please select one)
34%
20% 28% 30%
28%
21% 23%
21% 27%
15% 17%
More business-friendly regulatory regime Improved incentives/FITs
Non-French respondents
Source: KPMG and Acuris survey French respondents Easier access to planning permits/ licenses
Total Easier access to financing
France renewable energy transactions*
60 3,000
50 2,500
Volume 40
30
20 2,000
1,500
1,000 €(m) deal value
10 500
0
2012 2013 2014 2015 2016
Volume €(m) deal value
Source: KPMG and Mergermarket data
*Includes M&A, asset sales, capital increases, equity funding and IPOs H1 2017 0
“There’s definitely going to be an easier investment space in France now,” believes the strategy director of a Norwegian oil and gas company. “We’re expecting investor-friendly policies in France, such as tax incentives, as it intends to double its green energy.”
Another respondent, the chief financial officer (CFO) of an Australian utility, adds that France has a strong vision in terms of renewable energy use, based on the government target which calls for at least 70GW of renewables capacity by 2023: “With climate changes taking place at an alarming rate, and the need for proper use and reuse of energy whenever there is scope, we expect several reforms to take place,” he says. “We also expect investing to get easier. We are aiming at mid-size targets and are sure to get the best value as we are going to use cash, which helps in negotiating to a great extent.” In terms of deal activity, France has been a popular choice in recent years, with deal volume and value on the rise. In the first half of 2017, there were 19 deals in the renewable energy sector targeting French companies with a total value of EUR1.2 billion. By way of comparison, during the same period in 2016 there were 18 deals worth EUR1.5 billion.
Major deals include EDF Énergies Nouvelles’ purchase of wind energy developer and operator FUTUREN for EUR394 million; the acquisition of renewable energy producer Quadran by Direct Énergie for EUR303 million; and Innergex Renewable Energy’s purchase of three wind farms in France from Velocita Energy Developments, with an aggregate installed capacity of 119.5MW.
The BRIC economies
Among BRIC (Brazil, Russia, India and China) countries, 35 percent of respondents say they are most likely to invest in China over the next 12 months, followed closely by Brazil (33 percent) and India (28 percent). Just 4 percent say they are most likely to invest in Russia.
China
“Global renewables are being skewed significantly by China, which has been a high-growth market for the past 6 or 7 years,” says Adrian Scholtz, KPMG in the UK. China is currently the world’s largest single developer of renewable power, followed by the US, with the largest installed capacity of hydro, solar and wind power.
The country’s policies have promoted renewable energy use for over a decade, beginning with its Renewable Energy Law in 2005, which prioritized the development and use of renewable energy. In 2017, the government announced it would invest 2.5 trillion Yuan (US$377 billion) into renewable power generation by 2020 as part of its 13th Five-Year Plan on energy development. According to the country’s National Energy Administration (NEA), the plan will increase installed renewable power capacity to 680GW by 2020. 11
The array of existing assets and huge project pipeline make China a major draw for investors, says Scholtz: “One of the themes of the next couple of years will be international capital going into China. The country also has an extremely large pool of domestic capital.” Sub-sectors of interest include photovoltaic solar, hydropower and onshore wind, but investors need to weigh up the risks, says Scholtz: “You need to look at certain locations and certain vintages because some of those assets are subject to major curtailment risks, such as grid issues. If you’re putting money into Chinese renewables, you need to invest through an expert team.”
Brazil
The country’s abundant solar, wind and hydropower potential — it has the largest hydro resources in South America 12 — prompts one respondent to describe Brazil as “geographically gifted.” Another, the CFO of an Australian renewable developer, says: “We see potential for further development in Brazil, which has a large, untapped renewable energy source — especially hydro energy.”
According to the International Energy Agency (IEA), almost 45 percent of Brazil’s primary energy demand is met by renewable energy, with around 80 percent of total installed capacity stemming from large hydropower plants and the rest made up of biomass and wind power, followed by fossil fuels and nuclear. 13
According to the ABEEólica, the Brazilian Wind Energy Association, wind power has a particularly strong future, with 496 wind parks already installed, representing an installed capacity of 12.48GW, with 4.86GW of capacity under construction. 14
11 China 13th Renewable Energy Development Five Year Plan (2016–2020). International Energy Agency (IEA). 10 December 2016. https://www.iea.org/policiesandmeasures/pams/china/name161254-en.php 12 Profile on Brazil. International Hydropower Association. https://www.hydropower.org/countryprofiles/brazil 13 “Brazil (Association country).” IEA. https://www.iea.org/countries/non-membercountries/brazil/ 14 ABEEólica, the Brazilian Wind Energy Association. abeeolica.org.br/en/quem-somos/
Russia 4%
Brazil 33% India 28% China 35%
Recent recessions in some countries in Latin America have weakened their economies. However, this does open up opportunities for acquirers, according to Oscar Silva, KPMG in Mexico.
“The downturn means it is possible to buy assets cheaply, so now is a great time to invest, looking ahead to the recovery of the economy,” he says. “The risk is low, relative to the profit potential, and it offers a great investment.”
India Investment opportunities are expected to open up with the shift to renewables in India, according to the IEA: “By 2022, India’s renewable capacity will more than double. Solar PV and wind together represent 90 percent of India’s capacity growth as auctions yielded some of the world’s lowest prices for both technologies.” 15
This leap in renewables is being driven by the government’s ambitious target for renewables, announced in 2015, of 175GW installed capacity by 2022 (the country’s current renewable capacity is 58.30GW).
A report by the government’s economic policy think-tank, NITI Aayog, published that same year, indicates this is achievable, despite the tight timeframe: “One of India’s major advantages ... is that its renewable energy potential is vast and largely untapped. Recent estimates show that India’s solar potential is greater than 750GW and its announced wind potential is 302GW (actual could be higher than 1,000 GW).” 16
Indian Prime Minister Narendra Modi emphasized the country’s renewables ambitions at the 2017 BRICS summit meeting, asking fellow BRICS leaders to work with the International Solar Alliance (ISA): “Our five countries have complementary skills and strengths to promote use of renewable and solar energy. The New Development Bank (NDB) can also establish an effective link with ISA to support such cooperation. We would wish to see more clean energy funding, particularly in solar energy, from the NDB.” 17
15 “Solar PV grew faster than any other fuel in 2016, opening a new era for solar power.” IEA. 4 October 2017. https://www.iea.org/newsroom/ news/2017/october/solar-pv-grew-faster-than-any-other-fuel-in-2016-opening-a-new-era-for-solar-pow.html 16 “Report of the Expert Group on 175GW RE by 2022.” National Institution for Transforming India. 31 December 2015. /niti.gov.in/writereaddata/files/ writereaddata/files/document_publication/report-175-GW-RE.pdf 17 timesofindia.indiatimes.com/india/modi-pushes-for-solar-alliance-at-brics-summit/articleshow/60366699.cms
The Americas
The US
While 10 percent of respondents say the US is one of the top two countries where they expect to see the greatest rise in M&A activity in renewables over the next 12 months, much of that will be influenced by the current administration’s stance. For example, renewable energy tax credits were cut in the Republican tax bill launched in November 2017 and there are signs that this trend is set to continue under the current administration.
As the CFO of a renewables developer in the US explains, “We’re in a situation where we need to play safe and smart. The fact that the US withdrew from the Paris Agreement has made things a lot more complicated for us as we know now that our government won’t be backing policies for renewable energy. This has just complicated our perspective towards acquisitions in the United States.”
Such concerns aren’t limited to renewables investors in the US: “We’ve invested a lot in the US and the decision taken by the United States was a scare for us,” says the director of corporate finance at one Canadian bank. “There are going to be consequences that won’t be in our favor and hence our appetite for acquisitions in the US has definitely reduced. The only silver lining for us would be the fact that the American corporates are still going strong with the renewable energy sector. But for now we would rather wait it out.”
Mexico Major reforms in Mexico’s electricity sector in 2014 have paved the way for increased private investment. The Mexican government’s clean energy generation targets are ambitious: 25 percent by 2018, 30 percent by 2021, 35 percent by 2024 and 50 percent by 2050.
“This country has a very aggressive renewables policy,” says Oscar Silva, KPMG in Mexico. “Today, we generate approximately 18 percent of our total electricity with renewables. The goal is to reach 35 percent by 2024. We recently had the first public bids for electricity — most have been granted to renewable projects.”
Africa
According to respondents, three countries in Africa are hotspots for investments in renewables in the near future:
South Africa South Africa, a clear leader among African economies, was chosen by 46 percent of respondents, who said they would be most likely to invest there over the next 12 months. The country has provided clear signals that it intends to develop its renewables capacity as part of its energy mix.
In a speech at the Generation IV International Forum in Cape Town in October 2017, South Africa’s newly appointed energy minister, David Mahlobo, stated that “South Africa recognizes the role of nuclear power in ensuring security of energy supply and meeting the challenge of climate change. We promote an energy mix of coal, gas, renewables and nuclear. Each of these options has their role; some of the energy sources are intermittent supply while others, such as nuclear and coal, are base-load supply.“
The government replaced its FIT system in 2011 with a public procurement program — the Renewable Energy Independent Power Producer Programme (REIPPP) — to encourage private investment in the sector.
The REIPPP covers onshore wind, solar PV, solar thermal, biomass solid, biogas, landfill gas and small hydro plants, establishing a ceiling tariff level for each in auctions. The winning bids are given power purchasing agreements (PPAs) guaranteed for years.
According to the IEA, “From 2011 to the beginning of 2015, five rounds of reverse auctions were held for construction and supply of 3,625MW of large-scale (>5MW) renewable energy capacity.” 18
46%
21%
18%
South Africa Nigeria Morocco
Source: KPMG and Acuris survey 8%
Kenya 4%
Ivory Coast 2%
Senegal 1%
Egypt
“Challenges from regional stability and under-developed regulations make investing in African countries very risky,” says the partner of a UKbased fund. “If we had to invest, it would be in South Africa because the economy is growing well, regulations are developed and are enforced, and there are opportunities for us to take advantage of.”
Nigeria
Despite it being Africa’s largest economy, only 21 percent of respondents cited Nigeria as the African country they were most likely to invest in over the next 12 months. The country has made strides in recent years to develop its renewables market, bringing in the Feed-in Tariff for Renewable Energy Sourced Electricity regulation in 2015.
Among other things, this directs distribution companies to source at least 50 percent of their total electricity procurement from renewable sources, with the rest coming from the Nigerian Bulk Electricity Trading Company. According to the IEA, a total of 2,000MW will be generated in the country through renewables like biomass, small hydro, wind and solar by 2020. 19
Morocco
Under the auspices of the Office National de l’Electricité (ONE), Morocco’s plans for renewables are ambitious and, as demonstrated by the Noor-Ouarzazate Concentrated Solar Power Project, definitely achievable. The project is expected to produce 580MW at peak when finished.
Much of this is being driven by government edict. In 2015, King Mohammed VI announced a target of 52 percent renewable electricity generation by 2030, with installed capacity of around 10GW split between solar, wind and hydraulic dams.
18 “Renewable Energy Independent Power Producer Programme (REIPPP).” IEA. 9 Nov 2017. https://www.iea.org/policiesandmeasures/pams/ southafrica/name-38785-en.php 19 “Nigeria Feed-in Tariff for Renewable Energy Sourced Electricity.” IEA. 23 Aug 2017. https://www.iea.org/policiesandmeasures/pams/nigeria/name154529-en.php
