Investing in New Energy
As the world focuses more resolutely on its climate change goals, reducing carbon emissions, meeting common global directives, including perhaps most prominently the Paris Climate Agreement, we are seeing an inevitable increase of investment into new energy power sources as businesses seek to transition their operations from brown to green. As Miranda discusses in her editorial the Covid-19 pandemic has shifted the global mindset towards the necessity to focus on ESG and our energy transition, more resolutely than ever before.
That’s not to say that the transition hadn’t already begun. According to data from the International Energy Agency (IEA), global renewable energy capacity grew by an incredible 45% in 2020 alone, reaching 280 gigawatts (GW). As our appetite for energy consumptions grows unabated, industry forecasts suggest this level of increased capacity from new energy sources is set to become the new normal – in fact the IEA predicts that for 2021, we will see an additional 270 GWs of renewable energy capacity added.
Likewise, in 2020, investment in global renewable energy capacity was USD 303.5bn, an increase of 2% year on year. It also marked the seventh year in which investments into renewable development have surpassed USD 250bn, signaling clear advances sector. Furthermore, investment appetite and capital allocation towards green infrastructure remains robust, particularly amongst infrastructure funds, pension funds, and energy companies looking to accelerate their energy transition efforts. So, despite the headwinds brought by the Covid-19 pandemic, the development of assets and M&A within the renewable energy sector has remained resilient.
Surely then, for those looking to invest in the new energy/renewables space, it’s good news?
Platforms or Assets
Depending on their priorities, when it comes to M&A in the new energy or renewables space, investors may be looking at two options to develop and grow their business: acquiring individual assets or a platform.
Individual asset acquisitions are more typical where an investor sees that a complementary asset, which is value accretive as a “bolt-on” to an existing portfolio. Typically, a player who is already well-established and looking to expand their presence in an existing discipline or geography, where they already have the know-how and technological capabilities to succeed.
Conversely, investors may be looking to acquire a platform, or portfolio of assets which has operational assets as well as those under development, as well as an existing management team. Thus, with a team, existing knowledge base, and importantly, identified or well-progressed growth projects, the investor is able to fast track their entry into the sector or gain a foothold in a new region.
And with the emergence of new types of investors in renewables (e.g. energy companies) and increasing diversification geographically, the majority of capital in the market today appears to be looking for platform acquisitions. The desire to deploy larger and larger cheque sizes for individual deals is another reason why investors gravitate toward platforms.
As an example Natixis, alongside its affiliates Vermillion Partners and EFG Hermes, recently acted as the exclusive financial advisor to a consortium led by China Three Gorges South Asia Investment Limited (CSAIL – a subsidiary of China Three Gorges Corporation (CTG)), for the 100% acquisition of Dubai-based Alcazar Energy Partners, which owns over 400MW of wind and solar projects in the MENA region. The transaction was CTG’s first investment in the MENA region, and has established a solid foundation for CTG to further expand its renewables footprint in a region, which is exposed to strong structural growth trends.
A Question of Quality
For all the abundance of projects and targets in the market, investors/buyers are still resolute in their focus on quality. Which means that despite the buoyant markets, some targets may still find it difficult to gain investors. In fact, we see certain recent deals in the market that have not completed or not achieving the valuations that sellers were initially expecting.
So what makes a quality target? It is really in the eye of the beholder, and the challenge is to find a project or platform that has the right balance of perceived risks vs returns, which fit an investor’s unique set of risk appetite and investment objectives.
Risk vs Returns
Underpinning current dynamics in the infrastructure sector (including renewables), is the well-documented abundance of “dry powder” and resulting yield compression. To achieve the same return hurdles, financial and strategic investors alike have had to consider exposure to higher risk assets.
This has not only driven a change in mentality for infrastructure investors, but the overall approach to their risk profile. Attractive returns can still be achieved if risks are properly understood and appropriately managed, and as such, there has been increasing acceptance of new technologies and technical and commercial risk profiles. Having said that, every investor’s perspective is unique and there is no common path to what can be accepted or not.
To outline some of the high-level factors that differentiate where capital is deployed in the new energy or renewables sector:
- Merchant risk: a majority of investors in Asia traditionally would only seek out fully contracted assets with long-term Power Purchase Agreements (PPAs), which, once upon a time did provide stable, double-digit returns. Today, that is no longer the case, and thus investors are willing to take on greater exposure to merchant risk, although the degree of merchant appetite differs.
- Greenfield risk: although a portfolio of assets with a mix of operating and development assets is generally preferred by investors, there remains a wide spectrum of investor perception and comfort in managing development risks, and thus the appetite and value ascribed to greenfield projects.
- Country risk: here lines can be drawn along OECD vs non-OECD, investment grade vs non-investment grade, perceived political and/or regulatory stability, and currency linkages. In Asia in particular, the two biggest renewables markets, China and India, also illicit a wide spectrum of views and reactions, depending on who you ask.
- Utility scale vs distributed projects: another trend over the past 3-4 years has been the emergence of distributed solar projects, in particular Commercial & Industrial (C&I) rooftop solar. In Asia Pacific there has been a notable growth in C&I rooftop solar capacity being developed, especially in China, India, Australia, and across Southeast Asia. While the ability to scale-up and customer counterparty risks remain generally less well understood, we are seeing growing willingness from investors to consider distributed projects.
- New technology: one may argue battery storage is no longer “new technology”. However the revenue case and economics of investing in such assets remain subject to a wide range of views and approaches. The viability or commercial case for batteries is also highly dependent on country-specific market dynamics. Another example of new or emerging technology is green hydrogen, where views appear to be bookended by “inevitable wide-spread adoption” and “subsidy-dependent hyped-up technology”.
As Natixis continues to grow our deal flow and market share in the renewables/green sector in both Asia and globally, we continue to witness a breadth of investment opportunities while at the same time significant (and growing) sums of capital still looking for a home in this sector. The key to success is appropriately matching the capital with opportunities that exhibit the right risk and return profile.
Natixis and its global network of boutique partners have recently advised on and continue to be involved in a number of buy-side and sell-side transitions in this sector. Furthermore, we continue to push the boundaries and look for innovative financing solutions to support interesting projects for clients.
As another recent example, Natixis recently acted as one of the Mandated Lead Arrangers for the US$80 million debt financing to TEESS, the 50/50 joint venture company between TotalEnergies and Envision, for a 170 megawatts (MW) solar portfolio in China. It was the first green project financing in China’s C&I solar sector, and which was certified by a third party, Sustainalytics, the world's leading environmental, social and corporate governance rating company.
With perspectives and expertise gained from the combination of 1) our global advisory deal flow and 2) innovative infrastructure financing solutions, Natixis is uniquely positioned to deliver bespoke support to our sell-side or buy-side clients, to help find the right pool of capital or investment opportunity.