Capitalising on new M&A opportunities with renewable energy

Energy-related M&A activity heated up over the summer, as predicted in our previous blog, with the energy transition driving deal activity - fuelled by growth in renewables (including small scale), storage, micro-grids, EV infrastructure and Energy-as-a-Service (EaaS).

We anticipated an increase in acquisitions as energy suppliers diversify their product offerings, and mid-market players consolidate to realise synergies, and accelerate growth through access to new markets.

Given Labour’s ambition for Britain to become a clean energy superpower, and the emergence of state-owned GB Energy, we’re expecting further increases in M&A relating to renewables across the rest of 2024.

Profits, economies of scale, and enhanced customer engagement are on offer to those who capitalise on these opportunities, as we’ve explored below.

How has M&A activity played out so far in 2024?

Despite ongoing challenges such as high interest rates and stringent regulatory scrutiny, M&A activity has continued. According to data from Dealogic, two industries have experienced significant growth in deal value: technology and energy. We’re seeing more technology integration with energy in M&A specifically specialising in innovative technologies, such as grid infrastructure and energy storage.

For example, Brookfield Investment Group’s acquisition of Neoen for €6.1bn further expands their combined Battery Energy Storage Systems, highlighting the strategic value of these assets in today’s market.

This trend aligns with our predictions in our previous blog, where we anticipated a shift from broad energy transition deals to a more focused, scale-driven consolidation within the energy sector.

Energy security became a priority, but the transition continues to drive M&A

Interestingly, 90% of the M&A deals in the energy sector this year have been related to oil and gas, showing a potential shift in priorities. The energy crisis highlighted our dependency on Russia to provide vital fuels. When Russia’s invasion on Ukraine took place, it was paramount our energy supply was not impacted. This has led to supply security being a top concern, temporarily overshadowing the drive towards renewable energy.

However, this doesn’t mean the transition to clean energy is no longer of importance. Renewable energy acquisitions are still happening and the path to net zero is still on the agenda, supported by rising pressures from ESG reporting requirements and regulation.

Hometree, a challenger residential energy services company, secured its first debt facility from BlackRock to acquire GeoWarmth Heat Pumps and The Little Green Energy Company. They have also secured a £250mil asset-backed debt facility from Barclays to finance over 28,000 residential solar panel systems, batteries and heat pumps across UK for the next two years. Additionally, Certas Energy’s acquisition of Next Energy, one of the country’s fastest growing renewable energy installers, further demonstrates the continuing momentum towards cleaner energy.

It's not just renewable energy that’s attracting investment. LDC’s £12mil investment in Waterscan, a tech-enabled ESG focused water management consultancy, and Palatine’s majority share acquisition in Isle Utilities, a global innovation consultancy in water and environmental sectors, indicate that sustainable water management is also a growing area for M&A. The global push to upgrade aging infrastructure and adopt digital, data-driven asset management strategies in the water sector is a significant driver of this trend.

New opportunities emerging from renewables, and stabilising market conditions

H1 was marked by uncertainty. With the international political environment in question, volatile inflation and high interest rates affecting valuations, many buyers held off on deals.

However, current market conditions show signs of stabilisation. Interest rates have decreased slightly from 5.25% to 5%, potentially closing the valuation gap between the perceived value of the buyer and seller. Moreover, inflation is gradually returning to target levels, freeing up capital for investors and enabling more long-term planning.

The new Labour government has already made some significant steps towards their mission to make Britain a clean energy superpower by 2030. They’ve removed the ban on onshore windfarms and established GB Energy. This could leverage up to £60bn in private investment into renewable energy sources, further fuelling the UK’s drive for energy independence. Additionally, the increased budget to £1.5bn for the Contracts for Difference Allocation Round 6 signals a strong commitment to building new renewable infrastructure, all part of the mission to deliver clean power by 2030.

On top of this, flexibility remains as the forefront of many suppliers and investors minds. As electrification increases, how can the grid be used to support this electrification in a sustainable way?

Energy M&A to increase further, driven by MHHS, flexibility, and customer engagement

As we look towards the remainder of the year, we expect a modest increase in M&A deals, particularly in the renewable energy sector, facilitated by the Labour government’s priority to lead the green revolution. Deals that were previously delayed due to political uncertainty are now likely to take place.

Investment in technology-enabled clean energy solutions is likely to continue to drive the next wave of M&A activity. The introduction of Market-Wide Half Hourly Settlement (MHHS) could reshape investment strategies, particularly in areas that facilitate tariff changes, enabling Time of Use tariffs, and AI-driven data insights. Investments in companies that assist these areas will enhance customer experience and further drive digitalisation across the sector.

This trend is exemplified by UrbanChain securing £5.25mil in a Series A funding round led by Eurazeo, enhancing UrbanChain’s peer-to-peer exchange platform which uses blockchain and AI technologies.

Moreover, the energy industry’s future lies in a decentralised, flexible system driven by digitalisation and supported by renewable assets. Further investment is likely to be made in innovation to enable the scaling of production and rollout of existing technologies such as batteries, solar panels and heat pumps, while also increasing consumer engagement in energy management through Smart Homes, AI and Community networks. These efforts are aligned with broader energy transition and decarbonisation objectives.

Given the current fragmentation in the new energy sector, many companies are expected to pursue a buy-and-build strategy. Consolidation will unlock new markets, enable economies of scale to be achieved, and provide end users an improved and simpler customer experience, which drives engagement.

Lastly, a focus on portfolio investment will be critical for companies aiming to accelerate EBITDA improvements through targeted growth into adjacent markets across Power, EV & Heat. Optimising operating models to reduce costs, and realising value creation from ESG initiatives will be key strategies for success in the evolving M&A landscape.

So far, 2024 has lived up to expectations with a dynamic and evolving M&A environment, particularly in the energy and tech sectors. The rest of the year promises further growth and transformation as companies navigate the complex dynamics of market conditions, technological advancements and regulatory changes.

For more on the new M&A opportunities emerging in energy, and how they can be leveraged to drive customer engagement, contact Angela Tooley.