M&A in the energy (not including oil and gas) sector has been holding up, despite the headwinds facing M&A generally. According to White & Case analysis there were $143bn worth of deals last year globally – down on the $174bn in 2022, but still in the ball park. And if you look at deals involving UK targets, energy sector M&A is doing more than holding up. Last year there were $13bn worth of transactions, the second highest amount in the past decade and up on the $9bn completed in 2022.

“If you look at M&A volumes more broadly, and then look at energy deals compared with other sectors, you see that energy is still flying,” says Gavin Quantock, who leads KPMG’s clean energy M&A team alongside fellow dealmaker Adrian Scholtz. “There’s definitely a continued upward trajectory and it’s great to be at the heart of it. And I don’t think that’s going to change any time soon. Energy transition is continuing. But the question is, has it slowed down? It has a little bit. There aren’t as many deals happening as in the past two years, but there is still significant deal flow and there is more capital than ever before.”

Quantock’s own team has been busy, advising on eight transactions in eight weeks around the turn of the year, he says. Together, those deals had a combined value of more than $5bn, and the headline deals were the $850m equity raise for Octopus Energy in December 2023, and a month later the $800m sale of Toucan Energy’s portfolio of 53 UK solar farms, to Schroders Greencoat, the specialist renewables manager of Schroders Capital.

The concept of a ‘specialist renewables manager’ would have caused confused looks in investment houses, to say nothing of energy boardrooms, a generation ago, but the macro picture has completely changed since then. The interlocking requirements to diversify energy supply, phase out fossil fuels and increase energy security have led to a totally new market, both in terms of investment opportunities available and the active players.

“There are lots of new pools of capital in the space,” says Quantock. “It’s a truly global M&A sector. There are pension funds, and then there’s the rise of transition funds as well. Brookfield’s large infrastructure fund, Apollo, KKR and Blackstone have all raised energy transition money aiming for higher returns when providing capital to businesses that are enacting the energy transition.” He estimates that there is $1.8tn of dry powder in private equity earmarked for energy transition – a 17% year-on-year rise. “There are a lot of energy transition deals happening and this isn’t going to slow down.” 

Closure delays

Additionally, Quantock points to a significant amount of capital that is looking in the energy tech space, but adds: “Although the environment is still buoyant and lots of transactions are still being done, deals are taking longer to close and prices in onshore and offshore wind have softened.” He adds that core renewables deals have cooled a little bit lately in terms of the number of deals in the market, but deals are still being done. 

Like all sectors, deal valuations are being impacted by the interest rate environment: “The market has the view that rates will start falling, but doesn’t know when that will be,” says Quantock, adding: “And despite the amount of dry powder, depending on when that money was raised and where it is in the cycle, people’s expectations and requirements have changed.”

Tim Short, an infrastructure partner at 3i, also sees the energy market as “pretty buoyant”. Events in Russia “highlighted the need for domestically sourced energy” and a diversification of supply. That feeds into a further switch towards solar and wind energy, as well as two more key trends: lithium batteries and biofuels, which Quantock says will be a key area of focus and expected deal flow.

“There’s a lot going on in the sector,” says Short, “and while public policy in the UK and elsewhere has been confused, it’s generally supportive of further investment. But we are now in a market where since the spike in energy prices two years ago, things have come off dramatically. And that does present challenges in terms of the valuations.”

“The flip side to that,” he continues, “is that since the supply-chain crunch of 18 months ago, the cost of equipment is coming down, so we’re seeing solar panels, for example, materially cheaper than they have been for quite a long while. 

“The overwhelming amount of capital is going into the generation side, meaning renewables, but also energy storage systems to counterbalance the intermittency of renewables.”

A well-publicised problem for the sector is the nature of the national grid. It would seem pointless building up huge new power sources only to find there’s inadequate infrastructure to distribute the energy. Future-proofing the grid requires the sort of thankless, long-term investment that private investment is unlikely to provide. But that’s not the only place the UK state will have a role; as Short says, “Talk of freeing up network access so that you can get an earlier network connection for your wind farm or solar farm is a step in the right direction for now, but we see it as talk rather than something that’s having a big impact yet.”

In the meantime, if the grid isn’t reaching the potential power sources, there have been opportunities to bring those power sources closer to the grid. 3i invested in Infinis, a renewables business that captures the methane from landfill sites and uses it to generate electricity. Adding solar and battery applications to their sites, 3i’s thesis for Infinis was, says Short, that “landfill sites are always built close to centres of population, so if you’ve got a grid connection on the landfill site, it’s a certainty that you’re going to be supplying electricity in a location the grid actually needs because you’re close to demand. It’s the opposite of building wind farms in the north of Scotland.”

For Short, the solution is “more distributed generation – rather than large transmission-connected plants. It’s the small generation, 10-50 megawatt suppliers connected to the distribution network as close as possible to where demand is.”

What that means for M&A is not quite clear. McKinsey found that in the oil and gas exploration and production sector, more than 50% of M&A deals failed to create value for shareholders. But maybe clean energy can do better. Another McKinsey report highlighted the role of digital tech in enabling companies to “consolidate at scale”, while PwC’s UK energy, utilities and resources deals leader, Matt Alabaster, says: “We estimate 45% of the decarbonisation needed in the UK will have to come from technologies not yet commercially mature.”

Storage and infrastructure

Looking forward, there are certain factors to note. A key driver of M&A in the sector will be the outcome of the second Review of Electricity Market Arrangements consultation, which closed on 7 May. Costs (to build and maintain) the necessary infrastructure has dampened energy sector deals, but this might present opportunities for funds/investors with cash. Meanwhile, several European utility entities have modified their renewable energy targets, due to high costs and low power prices. The level of M&A activity in 2023 was the highest amount for any UK industry, highlighted by PwC in its Global M&A Industry Trends report, and Alabaster adds that “looking forward, sectors we expect to remain lively for M&A activity include energy storage, network infrastructure and transport decarbonisation, as well as in areas such as building decarbonisation and energy services businesses. 

“PwC’s recent UK Energy Survey found that only 19% of UK organisations said they had achieved significant success in managing energy costs, showing that there is a real opportunity for businesses that can provide the skills, solutions and capital needed to help organisations manage their energy usage better.”