Insights on renewable energy mergers and acquisitions

SunCast podcast host Nico Johnson joined KeyBanc Capital Markets (KBCM) experts to unpack the M&A landscape in the livestream podcast Renewable M&A Market Update at RE+ in Las Vegas. Panelists included Timothy Beach, Ari Citrin, and Ryan Pirnat, all managing directors within KBCM’s Utility Power & Renewables team.
 

KBCM: A conduit for opportunists

An active player in the renewable energy advisory and lending markets, KBCM leads this industry with nearly $18.5 billion of capital invested in solar, storage, and wind projects since 2007. Solar, wind, and battery storage have been the team’s primary focus to date; however, that’s changing with the maturing market. As developers, owners, and operators continue to increase in size and value, Beach explained, “At some point, renewable energy founders and investors will seek liquidity for growth or monetization of their investments, and we will be there to provide the entire suite of advisory services to help access the capital markets.”
 

What all the buzz is about

Reflecting on their combined industry experience, Johnson asked the KBCM team, “What gets you excited about M&A today, specifically with regards to how the renewable energy market is developing?” All the panelists agreed that the relative early stage of renewables is unique and compelling for a variety of reasons. Beach opened the discussion by acknowledging that, “despite the fact that it feels like there is an enormous amount of capital coming into the space and infinite projects under development, this industry is still very much in its infancy.” In 2022, renewable energy accounted for 21.5% of U.S. electricity generation, of which solar was only 3.4%.⁴

Citrin is inspired by the burst of broad industry support today. “It’s the first time in the history of this space where policymakers, regulators, investors, corporations, and now even utilities are starting to care about renewable energy.” For Pirnat, it’s the convergence of new legislation, emerging technologies, and a changing capital markets environment that “make it impossible to not be excited about renewables,” he said.

Pirnat concluded with recognition of the influx of capital “looking for opportunities” and development of all aspects of the value chain. “Fundraising,” he explains, “is happening at all levels; companies, private equity firms, and infrastructure investors, for instance. Hundreds of billions of dollars are pouring into this space and being put to work in different ways.”
 

How big can it get?

With consideration to the flood of capital and early-stage market penetration for renewables, Johnson asked KBCM to illustrate market maturity for this sector.  Again, the panelists’ opinions were unanimous:  While the opportunity to scale is massive, it’s hard to measure at this neophyte growth stage.

“Unlike other industries,” Citrin said, “where adoption of new technologies and growth happen fairly quickly, energy cycles are 20, 30, 50 years … we have another 20 years before we even reach industry maturity.” 

Beach added that using metrics such as megawatts, gigawatts, or assets under construction are not accurate or comprehensive this early in the game. “As an investment bank, we look at the whole value chain, from construction to components, to help … bring more capacity online as quickly as possible.”

But such efficiencies of scale take time, and how we define the space (as an industry) is equally important, Pirnat observed. “Compared to convergence in automotive and electric vehicles, for example … what does that mean in renewables — for grid stabilization, capacity markets, new technologies, or other unknowns? This industry is still in the early innings.”
 

M&A and value creation

From a capital markets perspective, grid-scale and distribution-level generation (DG) assets, along with storage, have been the traditional sweet spot for transactions, according to Citrin. But with emerging technologies and growth in supply chain participants, scale at every level of development is imminent.

There’s no doubt the surge of market participants and investment capital has created a foundation for tremendous value creation in the renewables market. As evidenced by the 2023 RE+ Las Vegas roster, the attendee profile has changed in size, scope, and asset interest. KBCM panelists expanded on what’s fanning the flames for M&A deals:

International appeal
“Looking around at this conference,” Pirnat observed, “at the scale of attendees outside the United States — it’s truly globally focused.” While the U.S. is far less developed in renewables than Europe, it is more experienced than European countries in managing risks and generally provides higher returns. Additionally, according to Beach, the U.S. “has the best property laws, best bankruptcy laws, and functioning capital markets.”

Broadening new asset interest
The combination of an early-stage growth industry and fast-emerging technologies has inspired investors to rethink their portfolio mix. “Buyers who have had historical focus on hydro, pump storage, gas markets, and renewable natural gas (RNG),” Pirnat noted, “are looking to electric and newer technologies.”

New legislation in utility space
The convergence potential is even greater at the state level, with little to no clean energy jurisdictions in approximately half of U.S. states. “As renewables are increasingly integrated and efficiencies of scale improve, “the possibilities are endless,” Pirnat said. “An entire new wave of M&A could be created if state jurisdictions adopt policy and programs supportive of renewable energy asset creation.”

A timely catalyst: The IRA

“Has the landscape changed as a result of the Inflation Reduction Act,” Johnson asked, “and how is M&A contributing to the IRA?”

The panelists concurred that real tax incentives will have a positive impact on investing. “The timing of the IRA couldn’t have been better, commensurate with the shift away from a risk-free environment. Even with higher interest rates, the returns in many markets have been boosted as a result of the IRA,” said Pirnat.

Investors like stability
Citrin compared today’s market conditions to the stagnation created by uncertainty about federal support for the industry. “Now that we have a stable policy for the next 10 years,” he said, “we expect it will provide a bedrock for investors and capital.” The team’s longer-term clients are now able to monetize investments made three to six years ago, adding that “follow-on clients know what to expect now.”

M&A trendspotting

With consideration to KBCM’s active role in the energy space and the diverse audience attending RE+, Johnson asked the team to provide some insight on the various capital markets and what to expect from each.

“You’re going to see a different level of capital coming into play,” Citrin said. “There is an ABS market and a bit of a bond market today. The equity markets aren’t there yet, but they’re going to come around.” 

Beach acknowledged that private markets have stepped up and valuations are still strong. “However,” he continued, “once public markets open back up, I think we’re going to see a huge wave of consolidation happening.”

“It’s not only the initial public offering that is important,” Pirnat added, “but also the ability of these companies to access public capital for extended periods of time. This will allow the industry to scale at the level required to meet our renewable energy growth requirements.”
 

An emerging value chain

Development is done best at the local level, the panelists agreed — which is exactly where the value chain starts. Beach walked the audience through the lifecycle stages of renewable energy projects, illustrating a predictable wave of growth and consolidation.

1. A small regional operator develops a handful of projects. Typically, early stage development capital acts as a great conduit for the development period.
2. The regionally focused operator then sells to a medium-sized aggregator, which, backed by private equity or an infrastructure fund, amasses a larger portfolio of assets.
3. Eventually, this portfolio will be sold to a pension fund, insurance company, or publicly listed company, which will be the ultimate permanent home for the projects.
    

The liquidity lever

As the leading lender and advisor in the renewable energy market, KBCM is poised to move with the trend over time. Renewable energy is a very capital-intensive industry. While value creation in this sector involves multiple players and many moving parts, the end goal boils down to liquidity. “Whether running an M&A process to sell your company or raising capital to build projects,” Citrin summarized, “developers and asset owners need liquidity to grow their business and stay competitive. That’s the value we deliver — we’re bringing liquidity to a market that has a voracious appetite for capital.”
 

Learn more contact

The KBCM Utility Power & Renewables M&A Team: 

Timothy Beach | Ari Citrin | Ryan Pirnat

Visit key.com/energy.