The race is on to achieve carbon neutrality, and this is providing one of the biggest investment opportunities in a generation for energy businesses and investors around the world.
The global energy sector had a record year for M&A transactions in 2022, with 1,241 deals—the highest annual total on Mergermarket record—worth US$193.8 billion. Value is down 13% year-on-year, but remains the second-highest total since 2007.
It is estimated that, in 2021, energy transition deals accounted for approximately 20% of all energy-sector M&A deals greater than US$1 billion, according to Dealogic.
Europe has long been seen as the pacesetter in this area. The EU’s Renewable Energy Directive, enacted in 2009, laid a framework for individual member states to share the overall EU-wide 20% renewable energy target for 2020. This target has since been ratcheted up, first to 32% by 2030 and then to 40% in 2021. Less than a year after the European Commission revised its target, the conflict in Ukraine led to a surge in energy prices. This has undoubtedly set the region back.
Germany, which was heavily dependent on Russian gas supplies, re-fired coal plants from the grid reserve in July 2022 to save gas and ensure its energy security. The country, Europe's largest economy and the fourth biggest in the world, aims to fully phase out coal by 2038 at the latest. Of course, Europe is not homogenous. Germany is one of several European countries that are lagging in their energy transition efforts. Others include the UK, Ireland, Italy, Poland, Spain and Switzerland, according to the Energy Transition Readiness Index published by the Association for Renewable Energy and Clean Technology.
Better positioned are Denmark, France, the Netherlands, Norway and Sweden, while Finland stands alone in the highest readiness category, which takes into account factors such as national regulation and political commitment, societal buy-in, grid accessibility and electric vehicle uptake. Notwithstanding current geopolitical roadblocks and the urgent need to secure energy supplies, the ambition in Europe is second to none. Norway, Denmark and Switzerland are aiming to reach 100% renewable production by 2030.
Carbon targets equal deals
This will be one of the biggest M&A drivers in Europe for the foreseeable future, led by energy majors repurposing their production portfolios and greening their operations through sustained acquisitions and divestments, rather than spending vast capex to build this out from the ground up. For years to come the energy transition will spur investment across everything from solar and wind projects to hydrogen applications, carbon capture and battery storage infrastructure and technologies.
As recently as December, Spanish energy group Repsol, one of the top 20 companies in the sector in Europe, acquired Asterion Energies from infrastructure fund Asterion Industrial for €560 million plus contingent payments of up to €20 million. The company manages a portfolio of renewable assets in Spain, Italy and France, delivering 7,700MW of capacity. The deal has brought Repsol one step closer to achieving its strategic plan of owning 20,000MW of installed renewable generation capacity by 2030.
Acts of good will
In the US, the Inflation Reduction Act, passed by Congress in August 2022, will serve as a major ongoing catalyst for investment. By resetting existing tax credits and implementing several incentives equivalent to more than US$400 billion in Federal spending, capital will pour into renewable energy sources and related technologies.
Unlike in Europe where there is an almost singular focus on renewables, the US has far more access to cheap fossil fuels, and this is seeing US energy sector companies focus their attention on carbon capture, utilization and storage (CCUS) assets. In May 2022, Chevron set up a joint venture to develop the Bayou Bend CCS carbon capture and sequestration hub owned by Talos Energy and Carbonvert, located in state waters off the shore of Beaumont and Port Arthur, Texas. Similar landmark tie-ups are expected as CCUS moves from niche to mainstream investment thesis, and not just in the US. It is estimated that, globally, the CCUS project pipeline increased by over 50% in 2022.
The scaling up of renewables, meanwhile, will be impossible without significant investment in battery storage infrastructure due to the intermittent nature of these energy sources. Battery storage allows excess supplies to be stored during periods of high production—such as when the sun is shining and wind is blowing—and then released during periods of low production.
This will likely drive more deals in the future and could attract more cross-border M&A, depending on where the technology in being developed. For example, in July 2022, Equinor, Norway's largest petroleum company, bought US-based battery storage developer East Point Energy, which has a pipeline of 4.1GW of early to mid-stage battery storage projects focused on the US East Coast that will serve the grid. According to Equinor, the deal will contribute to its efforts to become “a leading company in the energy transition.”
APAC moves fast
The Asia Pacific (APAC) region is slightly behind in its efforts to achieve a net-zero future, with coal having fueled much of the region's growth in the past two decades. PwC estimates that, in 2020, less than a quarter of governments in the region had a firm net-zero commitment—and the pandemic likely stalled any further discussion at the time. This is a problem given that APAC accounts for around 60% of the global population, including two of the world's most populous nations, China and India. It also accounts for the largest share of GDP and economic growth—and, by extension, higher projected energy demand.
While the region is trying to catch up, it is outrunning both Europe and North America in its pace of renewables investment, thanks largely to major pushes from China, India and Australia. China owns more renewable assets than any country in the world and further investment in 2022 lifted its share of clean energy in the overall electricity mix to a national record of 31.9%.
In India, the International Energy Agency has estimated that a power system the size of the EU would need to be added to the current providers to meet the growth in electricity demand anticipated in the next two decades. As part of this transition, the recently launched Norwegian Climate Investment Fund and KLP, the Nordic country's largest pension fund, made a US$11 million investment in a 49% stake in the South Indian transmission project of ReNew Power, a Nasdaq-listed renewables company and one of the largest in the Asian sub-continent. Norway's new climate fund was only set up in May 2022 and, in addition to the ReNew deal announced in January 2023, has already made two other transactions in India, including a large-scale solar park with Enel and Fourth Partner Energy, a solar, wind and battery storage infrastructure project developer and maintenance company.
There is still a long way to go before ambitious net-zero targets are reached and this will be the central theme for M&A in the energy sector for 2023 and many more years to come.