The US renewables sector has battled various challenges over the past few years. High interest rates, stubborn inflation and supply chain bottlenecks have pushed up the cost of materials, squeezing profits in the industry.
These headwinds resulted in subdued activity in 2023, but dealmaking could be making a recovery in the sector. Deal value of US$61.7 billion for the first nine months of 2024 is heavily weighted by GE’s landmark US$38 billion spin-off of renewables business GE Vernova—the largest deal of the year globally—but even discounting this transaction, the remaining US$24 billion is higher than the US$22 billion in deal value recorded in all of 2023.
Overall, the US energy sector has performed just as strongly in 2024, posting the highest Q1-Q3 value since 2019. Of that, renewables made up a notable 27 percent of the mix, up from just 12 percent in Q1-Q3 2023.
Deal drivers
Renewable energy’s share of total electricity production is also on the rise in the US, driven by government and societal pressure pushing the agenda forward. The rate varies across subsectors, though, with solar and battery power experiencing the most prolific growth. A record 31 GW of solar energy capacity was installed in the US in 2023—an estimated 55 percent increase compared to 2022. Growth within the offshore wind sector, however, has been more conservative.
President Biden’s Inflation Reduction Act (IRA) has been a major stimulus for growth across the sector. The landmark act, signed in 2022, encourages investment in clean energy and related technologies by facilitating access to tax credits. The legislation has led to a burst of clean-energy manufacturing facilities across the US. According to American Clean Power, 113 manufacturing facilities or expansions have been announced since 2022, totaling US$421 billion of clean energy investment.
Despite this increase, however, a significant amount of renewable power generation is still needed to meet US greenhouse gas reduction targets. According to the World Resources Institute, annual installation rates of renewables in the next few years need to almost double from last year’s level if the government’s 100 percent carbon-free electricity target is to be met by 2035. This leaves a sizable hole for investors to fill.
Plugging the investment gap
Government initiatives, along with stabilizing interest rates and a more favorable financing environment, are encouraging investment in the US renewables sector, both domestically and from overseas.
One significant deal announced this year saw US PE firm Stonepeak acquire a 50 percent stake in Dominion Energy’s Coastal Energy offshore wind farm off the coast of Virginia. The US$3 billion investment will help finance the construction of the 2,600 MW project, which is expected to be the largest offshore wind farm in the US.
Spanish utilities powerhouse Iberdrola, meanwhile, agreed to acquire its remaining stake in Avangrid—subject to regulatory approvals—as it seeks to increase US exposure. The US clean energy company houses renewables assets across 24 states, reaching an estimated 3.3 million customers.
Private finance is also making moves in the sector. Brookfield Asset Management has recently committed to invest up to US$1.1 billion in sustainable fuel producer Infinium. Sustainable fuel producers are currently experiencing an investment boost due to the US Environmental Protection Agency's Renewable Fuel Standard, which aims to reduce greenhouse emissions while also reducing reliance on imported oil.
Private finance’s involvement in the renewables sector is likely to grow over the coming years, with the gradual stabilization of interest rates narrowing the bid-ask spread and pushing more deals over the line.
Challenges on the horizon
Despite these promising signs, the US renewables sector continues to contend with several headwinds. While falling interest rates will bring some relief, they remain stubbornly high, and supply chain bottlenecks continue to push up costs.
Rising protectionism within the US and Europe also holds the potential to hamper progress. Strict trade barriers on Chinese products, for example, could mean that the sector misses out on valuable technology, slowing the national response to climate change.
Indeed, demand for fossil fuels is rising despite the growth of renewable power generation, with experts pointing to “lopsided” progress in the shift to renewables. Until clean energy has the capacity to reliably meet a significant portion of US energy demand, this tension with traditional fossil fuel production will remain. The latter half of 2023 saw a number of big-ticket transactions in the fossil fuels space, notably Chevron’s US$59.7 billion agreement to acquire mid-sized independent Hess and ExxonMobil’s US$68.3 billion acquisition of Pioneer Natural Resources. These deals indicate that investment in conventional energy remains high on the agenda of global energy corporations.
The rapid growth of AI is another complex issue facing the sector. Data centers used to power AI technology need vast amounts of power, which, according to the International Energy Agency, could double their electricity consumption by 2026. With the US home to a third of the world’s data centers, this places intense demand on domestic electricity production, which has significantly benefited traditional energy but could present an opportunity for renewables.
Caught in the political crossfire
Notwithstanding various challenges, the drive toward renewable energy shows no sign of slowing down. Ambitious government targets leave a sizable investment gap to fill, with the US’s advanced infrastructure providing a draw for both domestic and overseas investors.
The upcoming US election could prove an important moment for the industry, as the candidates diverge sharply on energy and climate policy.
While some political uncertainty remains, dealmakers continue to be driven by the fundamentals of the market and the macro trends of sharply increasing load, the imperative of reliability and the increasing drive to decarbonize the US energy system.
