Canada: M&A Activity In Renewable Power Sector Signals Growing Optimism About Viability Of Renewables

At the Indo-Canada Chamber of Commerce Awards Gala this past weekend, the High Commissioner of India to Canada, Nirmal Vermal spoke enthusiastically about India's interest in promoting renewable power development, and also indicated that India would draw from the experiences of countries such as Canada to inform its renewable policydecisions. Mr. Vermal's comments are significant for two reasons: first, they highlight the extent to which renewables are no longer just the pet projects of developed economies; and second, they reflect a tacit recognition that the developed economies' initial policy endeavours in this area, while undoubtedly successful in promoting renewables development, were not without their flaws.

Indeed, the recently-released Renewables 2014 Global Status Report (GSR Report), put out by the Renewable Energy Policy Network for the 21st Century, situates India within the context of a broader trend of lesser developed economies—particularly countries throughout Latin America, the Middle East and Africa—starting to focus on the primary development of renewables within their jurisdictions. As the GSR Report notes, the number of countries with renewable energy support policies in place has been steadily increasing in the past decade, rising to 138 countries as of early 2014. Importantly, though, the GSR Report also observed a simultaneous trend of many of these countries undertaking a significant retooling of their policies as they look to retrench from, and in some cases, retroactively revoke, the regulations, subsidies and tax incentives that have caused consumer energy prices to soar and have invited significant political blowback.

This reshaping of renewable energy policy is already having, and will continue to have, a significant impact on the market dynamics of renewables development and use. Promisingly, the decline of public sector investment in renewable projects does not spell the end of renewables development. This is not least because of what the Bloomberg New Energy Finance report, Global Trends in Renewable Energy Investment 2014 (Bloomberg Report), refers to as a "phenomenon of unsubsidised market uptake" by companies and investors that are adopting an increasingly "warm attitude to renewables". This "market uptake" is manifesting itself in numerous ways, including in the form of new investment in the sector—through public market equity offerings, venture capital and private equity investment, and asset financings—as well as the recycling of finance in the sector through M&A activity in the secondary renewables space. With respect to the latter, the Bloomberg Report found that, in 2013 alone, $54 billion was spent on acquisition activity in the form of corporate mergers and takeovers, asset purchases, buy-outs and re-financings.

As reported by PwC in its 2014 deal outlook study (PwC Report), there is a full roster of acquisition-focused companies and funds that are eager to expand into the renewables market being vacated by primary developers—developers who were initially attracted to the sector by generous subsidies or tax incentives, but who are now keen to liquidate their assets as those benefits disappear. The most significant drivers of this M&A activity are "corporate buyers" (a term which includes, but is not limited to, energy and utility companies), who accounted for 75% of renewables deal activity in 2013, but various forms of institutional investment funds, infrastructure funds, banks, venture capitalists and private equity firms are also significant players in this field.

At first blush, this increase in M&A activity seems surprising: governments' policy vacillation and retreat from subsidization would, one would think, undermine investor confidence and deter acquisitions. But this train of thought merely reflects certain embedded assumptions about renewables: mainly, that they are not, on their own, viable business propositions. The fact that companies and institutional investors are taking a bet on renewables is promising precisely because it reflects an implicit market confidence that renewable assets can generate solid yields, even in the known or predicted absence of government supports.

This market signal is noteworthy not least because it represents such a marked change from years past. A number of factors can be identified as having contributed to this shift: for one, renewable power technologies are becoming increasingly cost-competitive; as noted in the Bloomberg Report, the worldwide average cost of electricity has declined by 53% for PV systems and 15% for onshore wind turbines, while the cost per MWh of coal- and gas-fired generation has increased in many countries. There have also been significant reductions in the costs associated with installing, maintaining and operating renewable projects, as well as improvements in grid management practices and infrastructure. Energy storage technologies are also starting to reach a level of commercial maturity that will make them widely-deployable, thereby allowing renewables to be treated as stable suppliers to electricity grids. Additionally, a Deloitte study found that many major companies are using their investment in renewables as a means to "offset their tax liabilities on robust profits, and to fulfill their corporate commitments to developing clean energy". Finally, the recently-announced carbon emissions reduction regulations in the United States, and similar regulations in other countries, are seen as likely to increase demand for renewables as older coal-fired plants are retired.

In short, M&A activity in the secondary renewables space is an indicator of the growing optimism about the continued role for, and viability of, renewables within energy markets. Importantly, this shift in confidence not only stands to benefit investors, but also the countries keen to build or sustain momentum around renewables development that have recognized that governments cannot afford to singularly shoulder the burden of achieving this end. Of course, for newcomers to this game, such as India, it seems clear that sometimes it pays not to be the policy leader.

Norton Rose Fulbright Canada LLP

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