Here are six key items to be aware of today in US Renewable Energy M&A Transactions:
- As the demand for renewable energy increases, so does M&A activity in the industry. The M&A renewable energy market remains very active for both development-stage and operating assets. Foreign strategic buyers and private equity funds continue to show a strong appetite for the US renewable energy operating assets market, which offers a reasonably predictable revenue stream without the risks associated with the development and construction of a project
- Renewable energy tax incentives remain critical to the value, financing, and successful development of a project. Any party involved in buying or selling a development-stage project needs to be well versed in the applicable tax rules (including as they evolve with the current infrastructure and clean energy plans of the current administration) so as to cement, to the maximum extent possible both in amount and certainty of availability, the project's qualifications for these tax incentives. A single mistake on this front can significantly reduce a project's economics, financing, and marketability.
- Representations and warranty insurance (RWI) has become a key component of overall M&A transactions and the trend has continued in the renewable energy industry. Recent deal flow, in particular for development-stage energy projects, shows RWI gaining traction in the renewable energy M&A market, even for single project deals. In that context, understanding the claims handling experience, payment history of the selected insurer, and what provisions in these policies can be negotiated becomes an important part of these transactions. Sheppard Mullin has dedicated attorneys whose practice focuses on providing legal and strategic advice to clients on the effective use of RWI.
- Understanding the regulatory framework (e.g., FERC, HSR and CFIUS) is critical for transaction efficiency and closing certainty. Because these transactions involve buying or selling entities that engage in wholesale generation and transmission of electricity in regulated markets, and can be deemed critical infrastructure for national security purposes, understanding the regulatory framework of these transactions early in the process remains critical in controlling both the timing and the successful close of a transaction.
- The development stage of a project spans a wide range, including from site identification to pre-construction. When buying a development-stage project, it is critical to precisely calibrate the project's specific stage within the development cycle up front. Such early analysis will heavily impact the key terms of the M&A transaction including amounts at risk because of a milestonebased payment approach, scope of representations and warranties, and the extent of put/call rights. Similarly, properly structured development services agreements or joint venturing can reduce or reallocate buyer-side risks associated with lack of skills or relationship to assess project risks and create meaningful pathways to project and deal success.
- Non-compete provisions and build-out agreements should be carefully negotiated. With the increasing number and types of developers and sponsors of renewable energy projects, the scope and term of non-compete provisions in development-stage renewable energy M&A have become more nuanced. Similarly, build-out agreements to protect the project's revenue stream (including by protecting against wake effects) are more frequently requested and negotiated in sell-down transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
