European Renewables M&A Breakfast Briefing
EU
RenewablesMarket UpdateWith the worst regulatory changes behind it, the European renewables market presents a significant M&A opportunity for an increasingly broad range of investors, though the likes of Italy and Spain still present challenges
The general feeling in Europe is that the renewables market has come through its most uncertain period – that's according to panellists at inspiratia's European Renewables M&A Breakfast Briefing, hosted by Macquarie Group on 24 February.
While true stability might be something of an illusion for a sector dependant on government intervention, the second best thing is clear and reliable medium-term guidance on the anticipated direction of travel.
Mark Dooley, head of infrastructure, utilities and renewables at Macquarie Capital Europe, said the UK was a good example of this. We don't know what the offshore wind contracts for difference (CfD) programme will look like, he explained, but we know the UK government's broad intention to support the technology.
As a result of the returning clarity across Europe, a wide range of investors are now looking at deals – both development-stage and operational assets.
The amount of money and the number of investors are fast increasing, according to Thijs Bauer, managing director at Colville Partners. This is evidenced by Figure 1 below.
Bauer pointed towards the negatively-yielding government bonds in Germany as one of the drivers behind the growing appetite for renewable energy from institutionals.
EU renewables M&A transactions by quarter (Q1 2015 - to present)
Source: inspiratia | datalive *Solar includes Ground Mounted PV, Rooftop PV and Concentrated Solar Power
For certain institutionals, doing deals in renewable energy is much more about sector allocation. And the market is seeing that the investors without exposure to the sector are able to be the most competitive, as those with exposure start to price in risks.
A prime example would be Lancashire County Pension Fund, which last year [2015] acquired a 50% stake in a major Portuguese wind portfolio owned by EDF Energies Nouvelles. While the big Canadian and Australian funds have long had the firepower to compete, newer entrants like Talanx and the Gothaer Group are also now having successes.
While an increasing number of institutionals are investing directly, their previous route to market was through GP funds – vehicles managed by the likes of First State Investments.
Marcus Ayre, head of transactions at First State, noted the irony that by making direct investments institutionals were still paying fees – just to the renewable operators rather than the fund managers.
He added that while the likes of Lancashire and the bigger pension funds have the scale and staff to go direct, there was still a need for GP-managed funds to serve the smaller and mid-market investors who weren't able to.
However, dedicated renewables funds have struggled to raise investment since the regulatory upheavals witnessed in Spain, Italy and other jurisdictions, with limited partners now more comfortable investing in renewables as part of a wider infrastructure mandate, Ayre said.
Declining power prices
One of the biggest talking points in the renewables market currently concerns the impact of declining power prices, which the panel agreed could not drop much further.
Andrew Lee, chief executive of wind developer Velocita, said the power price decrease was mitigated by the investor adjustment to a low interest rate environment over the last three years.
"That has obviously boosted valuations and offset the price decrease – together with the risk premium," Lee explained.
However, when it comes to M&A, some in the market have said that the low power prices have proven to be a difficult obstacle for those trying to offload assets.
In the UK, where the renewables obligation (RO) scheme carries merchant risk for about 40% of its value, certain groups are attempting to sell assets based on their future market value, on the basis that power prices will pick up – but many buyers are saying this is not a risk worth taking.
Spanish resurgence
The story in Europe is one of recovery, with Spain – whose retroactive subsidy cuts have had the most coverage – slowly returning to investors' thoughts.
Alejandro Ciruelos, a managing director in Santander's project and acquisition department, said the major thing that has changed in Spain since its cuts is that there is now no tariff deficit: "People who take a more macro view have started to think it's perhaps not such a bad time [to invest in Spain], because the trigger for all of the retroactive changes was really that."
Assets that were highly levered before Spain's problems are finding themselves in a difficult position, Ciruelos added. He pointed towards private equity firm Cerberus's recent acquisition of renewables operator Renovalia as an example of the new market that has been created, in which distressed plays have become attractive options.
Such opportunities are harder to make attractive for traditional pension funds and infrastructure investors, according to First State's Ayre. Such investors see the retroactive tariff changes, coupled with Spain's uncertain political situation, and are rarely convinced it is a risk worth taking.
Dooley of Macquarie, which is active in Spain, said the market's previous upheavals had led to changes in the way investors approach pricing – whether that means including a return premium or undertaking some form of stress testing. Either way, he said, it adds up to the fact that "the same megawatt doesn't trade for the same price in Spain as it would in the UK".
Offshore wind M&A
Away from onshore wind and solar PV, an increasingly attractive technology for M&A activity is offshore wind.
The sector brings with it the scale that infrastructure investors like – so much so that many view it as a sub-sector of infrastructure, rather than renewable energy – and has a long pipeline of deals set to come to market. As an example, many believe Global Infrastructure Partners' acquisition last year [2015] of a 50% stake in Germany's Gode Wind 1 project [see Figure 2] will be its first in a series of big offshore wind deals.
With a large fleet of wind farms already online out at sea, and more entering operation all the time, the feeling is that the sector is ripe for institutional buy-in at various stages of development.
This trend comes as the sector is moving away from its historical delivery model. Utilities, who were the early pioneers of offshore wind, are finding themselves needing support from financial investors and industrial players. The likes of Macquarie, the UK Green Investment Bank (GIB), Copenhagen Infrastructure Partners and Siemens are some of the most active.
Macquarie's Dooley says having a blend of players in an equity consortium is "essential", helping to bring the scale of investment required.
Ciruelos added that 2016 promised to be a "very strong" year for offshore wind – particularly for Germany, the Netherlands and the UK. In the case of the latter, he said five projects were due to reach financial close this year.
Pockets of opportunity
Other European renewables markets that drew the panel's attention at inspiratia's event included Portugal, where First State bought a major onshore wind business from Enel Green Power in one of last year's biggest M&A deals.
Ayre said it was Portugal's more "consultative" approach to its regulatory changes that made the deal attractive: "Particularly the way that they had restructured the regime to extend feed-in tariffs, giving you that stable cashflow for longer."
While the back end of 2015 saw a handful of big wind acquisitions in Portugal, the consensus is that few, if any, similarly large opportunities remain. As such, First State plans to use Finerge – the EGP business it acquired – to hoover up some of the smaller assets into its portfolio.
Poland was heralded as another market of interest, while Colville's Bauer pointed towards Germany and its 80GW of installed renewable capacity as having huge M&A potential, particularly for local players.
Finally, Velocita's Lee remained confident about his home market: "There's still good business to be done in the UK," he said.
The developer is currently the subject of a sale process, with its private equity owner Riverstone on the lookout for a new investor. Lee said they had seen interest from all categories of investor, and while the group's future strategy depends on the eventual buyer, it business model is focused on mature markets with low risk and solid financial returns.
Panel:
- Mark Dooley, Head of Infrastructure, Utilities & Renewables, Macquarie Capital Europe
- Alejandro Ciruelos, Managing Director, Project & Acquisition Finance, Santander
- Thijs Bauer, Managing Director, Colville Partners
- Marcus Ayre, Head of Transactions, First State Investments
- Andrew Lee, CEO, Velocita Energy
Partner: Macquarie Group
Date: Wednesday, 24 February, 2016
