The global economy is going through a major energy transition, steadily reducing its reliance on fossil fuels and accelerating its adoption of cleaner, more renewable energy resources. The trends are playing out in M&A with more deals.
The transition to renewable energy supports the increased electrification of the global economy, which, in turn, is driving growth for a host of innovative businesses that seek to capitalize on trillions of dollars of market opportunity.
Despite the economic headwinds of Covid-19, global investment in renewables reached $137 billion in the first half of 2020, a 5 percent increase from 2019, according to Bloomberg New Energy Finance (BNEF). For the 12 months ended June 30, 2020, annual investment in clean energy represented a nearly 3x increase from 2006.
BNEF projects that renewables and batteries will represent nearly 80 percent of projected investments in new power capacity through 2050. While the use of natural gas is predicted to increase throughout the projected period, oil demand is expected to peak in 2035, while coal is expected to continue its decline as a global energy resource. Overall, BNEF estimates that this changing landscape will require more than $64 trillion in investment into power and grid infrastructure.
U.S. President-elect Biden is likely to accelerate such investments in renewables and energy efficiency. This support has been further strengthened by the increasing cost-competitiveness of renewables with traditional resources.
According to the National Renewable Energy Laboratory, over the past decade, wind energy prices have decreased by 70 percent, and solar photovoltaics have fallen by 89 percent on average. Lithium-ion battery prices have declined nearly 80 percent over the past five years.
Greater focus on decarbonization is also driving increased electrification across the global economy, including energy-intensive sectors such as industrials and transportation. In the U.S. alone, electricity usage is poised to grow from 3,935 billion kilowatt-hours to 5,142 billion by 2050, per Statista.
Yet, despite the rapid growth in recent years and ahead, the energy transition is likely to be a multi-decade process that will require continued extraction and use of fossil fuels for the foreseeable future. Oil demand will remain robust for several decades, and natural gas will continue to grow in importance as an energy resource. This reality is being met with increased digitalization and environmental, social, and governance (ESG) focus from oil and gas companies that seek to operate more sustainably while optimizing production, creating opportunities for companies that can help.
Over the past several years, there has been a significant amount of M&A activity targeting this evolving landscape. Acquisitions have included providers of electric vehicle charging technology, demand response solutions, energy efficiency services, and energy management software.
Strategic acquirers active in the space include professional services companies like Accenture; utilities such as Duke Energy and Southern; industrial technology companies like Emerson, Honeywell, Koch, and Generac; international oil companies like Shell and Total; and global energy service companies such as Engie, EDF, and Enel.
The M&A market has been further supported by increased interest from the financial sponsor community. Dedicated impact funds focused on ESG mandates, including KKR Global Impact, Bain Double Impact, and TPG Rise, have been raised in recent years to compete alongside infrastructure funds. Other participants include energy transition-focused funds such as Energy Impact Partners, Lime Rock New Energy and Ara Partners, as well as traditional sponsors and energy funds. In sum, the competition is strong.
The Year(s) Ahead
As we look ahead, we believe the following areas are especially well-positioned to benefit from the ongoing energy transition:
Infrastructure and Utility
These businesses will benefit from both investments in new grid infrastructure and, more substantially, the ongoing maintenance and replacement of the aging electric grid. Financial sponsors have been very active in these markets, and they have built platforms across the space, including electric and natural gas line services such as PowerTeam (owned by Clayton Dubilier & Rice); distribution pole maintenance offers such as Osmose (EQT); underground locating solutions such as USIC (Partners Group) and GPRS (Kohlberg & Company); geospatial services such as Survey and Mapping (Austin Ventures); and substation and electrical services such as Shermco (Gryphon Investors) and North American Substation Services (Industrial Growth Partners).
We expect to see continued focus on energy management in the coming year, particularly in businesses focused on energy efficiency, demand response, and ancillary energy management services. Large platforms in the space include energy efficiency program managers such as Franklin Energy (Abry Partners) and CLEAResult (TPG); software providers such as Uplight (Rubicon Technology Partners); ESCOs such as Veregy (Court Square), SiteLogIQ (AEA Investors) and Bernhard (Bernhard Capital Partners); and demand response providers such as CPower (LS Power), NuEnergen (TriVest), and Voltus (NGP Energy Technology Partners).
Software and service providers represent some of the most attractive opportunities in the renewables value chain. Residential and commercial and industrial (C&I) installers are set to benefit from the rapid growth in distributed solar and storage in the coming years. Meanwhile, operations and maintenance (O&M) platforms will benefit from the large and growing installed base of renewable assets. Platforms in the space include solar and storage installers such as Powerhome (TriVest), O&M providers such as NovaSource (Clairvest Group Inc.) and Pearce Services (New Mountain Capital), and software providers such as Power Factors (Oaktree Capital) and Also Energy (Clairvest Group Inc.).
Environmental service companies are an increasingly critical link in the sustainability value chain. In addition to beneficial re-use and recycling, areas such as testing and analytical services, water and wastewater management, emissions monitoring, and environmental compliance will continue to see growth and investor focus. Market fragmentation in these areas often provides the opportunity for additional consolidation with platform investments. Relevant platforms include testing and analytical service providers such as Montrose Environmental (public), wastewater treatment providers such as Valicor (Pritzker Private Capital), emissions monitoring technology and solutions providers such as Flogistix (White Deer Energy), and compliance software solutions such as Cority (Thoma Bravo).
There are many ways to create value as the global economy continues its long-term transition to cleaner, more renewable sources of electricity. It’s exciting to see new business models, technologies, and services that will play such an important role in our collective future.
Luke Semple and Drew Spitzer are managing directors in the Energy, Power & Infrastructure Group at Harris Williams.
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