2016 to be game-changer for power and utilities sector in Australia

Monday 22 February 2016

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  • Technology and empowered consumers shaping trends
  • Investment in renewable energy in Australia to surge; renewables accounted for 50% of global deal value in 2015
  • Government asset sales again set to dominate deal value

A surge in renewable energy investment, empowered consumers and further NSW asset sales will shape what is expected to be a busy year for M&A in the Australian power and utilities sector, says EY Oceania Power & Utilities Leader Matt Rennie.

Rennie’s comments follow the release of EY’s global report, Power transactions and trends: 2015 review and 2016 outlook, which notes that Australia is likely to be a regional hot spot for the sector deal activity in 2016, the nature of which is likely to have lasting impact.

“Momentum is rapidly building from disruptive technologies that are empowering consumers and changing the face of the sector. Expect the unexpected.”

In Australia, deal value in 2015 nearly doubled to reach a four-year high of US$12.2bn from nine deals, primarily due to the US$7.4bn privatisation of NSW state-owned TransGrid. Privatisation is set to continue in 2016 with potential longtime lease of both AusGrid and Endeavour Energy.

The report notes that globally deal value in the sector in 2015 reached a six-year high of US$200bn. Renewables accounted for 50% of transactions with 245 deals generating US$68bn.

Alongside renewables, cross-sector convergence was a primary deal driver for utilities seeking new avenues for growth globally, with transactions globally involving convergence totalling US$33bn in 2015.

Strong global investor appetite for renewable energy in Australia

Rennie says the Federal Government’s revised Renewable Energy Target (RET) is sparking a surge in investor interest in renewable energy in Australia, helped as well by a range of new state-based wind and solar energy programs and more positive renewable energy political in recent months.

Investment in large-scale renewables projects in Australia reached just US$830m in 2015, which is about one-third of what is required to meet the 2020 target. The revised RET, set at 33,000 gigawatt-hours of renewable energy generation by 2020, will require about 5000 megawatts of new projects, accounting for between $8bn and $12bn of investment in the next few years.

“We expect the revised RET to trigger a wave of new renewables projects,” says Rennie.

Already Queensland utility Ergon Energy has released a tender to buy 150 MW of renewable energy capacity which attracted strong interest from diverse players. In January 2016, privately-owned Alinta Energy also called for expressions of interest for large-scale generation certificates and renewable energy.

The report notes that while these developments are positive for the clean energy sector, as new renewable energy capacity comes online, existing coal-fired generators will need to review costs and flexibility of operation if they are to remain viable.

Technology a key driver investment and deals

Rennie says energy technology, especially battery storage and connected homes, and a growing trend by consumers toward grid independence will also set off a new wave of M&A, with technology companies and utilities forming partnerships to retain their roles in the value chain.

“Australia is seen by many as a test-bed for battery storage technology innovation, with relatively high retail electricity prices, the highest penetration of rooftop solar PV in the world and a tech-savvy population,” he says.

“So we expect M&A activity in Australia to be stimulated by this continued adoption of rooftop solar and a growing consumer inclination toward grid independence. Utilities are responding to this trend by seeking partnerships with battery storage players such as Tesla and Panasonic to offer customised services to consumers. We are also seeing non-traditional players enter the market.”

Impact of disruptive technologies

The report notes that the valuations of transmission and distribution assets, as well as generation assets, will be impacted by the growing penetration of disruptive technologies such as solar rooftop and battery.

Already, energy efficiency measures and demand response programs are reducing electricity demand. Annual energy consumption in Australia’s eastern states fell by 7% between 2009 and 2014.

“Many in the industry believe that 2016 will be a critical year that reveals more about the timing and degree of impact of these disruptive technologies on valuations,” says Rennie

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Notes to Editors

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