Our 15th Capital Confidence Barometer reveals that merger and acquisition (M&A) activity in the power and utilities (P&U) sector will remain robust over the coming six to 12 months. With current economic and political uncertainties, regulated network and renewable energy assets that can deliver stable and long-term returns, will remain top priorities for investors.
Among utilities, the quest for advanced technological capabilities and market share in an increasingly competitive environment, will also drive M&A deals. Energy storage, distributed energy resources, digital technologies and new market entrants will dominate utility boardroom discussions, and we expect these trends to influence organic and inorganic acquisition strategies.
Despite concerns about growing economic risks, the majority of P&U survey respondents see the global economy as stable. The International Monetary Fund (IMF), in its October 2016 update, warned of increasing global economic risks as total global debt hit a record US$152t.1 The Organization for Economic Co-operation and Development (OECD) projects global economic growth will slow to 2.9%, compared with 3.1% in 2015.2
Economic improvements in larger emerging markets, such as Brazil and Russia, have been largely offset by weaker conditions in major economies — slower investment growth in the US, uncertainties over Brexit in the UK and ongoing economic rebalancing in China.
Continuing high levels of volatility in capital markets and political instability are the primary economic risks to utilities’ core businesses and M&A strategies. Utilities are also apprehensive about regional geopolitical conflicts across the globe. The UK’s decision to leave the European Union, the outcome of the general election in the US, and terrorism and conflicts in the Middle East and South Asia contribute to this uncertainty.
Uncertainties cloud economic confidence
While 57% of respondents believe the global economy is stable, just 20% of P&U executives consider it is improving, down from 81% one year ago. Now, 23% of respondents see the global economy as modestly declining, up from 5% one year ago.
Q: What is your perspective on the state of the global economy today?
Confidence in key market indicators moderates
Sustained weak demand for electricity in many markets, the continued growth of renewable energy and the growing penetration of disruptive technologies influence sentiments on corporate earnings and valuations.Electricity demand in the US, for example, has fallen five times in the eight years to 2015, and is likely to fall further in 2016, according to the U.S. Energy Information Administration (EIA).3 Despite strong economic and population growth, reduced electricity demand in the state of Victoria in Australia has been largely attributed to a rise in energy efficiency installations in the region.4
Q: Please indicate your level of confidence in the following at the global level.
To compete with new entrants from within and outside of the P&U sector, and to deliver the convenience and innovation that customers want, utilities need to embrace advanced digital and new energy technologies. At the same time, increasing competition and eroding margins are prompting utilities to automate in order to drive efficiency and reduce costs.
As growth in their traditional businesses stagnates, utilities are pursuing strategic acquisitions and technology alliances to complement their organic growth investments.
The French utility ENGIE, for instance, partnered with Google’s Nest for its home-automation capabilities, notably its smart thermostats. The utility also acquired energy services company, OpTerra Energy Services and battery storage company, Green Charge Networks in the US.5
Industry regulation, accompanied by increasing globalization, is a growing challenge, adding extra layers of complexity for P&U utilities.
Digitalization and sector convergence top boardroom agenda
Utilities are increasingly focused on the need for digital services. A combination of new digital technologies, such as big data, mobility, the Internet of Things, smart meters and digital grids, is transforming assets and operational processes. Meanwhile, the costs of distributed generation and battery storage are becoming increasingly cost competitive, disrupting the energy value chain.
Into the mix comes players from other technologically advanced sectors, offering services such as energy management and home automation, with which utilities have to compete. So it comes as no surprise that digitalization and sector convergence are expected to top boardroom discussions in the coming months.
Q: Which of the following will be most prominent on your boardroom thinking during the next six months? Select your top two issues in order of importance.
Automation and re-skilling are top priorities
For 68% of respondents, employment strategies are being refocused to capture efficiencies from greater automation. However, 40% of respondents say that prior investments in automation have not been successful.
For digital transformation to be effective, it must be accompanied by a cultural shift that inspires a digital mindset across the workforce. Finding the right balance between hiring talent with new technology skillsets, and re-skilling existing talent with corporate knowledge, will be critical. The UK’s EDF Energy uses a digitally enabled knowledge management strategy for recruitment, re-skilling and retention of talent.6
Q: How will advances in technology change your employment or talent strategy? Select all that apply.
Q: How do you see automation impacting productivity within your company?
M&A and alliances to complement organic growth strategies
The transforming utility business landscape, accompanied by a challenging economic environment, is prompting utilities to become more innovative about growth. Increasingly, utilities are complementing organic growth strategies with strategic acquisitions, joint ventures and alliances. As revealed in our third quarter 2016 edition of Power transactions and trends, some utilities are partnering with local players to pursue growth in emerging markets, while reducing their risk exposure.
In the retail segment, utilities are employing creative practices to acquire new customers, including new digital channels and beyond-the-meter product offerings. Alliances with technology players, such as Google’s Nest and Amazon’s Echo, are increasing.
After joining forces with more than 50 efficiency and distributed resource partners in the US earlier this year, Nest announced a partnership with Southern California Edison in August 2016, its biggest demand-response contract so far.7 Several utilities, including Germany’s RWE AG and E.ON SE and France’s ENGIE and EDF SA, have set up in-house innovation labs to explore and test new technologies and business models.
Q: From where do you see growth within your company coming over the next 12 months?
Amid ongoing sector and global volatility, M&A in the P&U sector remains relatively robust as utilities seek avenues to drive growth and sustain cash flows. So far in 2016, M&A activity has increased year over year, with deal volume growing by 10% and deal value increasing by 1%. The third quarter of 2016 saw 102 deals totaling close to US$40b.
Regulated transmission and distribution (T&D) assets continued to command high valuations, while renewable power assets dominated deal volumes. More detailed deal analysis is available in our third quarter 2016 edition of Power transactions and trends.
Among P&U executives surveyed, 63% expect the M&A market to remain stable over the next 12 months, while 24% expect it to improve. Renewable energy and regulated T&D assets will remain safe havens while, increasingly, the shift toward disruptive technologies will drive M&A, alliances and partnerships.
Appetite for deal making remains strong
Our Capital Confidence Barometer findings reveal that deal intentions remain strong, albeit moderated. Now, 47% of respondents say that they will actively pursue acquisitions in the next 12 months, compared with 53% six months ago. We expect ongoing M&A activity as utilities continue to optimize their business portfolios in response to sector transformation.
Small and mid-cap deals to dominate
Lower economic confidence, increasing competition for a shrinking number of regulated grid assets, investor interest in renewables and a quest to incorporate bolt-on capabilities into their portfolios are driving small and mid-cap sized deals. Though the P&U sector saw several billion-dollar-plus deals during the year, deal volume was made up largely of sub-US$250m renewable power deals.
None of the executives reported plans for deals in excess of US$1b in the coming months and we expect P&U M&A will continue to be dominated by small and mid-cap deals. Of the survey respondents, 70% expect their P&U deal pipelines to stay at the current levels.
Q: What is your largest planned deal size in the next 12 months?
Utilities looking beyond sector boundaries for M&A
Competition from players within and outside of the P&U sector, new innovative products and business models, changing customer expectations and the pursuit of talent with advanced skillsets are persuading utilities to explore acquisitions beyond their traditional boundaries.
Battery storage, big data analytics and home automation are just some of the areas where we expect utilities to target acquisitions. Among them is French utility ENGIE, which announced its acquisition of California-based battery storage company Green Charge Networks in May this year.
Separately, AutoGrid, a US-based energy software solutions start-up, received investment from top utilities such as E.ON SE, Southern Company and National Grid.8
Q: What is the main strategic driver for pursuing an acquisition outside of your own sector?
Top M&A destinations
Where, in the next 12 months, are P&U executives likely to pursue an acquisition? This barometer, given the UK’s decision to exit the European Union, shows that the UK has fallen outside investors’ top five destinations.
- “IMF warns of risks to global economy as debt hits record $152trn,” The Independent, http://www.independent.co.uk/news/business/news/imf-international-monetary-fund-global-debt-152-trillion-a7347166.html, accessed 20 October 2016.
- “OECD Economic Outlook and Interim Economic Outlook: Interim Economic Outlook (September 2016),” Organisation for Economic Co-operation and Development, http://www.oecd.org/eco/outlook/economic-outlook/, accessed 20 October 2016.
- “Today in Energy: Total electricity sales fell in 2015 for 5th time in past 8 years,” U.S. Energy Information Administration, https://www.eia.gov/todayinenergy/detail.php?id=25352, accessed 20 October 2016; “Short-Term Energy and Winter Fuels Outlook,” U.S. Energy Information Administration, https://www.eia.gov/forecasts/steo/report/electricity.cfm, accessed 20 October 2016.
- “Victorian power consumption falling despite strong population and economic,” Green Energy Markets, http://greenmarkets.com.au/resources/victorian-power-consumption-falling-despite-strong-population-and-economic, accessed 20 October 2016.
- “ENGIE Acquires OpTerra Energy Services,” Business Wire, http://www.businesswire.com/news/home/20160225005330/en/ENGIE-Acquires-OpTerra-Energy-Services, accessed 20 October 2016; “ENGIE Acquires Majority Stake in Green Charge Networks,” ENGIE Group, http://www.engie.com/en/journalists/press-releases/engie-majority-stake-in-green-charge-networks/, accessed 20 October 2016.
- “Knowledge transfer strategies require long-term, digital approach,” Nuclear Energy Insider, http://analysis.nuclearenergyinsider.com/operations-maintenance/knowledge-transfer-strategies-require-long-term-digital-approach, accessed 20 October 2016.
- “Nest taps more than 50 providers for efficiency and DR services,” Utility Dive, http://www.utilitydive.com/news/nest-taps-more-than-50-providers-for-efficiency-and-dr-services/418009/, accessed 20 October 2016; “Inside Nest’s 50,000-Home Virtual Power Plant for Southern California Edison,” Greentech Media, Inc., http://www.greentechmedia.com/articles/read/inside-nests-50000-home-virtual-power-plant-for-southern-california-edison, accessed 20 October 2016.
- “ENGIE Acquires Majority Stake in Green Charge Networks, ENGIE Group,” http://www.engie.com/en/journalists/press-releases/engie-majority-stake-in-green-charge-networks/, accessed 20 October 2016; “Utility fund backs big data company AutoGrid in VC round,” AutoGrid, http://www.auto-grid.com/gallery/utility-fund-backs-big-data-company-autogrid-in-vc-round/, accessed 20 October 2016.
EY Global Transactions
+61 7 3011 3239
Download Power & Utilities highlights (PDF) Press release: Global power and utilities deal value falls for fourth consecutive quarter in Q3 2016