Unlocking potential: M&A in Canada’s power and utilities sector

External and internal forces are driving evolution in the Canadian power and utilities sector. Increasing electricity demands and capacity requirements, geopolitical shifts and trade disruptions across supply chains are significant factors.
 

Evolving consumer behaviour is calling for energy affordability and reliability while the internal need for financial and operational optimization is driving infrastructure modernization and mass technology deployment. These challenges are compelling utilities to reevaluate corporate strategies and deliver optimal outcomes for stakeholders — customers, regulators and investors.
 

According to EY-Parthenon’s latest Mergers and acquisitions opportunities in the energy transition article, M&A and divestitures may provide vital avenues for Canadian utilities navigating complexity to gain critical advantage in the current environment. Strategic transactions drive scale and growth, enable disruptive innovation, and optimize capital allocation.
 

With effective planning, M&A can unlock value, enhance operations, and facilitate the rapid acquisition of new capabilities essential for the energy transition.

Learning from the past
 

In the last three years, the Canadian P&U sector has trailed its global peers in M&A activity, with total deal value averaging 0.07% of annual GDP compared to the global average of 0.12%. However, the sector has boasted a robust history of utility transactions, with more than a dozen deals over CAD $1 billion having taken place in the past decade. The lower M&A activity in Canada compared to its global peers is attributed to higher public ownership of utilities and lower population density.
 

In turn, regulators have established frameworks to support the M&A process, recognizing the advantages of economies of scale and faster access to new assets. This gradual favourability towards sector consolidation has enabled utilities to expand their customer bases, strengthen capital positions and enhance operational capabilities while addressing regulatory demands.
 

Understanding ownership type of utilities is crucial for analyzing Canadian transaction trends. The sector features a significant portion of utilities that are owned by provincial or municipal governments. For instance, investor-owned electric utilities serve only 11% of Canadian customers, compared to 72% in the US. 
 

Investor-owned utilities have typically pursued larger international deals, while municipally-owned utilities focused on smaller transactions aimed at strengthening capital for infrastructure modernization. Provincially-owned utilities have engaged in transactions driven by provincial needs for capacity demand, energy mix diversification and enhanced operations.
 

Despite lagging their global peers in M&A activity, utilities in Canada have gained momentum and built key corporate development expertise, as seen by transactions in recent years. We anticipate utilities in Canada will continue to pursue M&A and divestitures to consolidate, reallocate capital and achieve important economies of scale for growth and modernization as the energy transition advances.

A new hope
 

Canada’s power and utility landscape is complex, comprising more than 140 electric utilities, 90 gas utilities (including cooperatives) and more than 4,000 water and treatment utilities. The sector is characterized by a range between concentrated and fragmented provincial jurisdictions.
 

For instance, Ontario has a fragmented electric distribution utility market, with more than 60 LDCs, but is concentrated for gas with a single investor-owned utility serving the majority of customers in the province.
 

Saskatchewan, in contrast, is highly concentrated with provincial utilities. One is responsible for electricity generation, transmission and distribution. A second is responsible for serving gas to nearly all customers. And a third is the primary provider of water and wastewater services.
 

This diversity is shaped by ownership structures, jurisdictional regulations and utilities’ need for growth, enhanced competitive positioning or the pursuit of operational efficiencies. This influences M&A activity potential and the range of strategic choices utilities can pursue for M&A and divestiture initiatives.
 

As the sector adapts to evolving market conditions, opportunities for M&A will continue to emerge. We predict four key scenarios that will drive Canadian P&U M&A activity in the coming years: 

• Consolidation of local distribution companies (LDCs) in Ontario’s electricity sector. With population growth expected at 41.7% over the next three decades, smaller LDCs will struggle to meet capital investment needs, creating pressure to consolidate, with larger utilities better positioned to address energy transition and infrastructure requirements while delivering affordable electricity rates.
• Strategic divestment. Utilities are facing significant capital challenges related to infrastructure modernization and energy transition requirements. To finance these initiatives, companies are increasingly pursuing non-core divestments instead of relying on traditional debt financing. This approach will allow utilities to reduce leverage and redeploy capital toward emerging priorities, making divestments a key strategy for addressing financial pressures.
• International expansion. Leading utilities will continue to expand internationally to enhance their market presence, diversify their service offerings and strengthen their financial profiles, particularly in rate base and dividend yield. Canadian investor-owned utilities have developed critical corporate competencies to support future M&A endeavours and, despite current geopolitical and economic challenges, are expected to pursue global opportunities over the medium to long term.
• Opportunistic partnerships in emerging energy transition areas. With the increasing adoption of distributed energy resources and electric vehicles, driven by government initiatives for a net-zero grid by 2050, Canadian utilities are exploring innovative offerings. As solar photovoltaics and battery capacity are projected to rise significantly, and gas utilities advance more hydrogen and renewable natural gas solutions, many utilities are developing nonregulated services and portfolios. This convergence of industries, including the power and utility, energy services, telecommunications and automotive sectors, presents opportunities for partnerships and acquisitions to enhance capabilities in these emerging areas.