- Large, integrated deals in Europe contributed 49% of deal value
- Renewables make up almost half (46%) of global deal volume
- The US attracted the most capital investment, totaling US$81.4b
Global power and utilities transactions attained an all-time high in 2018, increasing 28% in overall deal value to $256.3b with a record volume of 546 deals, according to the EY report Power transactions and trends Q42018.
Europe contributed most to power and utilities (P&U) deal value in 2018, with US$126.5b in deals, a 2.5x increase from the US$50.3b seen in 2017. Renewables continued to be a large driver of deal volume, with 253 deals that contributed 46% of deal volume across all regions and representing 19% of total deal value (US$48.3b). In 2018, five multibillion dollar integrated utility deals contributed US$32b (32%) of total deal value in the Americas.
Looking at capital flows, the US remained the most attractive target country, with capital invested in 2018 totaling US$81.4b, including US$55.1b of domestic transactions and US$26.3b of inbound activity. Canada invested US$20.2b in the US (67.3% of Canada’s total investment activity), with only US$6.1b of domestic investment. China was the top outbound investor, investing US$34b in foreign countries with US$32.6b (96%) targeted at Europe.
Miles Huq, EY Global Power & Utilities Transactions Advisory Leader, says,
“2018 was an exceptional year in global power and utilities transactional activity, driven by large scale M&A and portfolio optimization. While corporates conducted 70% of all transactions and accounted for 80% of total deal value, there was tremendous interest from financial sponsors as well. We also saw the new energy market continue to grow in both scale and importance driven by consumer demand and regulations. As we move into 2019, we expect a continued interest in renewables, energy storage and electric vehicle (EV) infrastructure investments.”
Renewables and energy storage remain top growth agenda in the Americas
In 2018, the Americas Power & Utilities (P&U) sector deal value fell by 3% to $98.9b, driven by a 7% decline in the US, while the rest of the region recorded a year-on-year increase of 22%.
Looking forward, expected changes in energy policies of Brazil, Mexico and Colombia can drive investment demand in these countries. In February 2018, the US FERC introduced Order 841, which will allow for the opening up of markets to energy storage resources and is expected to drive investments in energy storage in the US.
Huq says, “Order 841 was expected to open energy storage floodgates, but while progress is being made on compliance, the pace is slow. As independent system operators [ISOs] evolve and structure the market to accommodate these rules, we will see growing investment in grid side battery technology which will increase system flexibility and efficiency.”
Reforms pave the way for Europe’s clean energy transition
European Union (EU) energy market reforms, including raising 2030 renewable energy targets, mandating Co2 caps on transport and removing capacity payments for fossil fuel generation, are set to accelerate the clean energy transition.
Huq says, “2018 was an outstanding year for Europe M&A deals driven by portfolio optimization and interested foreign buyers. Looking forward, in 2019 it is expected that utilities will focus on renewable generation as they continue to transform portfolios. Investment in EVs will ramp up, particularly as the cap on vehicle emissions is implemented across the EU and investor interest in new technology, particularly grid-connected battery storage, will start to gain momentum.”
Generation assets drive deal value in Asia-Pacific
Asia-Pacific recorded a 36% decrease in deal value, down to US$29.7b from US$46.7b in 2017. Over half (US$15.4b) of the deal value was on generation assets, driven by two multibillion deals worth US$9.5b.
Huq says, “We expect to see a continued focus on generation assets in coming years as the mix shifts toward renewables in Asia-Pacific. Chinese investors with significant resources who are keen to acquire strategic assets overseas will continue to drive investments within and outside of the Asia-Pacific region.”
Continuing from 2017, confidence in overall global economic growth, access to capital and project financing, coupled with low interest rates, created favorable M&A conditions in the first two quarters, which contributed more than 70% of deal value. Q4 2018 saw the beginning of the deterioration of global markets, and M&A in P&U dropped to the lowest quarterly value since Q2 2015.
Huq says, “In 2019, as interest rates increase, macroeconomic conditions hang in the balance and political tensions weigh heavily on investors, we anticipate challenging M&A conditions. The market may shift to favor lenders over borrowers, with an increasing level of sophistication required to identify and secure strategic investment opportunities.”
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