This Energy Sector Will See The Next Big M&A Wave
Environmental, social and governance investments are hands down one of the hottest trends in financial markets. Investors are pressuring companies to reduce their carbon footprint, and asset managers and banks are developing ways to maximize that pressure to reduce emissions.
The ESG trend spans all industries, but one place where its impact is particularly visible is in energy providers. Renewable energies are there, fossil fuels are out: this seems to be the dominant trend these days. It is likely to remain stable for at least the coming years, although with all government support for renewable energies in key markets, it is likely to accelerate.
According to a recent report by EY, renewable energy has been the driver of most mergers and acquisitions in the utility sector over the past year. Investors wanted to reduce their exposure to “high carbon” assets and focus on greener businesses.
Of course, reducing costs was also a factor in doing business in the first year of the pandemic, but the shift from fossil fuels to renewables was as evident as it was with the big oil companies, with the pandemic likely only accelerating trends already present in the industry. And if ESG invests the new black, the utility sector could change in a similar way to Big Oil.
Comparisons between fossil fuel and renewable power generation made headlines in the Texas Freeze recently. Some accused wind turbines of frozen in the abnormal sub-zero temperatures that hit lone star earlier this month. Others accused gas-fired power plants that were not calibrated for such weather. Both camps brushed off each other's arguments.
The truth is that both renewable and fossil fuels have failed. Wind turbines frozen, and gas-fired plants - and coal-fired power plants and nuclear power plants - suffered outages from the cold. As a result, the Texan network was nearing a complete breakdown, as ERCOT announced this week. This should highlight the vital importance of grid security, especially with an increasingly diversified energy mix as renewables are going nowhere.
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"The low-carbon energy transition shows no signs of slowing," Miles Huq, partner for strategy and transactions at EY, told Oilprice. "When we look at the bigger picture, the growing appetite for renewable energy and ESG investments will continue after the Texas winter storms."
In other words, the ESG momentum is strong enough to ignore frozen turbines and focus on the equally frozen thermal power plants that not only turn out to be unreliable in winter weather, but also have a bad rap that investors increasingly dislike.
Renewable energy mergers and acquisitions in America totaled $ 17.3 billion last year, according to the EY report. By comparison, the value of oil and gas transactions was only $ 2.4 billion, and not all was exposure growth: the number includes both acquisitions and divestments in the industry.
Renewable energies are here to stay and will grow strongly as investors can't get enough of this market treasure and its two electric vehicles. But bad or not, fossil fuels tend to be more reliable - with the exception of extreme weather conditions - because they can continuously produce electricity rather than while the sun is shining and the wind is blowing. Many green energy skeptics have found that the intermittent nature of renewable energies is the number one problem for their conversion to the dominant form of generation.
However, it does not necessarily have to be such a problem as the grid adapts to the changing energy mix and weather.
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"As the storm events increased, the energy providers had to invest in both grid hardening programs and at the same time invest in grid modernization," says Huq from EY. "After Hurricane Sandy, which led to unprecedented customer outages in New York, the focus of energy policy was, for example, on strengthening and future storm hardening of the overall system while at the same time investing in the energy system of the future."
Grid enrichment is or should at least be an important consideration in the energy transition. It is not enough to just praise the sun and wind for their emission-free way of working. The security of the electricity supply depends on the planning of emergencies such as arctic explosions or heat waves and the preparation of generating plants. After all, thanks to modern technology, the weather forecast has become quoted accurate.
For the same reason, praising fossil fuel reliability is not enough, since that reliability, as we saw in Texas, is conditional. Of course, utility companies cannot prepare dozens of power plants for a freeze a few days in advance, but they can plan for the long term.
Investing in ESG is changing the face of the power industry as billions flow into renewable energy generating capacity. But those sending the data flow may want to add network security and reinforcement to their priorities. Many seem to be doing just that: while renewable M&A activities were the most added value, integrated utilities ranked second, valued at $ 15 billion.
By Irina Slav for Oil Genealogie
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