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U.S. Renewable Sector Sees Weak M&A Activity for Third Straight Quarter

The U.S. renewable sector enjoyed explosive growth in merger and acquisition activity at the end of 2022, buoyed by utilities shedding unregulated renewable assets. But since then, with the onset of increasingly higher interest rates, deal activity has started to run out of steam. In this Energy Market Insight, we examine how M&A activity in the U.S. renewable sector has retreated in this period of high interest rates.

Aimed at curbing surging inflation, the recent, historic ramp up in interest rates has increased the cost of capital, which has weighed heavily on the valuations of capital-intensive renewable assets in turn. Consequently, renewable investors, who would otherwise be actively chasing new deals, have been pushing the pause button.

This was especially true in this latest quarter. As the chart below shows, the total value of mergers and acquisitions in the third quarter fell to about $1.8 billion, according to estimates by BTU Analytics. That amount marks a new low since the Inflation Reduction Act (IRA) was enacted and accounts for the lowest level since the first quarter of 2022. The decline in deal value also represents the third straight quarterly drop, which stretches back to the start of the year. 

The drop in M&A deal value comes as the U.S. renewable sector faces a number of other headwinds in addition to high interest rates. Persistent inflation and global supply chain snags – though eased since the end of the pandemic – continue to buoy the cost of materials and components, further squeezing margins. Meanwhile, long backlogs in the interconnection queues for regional grids have created bottlenecks for developers seeking to advance new renewable projects.

Nevertheless, there have been some silver linings in the deal data. As the chart below shows, the number of pending and completed M&A deals for the quarter reached 32. This marks a small gain from the 29 deals identified in the prior period, though it remains far below peak levels.

The amount of acquired renewable assets – consisting of development-stage projects and operating facilities – has also advanced, reaching 30 GWs in the quarter. As with deal value, this also remains far below peak levels, meaning the sector may be operating far below full capacity. 

The rise in deal value in the third quarter was driven primarily by Spanish energy company Repsol. According to a company announcement, Repsol agreed to acquire the 20,000-MW renewable energy platform ConnectGen in a deal valued at $768 million, marking its foray into the U.S. onshore wind market.

However, despite these bright spots, the overall slowdown in M&A highlights the hurdles the sector faces from rapid-fire hikes in interest rates, which are effectively turning the outlook on renewable asset valuations more bearish. The sector’s retreat in deal activity also translates into declines in consolidations, entries into new markets, diversifications of portfolios, and expansions of project platforms. For developers, it means fewer willing buyers to snap up projects.

Lastly, this scale back in investor activity comes amid a surge in new renewable construction driven by the Biden administration’s IRA, a landmark law loaded with $369 billion in incentives for clean energy projects. With more investors sitting on the sidelines, the stage is being set for a large backlog of potential future M&A candidates once market conditions stabilize.

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Jonathan is a Senior Research Analyst with BTU Analytics, a FactSet Company, specializing in power markets. Before joining BTU Analytics, Jonathan was an editor and a director of product for Carbon Pulse and reported on energy markets and regulations for Bloomberg LP and S&P Global Market Intelligence. He received his master’s in journalism from the University of Maryland.

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