Asia renewables are a bright spot on the M&A horizon

AS THE world collectively grapples with the challenges posed by climate change, renewable energy will be an important driver of the energy transition.

Over the past decade, the sector has experienced remarkable growth in the Asia-Pacific, led by countries such as China, India and Australia. Today, South-east Asia, Japan and Korea are fast catching up as they accelerate their renewable energy initiatives. This growth has attracted massive investment and a flurry of deal activity, with the sector becoming a bright spot in Apac mergers and acquisitions (M&A), particularly in South-east Asia.

Diversification of ownership

There are several important factors driving the trend of the growing renewable sector M&A in Apac.

Firstly, strategic and financial investors are generally well-capitalised and have significant dry powder and appetite to pursue acquisition targets. With a broad preference for energy transition and defensive sectors, renewables are typically high on their list of priority targets.

Secondly, the monumental ambitions for renewable capacity growth across Apac markets require substantial debt and equity capital. As existing developers of projects look to recycle capital and seek partners to fund future developments, this will lead to a diversification of ownership in the region.

Additionally, growing policy support across different markets has been an instrumental factor in driving renewables penetration in Apac. Clear regulation, consistent policies and bankable tariff structures are essential to building investor confidence, encouraging capital inflows towards renewable projects, and building up local value chains.

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Strong deal environment

As governments and the private sector intensify their efforts to meet ambitious clean energy targets, companies are in a race to develop wind, solar, hydro, battery energy storage systems (Bess) and other sustainable energy projects across Apac. In the past two years, capital continued to flow into regions with favourable structural growth drivers, clear energy regulatory regimes, and clear government and political support for the sector.

This robust environment led to more than US$30 billion worth of renewables M&A transactions in Apac in 2022 alone, according to Dealogic. It is worth pointing out that Australia, South-east Asia and India accounted for approximately 90 per cent of these deals. Notable transactions included Ratch’s US$605 million acquisition of Singapore-based Nexif Energy; Wircon’s sale of Australian renewables platform Wirsol Energy to Gentari; and Gentari’s purchase of a 29.4 per cent stake in the Hai Long offshore wind project from Northland Power.

While the market has slightly cooled in the first half of 2023 compared to 2022, the pipeline of deals in execution remains strong.

Smaller deals, but more

Looking ahead, while there remain a few large regional platforms that may come to the market in the near future, we believe the majority of deals going forward will be driven instead by smaller developers and country-specific portfolios as they seek financial backing, or aim to sell operating assets to recycle them into future developments. Geographically, Australia and India are expected to maintain robust deal flows over the next year, with opportunities also emerging in Japan, Korea and Vietnam.

In terms of technology, utility-scale wind and solar projects still dominate, but deals in Bess and commercial and industrial (C&I) solar spaces are on the rise. As the sector matures and market liberalisation spreads across various countries, Bess and C&I solar will continue to gain a greater share of total deal flow.

Longer-term, we believe significant equity capital will also be raised for offshore wind projects, with countries such as Taiwan, Japan, South Korea, the Philippines and Australia promoting supportive policies and garnering increasing investor interest.

Importantly, renewables-focused fundraising globally remains very strong, with the US$27.4 billion raised in 2022 exceeding the combined amount from 2019 and 2020, according to data by Infrastructure Investor. What’s more, private equity capital raised by energy funds today is much more likely to be directed towards renewables – with 69 per cent of private energy funds raised in 2021 having a renewables mandate versus just 40 per cent in 2014, according to McKinsey & Company.

The Apac renewables sector is set for continued robust growth, and it reflects huge potential for bringing transformative change to the region.

The writer is co-head of energy transition and natural resources for Asia-Pacific at Natixis Corporate & Investment Banking.