Renewables M&A In Testing Times - An Opportunity Despite The Virus?

Without a doubt these are strange, difficult, testing times for all of us. Everyone is affected one way or another. In the work context many are not able to work, many are working too many hours in difficult circumstances, and many are working in unusual ways.

The usual ways of doing business are either not working at the moment, or not working very smoothly. And this is also true for the financing of new large scale renewable energy projects.

Pre-construction financing, especially bank banking for new-build large scale projects is now mostly on hold. There are suddenly many reasons for this, but questions about the following inject additional risks that were not present only 2 months ago;

• Construction timelines have all slipped massively
• OEMs ability to deliver equipment on schedule is in doubt
• Forecast power demand is unknown going forward 
• The ability to source staff in this very internationalised market is a problem
• Banks’ ability to finance or capacity to process the deal when busy with other things in question
• Risk level and associated financing costs may not be calculatable at the moment
• Safety of staff working on projects is a priority and in many countries all “construction” and “unnecessary meetings” are halted

But whilst new financing of the construction of new-build projects may be on hold at the moment, the sale or acquisition of projects - both those in development and those already operating - may be about to grow rapidly.

Many project owners and developers may be in distress because of Covid-19. Their business model relies on a steady throughput of projects, from greenfield or under development, through permitting, and work-up, contracting, financing, construction and finally operations. At the moment only the operations part of that model is functioning. This begs the question of what all the other parts of the business are currently doing, what the staff are doing. 

In normal times a developer might shift the staff to focus on another market if ones slows down, or downsize the company yo reflect the current level of opportunity. But what do they do at the moment. In some countries the Government has offered support but is this enough? Also, we have seen a massive drop-off in demand for power - so the question is will this recover anytime soon? And if it does recover but lets say to only 90% of where we were for the next year or two (which doesn’t seem unreasonable), what does this reduction in demand mean for new projects that were in pipeline? Do they now go-ahead or not? It might be that companies are furloughing employees but with no job at the end of the Government-supported period, currently 3 months.

Some companies may indeed be close to collapse, due to the fact that they have not had time to plan for this outcome and the usual solutions they would bring to bear need time to implement. 

Add to this mix, that some investment funds and Oil & Gas majors will now not be investing in new O&G projects that were in the pipeline because the current oil price is too low to justify the project. There is likely to be an oil-glut for at least a year or two, as the Q1 and Q2 global oil production in 2020 has largely not been consumed, and all major producers have continued pumping out record levels if product. Even if the global economy rebounded back to exactly the same level that it was at on 31st December last year in Q3 this over-supply and lack of consumption will take a year or two to work through.

These funds and O&G majors now have the choice of holding on to the cash, or finding something else to invest this in. With interest rates are now at an historic low, holding cash on account is not a productive use of this resource.

One solution that seems to jump out, is that now is a good time for these funds and O&G majors to buy up large scale renewables projects, especially offshore wind projects and especially those that are not quite ready to build, let’s say 2 years away from start of construction. There may be many willing sellers in the market in the coming weeks looking to stave off bankruptcy, and if these large players can refashion themselves as willing buyers there is a great opportunity in amongst all the other gloom.

As many of these players had anyway been ramping up efforts to diversify away from O&G and in to large scale renewables, this does not actually reflect a new activity but rather the acceleration of what was anyway being planned.

To facilitate these urgent sales, Vendor Due Diligence (VDD) is one way to maximise value for the seller. This is where the project that will be offered for sale is prepared for sale and an independent report prepared that presents the opportunity from a technical and commercial perspective, in a ready to consume package for buyers. This helps to de-risk the project and speed up the sale.

Acquisition Due Diligence, is provided to the potential Buyer on an urgent basis. This is where the technical and commercial aspects of the project are analysed by an organisation that is independent of the Buyer to help them gain an unbiased view as to whether the project is worth buying. This is important for 3 reasons. Firstly it provide external resources quickly to help them analyse the project and thereby boosting their ability to assess it. Secondly, because the process is so quick, it is possible to make a mistake quickly in the acquisition process and get carried away with the urgent drive to acquire the project. An independent view helps the Buyer understand any pitfalls. And thirdly makes where the money is actually someone else’s money (so for a pension fund this is actually the pension savers, for a bank this is the savers with money on account), and in these circumstances it is a requirement that an independent view is sought.

Teams of specialists work in the Due Diligence team, and often on a global basis. Often the project will be located in 1 country, and the original owner in another country, often contracts will be in English or another global language - so often the team needs to have a broad range of technical and commercial skills and also languages. 

These teams are well used to working on a remote or home-worker basis, and are ready to help both Vendors and Buyers at short notice.

I run my own renewable energy consultancy (Renewables Experts Ltd) focussing on the Technical/Financial/Commercial aspects of wind, offshore wind and solar projects (eg due diligence etc) and we work globally. There is no office and my team is based in many locations, many countries and all of us working remotely - and we are (as ever) open for business. No need to meet us face-to-face.

www.renewables-experts.co.uk | [email protected] | +44 7971635290