Renewable Energy Partnerships
To map the renewable energy partnership landscape, we identified 498 alternative energy partnership transactions announced between 2014 and 2015, of which 62% were joint ventures, 28% were non-equity alliances, and 10% were partial acquisitions. Our analyses revealed four broad themes:
1. A majority of the industry’s partnership activity is in solar: Solar accounts for 49% of all partnership activity, with 47% in North America (Exhibit 1). Falling production costs and rising efficiency have improved the commercial viability of solar power in general. The U.S. in particular has important policy incentives like the recently extended Investment Tax Credit (ITC). This has encouraged utility-scale investments by power producers, but also supported the deployment of distributed generation capacity. Around 68% of the partnerships in the U.S. target residential and Commercial and Industrial (C&I) applications, primarily combining cross-value chain capabilities to offer customers an integrated product, support, and financing package. For example, Vivint Solar, a provider of residential solar energy systems, expanded into the C&I market, and is partnering with Brahma Hunt to provide EPC services. Brahma Hunt in turn is a JV between Brahma and Hunt combining their complementary capabilities as suppliers of equipment and services to the solar C&I market.
Another driver of solar industry partnerships has been government support in emerging markets. Asia, Middle East, Africa, South America, and Eastern Europe collective account for 40% of the partnership activity in solar. Many of these naturally sunny regions see solar as critical to meeting acute power shortages, but require the funding and technology support that partnerships bring. Indian Prime Minister Narendra Modi, was instrumental in launching the International Solar Alliance at the Paris climate summit. This alliance between 120 countries is expected to promote the transfer of affordable technology and mobilize more than $1TN in financing to help developing countries take solar energy to scale. India had previously announced a 100 GW solar capacity target by 2022, attracting foreign investors like Japan’s Softbank, Singapore’s Nereus Capital, Norway’s Statkraft, and others through local partnerships.
2. Significant partnership activity involving partial divestments to financial investors: Of the 498 partnerships analyzed, 58% were structured to pursue a new project or initiative, 20% were existing projects converted into partnerships through divestitures and farm-downs, 12% were partnerships involving a significant ownership change (e.g., sale to a new set of investors), and 10% comprised minority investments and joint acquisitions of existing companies. Of the 207 partnerships that related to existing projects, initiatives, or companies, financial investors were the primary counterparty in roughly 41%. For example, DONG Energy divested a 50% stake in its Gode Wind 1 offshore wind project to private equity investment fund GIP. In another example, Enel Green Power, the renewable energy arm of Italian utility Enel, created a new entity called EGPNA REP as a holding company for a 760-MW North American renewables portfolio. GE Energy Financial Services bought 49% of the entity and will additionally receive a right of first offer to invest in operating plants being sold by Enel Green Power North Ameri ca over the next three years.
74% of these partial divestments to financial investors occurred in North America and Europe – not surprisingly, given their established renewable asset base (Exhibit 2). Applying a different lens, a majority occurred in onshore wind (36%) followed by solar (29%). These technologies lend themselves more easily than others to the presence of financial investors. They are relatively mature, and project operators have limited need for the skills and capabilities an industrial partner can contribute, and less appetite to endure the involvement of a co-operator. From the financial investors’ viewpoint, these technologies are less risky, have established mechanisms like performance guarantees to further reduce their risk, are liquid because of developed refinancing structures like yieldcos, and provide steady long-term returns (higher than market-based opportunities under a low interest rate environment).
3. Utilities and traditional power companies active as partners: 24% of the partnerships analyzed involved utilities and traditional power companies as direct equity stakeholders or alliance partners. While significant, we believe the figure masks the true extent of their involvement in renewable energy partnerships. If we just consider partnerships for new projects and initiatives, 38% involve the direct participation of utilities and traditional power companies. Further, industry data suggests that utilities are directly involved in more than 50% of the future large-scale project pipeline, which are ripe candidates for conversions to partnerships through partial divestitures. Finally, the dataset does not cover partnerships in “enablers” of renewables deployment (e.g., smart grid technologies, energy storage), where European and North American utilities and power producers like E.ON and Duke are active through alliances.
Most of the partnership activity of utilities and power producers is concentrated in Europe (30%) and North America (30%), where the regulatory and margin pressures on conventional power generation businesses (e.g., coal, nuclear, and natural gas) are the most severe. A map of the relative concentration of activity by sector within each geographical region (Exhibit 3), reveals some interesting patterns, for example: utility and power producer partnership activity in Western Europe is largely in offshore wind; in North America and the Middle East and Africa, it is in solar; in Asia and Eastern Europe, it is in hydropower; in South America, it is onshore wind.
4. Substantial partnership activity in emerging markets: Asia, Middle East and Africa, South America, and Eastern Europe collectively account for 39% of total partnership activity (Exhibit 4); and 43% of partnership activity in new projects and initiatives. There has been a steady shift in partnership activity towards emerging markets over the last couple of years backed by a policy environment that many companies view as more supportive than in regions like Western Europe. The data also shows a number of partnerships where companies from the Middle East, Asia, and other emerging market regions are venturing outside their home countries to create demand for their products, learn new skills, or simply as an attractive investment. For example, Chinese solar manufacturer Hareon has established multiple joint ventures in India for local manufacturing and project development. Gingko Tree Investment, the UK-based subsidiary of the Chinese government's State Administration of Foreign Exchange, acquired a 49% stake in Statkraft’s 142.2 MW onshore wind portfolio in the UK.
The emerging market split by sector mirrors the split in overall partnership activity (e.g., highest in solar, fairly limited in geothermal), though there are some key deviations. Emerging market partnership activity in offshore wind, for example, is proportionately far lower and activity in hydropower is far higher than corresponding overall data. F urther, a larger number of emerging market partnerships are structured to pursue multiple opportunities, rather than a single project or initiative. For example, the venture between Softbank, Foxconn, and Bharti intends to invest in a number of wind and solar energy projects in the country; SunEdison’s JV with Renova plans to develop, own, and operate 1 GW of utility scale solar photovoltaic projects to supply the Brazilian market; and the Manila Electric Company in a JV with Repower will develop a number of mini run-of-the-river hydro power plants in the Philippines.
Other themes too were evident from the data. Notably, the conspicuous absence of oil companies battered by financial pressures from the oil price slide (Total was active in solar primarily through its affiliate SunPower, and some companies like BP had limited activity in biofuels). Cash-rich companies with relatively high energy requirements (for example, Google and Apple to power their data centers) are investing in alternative energy projects through partnerships. Partnership activity in biofuels / biomass while not entirely absent, is clearly more tentative, involving single production facilities or R&D alliances, rather than big-bang global commercialization ventures that were routinely announced in prior years.
This analysis is emblematic of certain forces that are shaping deal making in the industry, and causing companies to design innovative deal structures, rethink their governance approaches, and redesign their dealmaking processes.