How to avoid bad renewable energy deals # 1: introduction

Wed 04 Mar 2020

A few weeks ago, I attended a really interesting seminar presented by colleagues across Mazars entitled “How to avoid bad deals”. The seminar was sector-agnostic, reflecting the broad experience across the firm of working on transactions. It was divided into four sections, each delivered by colleagues from different financial advisory teams:

• Valuation – ensuring that the valuation is based on solid assumptions and accounts properly for risk;
• Diligence – focusing on some key issues that tend to come up specifically in the financial due diligence process;
• Deal structuring – ensuring that risk is transferred appropriately through terms in the SPA, but also more fundamentally thinking about the structure and timing of consideration; and  
• Clawback – if something does go wrong in the deal, ensuring that there is scope to make a successful claim.

The seminar got me thinking what a similar session might look like focused on the renewable energy sector, especially looking at project acquisitions.

We will follow up with a series of articles looking at the above themes, but first three general observations:

First, the renewable energy sector has experienced its fair share of bad deals

Sometimes, these can be spectacular. Sometimes, just a matter of investments falling short of expectations. There have been significant construction delays and disputes. Some projects have been over-leveraged and gone into distress.

Second, some sub-sectors and geographies have seen particular systemic issues that go beyond individual projects

Higher than expected wake effects across portfolios of offshore wind farms is unlikely to be an issue faced only by Orsted. Several projects in the UK anaerobic digestion sector have faced operational issues tied to feedstock quality. Solar projects in Spain and Italy have had to deal with retrospective tariff cuts or tax increases. Across the wind and solar sectors, there were historic suspicions that energy yields had systematically been overestimated. Power prices across markets are materially down on expectations a few years ago.

Third, the sector has actually been good at learning lessons from failures – especially legal and technical.

The process of maturing in a sector is well illustrated by the offshore wind sector, where early contractor issues relating to cables led to new contracting and ownership structures. The technical assessment of solar or wind resource has become more accurate, learning from data points. And investors are becoming more sophisticated, analysing more scenarios, and subjecting acquisitions to more investment scrutiny.

But the chance of a bad deal may be going up as investors are forced to take more risks.

Although investors are now more familiar with the particularities of renewable energy projects, the chance of bad deals occurring may actually be increasing in an ever more competitive environment where to succeed in auction processes, investors are having to stretch forecast assumptions or take more risks.

In this series of articles, we will look at ways to avoid bad deals. But it could be that sometimes the right answer is not to do the deal in the first place and to hold out for better value.