Overview

The UK power and utilities sector saw the number of merger and acquisitions (M&A) transactions reach record levels in 2017. This was mainly driven by a surge in solar deals as investors and developers reacted to the end of March deadline that marked the closure of the subsidy scheme for large scale solar.

While the total declared value of transactions dropped by more than half compared with 2016, which included the largest energy networks transaction of the past five years, it was still significantly higher than in the three years preceding 2016.

This analysis is based on UK M&A transactions in the generation (thermal), renewables (wind, solar, hydro and biomass), nuclear, water and waste, energy networks and energy technology sectors.

The number of UK power and utilities M&A deals increased to 79 in 2017 compared with 50 in 2016. The majority of growth was due to a rise in solar deals, the number of which has more than trebled from 11 to 35, and there were 17 wind transactions in 2017, up from 11 last year. Ten water sector deals have been completed during the year, compared with nine in 2016.

The total value of deals has more than halved since 2016. While this represents a big drop, last year’s deals included the largest transaction of the past five years, National Grid’s sale of the majority stake in its gas distribution networks. Water deals accounted for nearly half the value of transactions and the total value of deals in the wind sector has reached new heights.
 

A rush for solar assets

The number of solar deals has risen from 11 in 2016 to 35 in 2017. This activity was driven by the 31 March 2017 deadline, which saw the closure of the renewables obligation subsidy scheme to all new generating capacity. Continuing the trend of previous years to consolidate asset portfolios, the majority of operating solar deals were acquired by institutional investors, including NextEnergy Solar Fund, Blackrock and Greencoat Capital in 2017.
 

The wave of deals continues in the water sector

While the number of deals remained similar to last year’s in the water sector, the value of transactions surged due to two large deals during the year. The shareholder consortium including Infracapital and Morgan Stanley sold Affinity Water to a consortium of investors, made up of Allianz, the German insurance company, HICL, the listed infrastructure fund and the Dutch Infrastructure Fund.

The sale of Macquarie’s remaining 26 per cent stake in Thames Water relates to the realisation of its closed-end fund. In addition, three smaller transactions – the Australian fund manager, Hastings Fund Management buying the remaining 50 per cent stake in South East Water, and Fiera Infrastructure and Omers Infrastructure acquiring additional stakes in Thames Water – highlight continued interest from investors looking for long-term, stable investments.
 

Continued interest in operating wind assets

Institutional investors also continued to build their operational wind asset portfolios. Greencoat UK Wind acquired a number of wind farms across the UK during the year, while JP Morgan Asset Management has bought the controlling stake in Zephyr Investments that operates 17 wind farms and also acquired Infinis Energy’s 19 operating sites.

While there are a number of offshore windfarms under construction, ending subsidies for new onshore wind farms has brought the commissioning of new onshore farms to a halt.
 

EnTech

A handful of companies that focus on battery storage or on the provision of novel forms of energy, such as hydrogen-based fuel cell power systems, have changed hands in 2017. This called for a new, separate category in our analysis that we named energy technology or EnTech. While the volume and value of deals in this category is still modest, the increasing interest in distributed and smart energy systems is likely to attract future investment.
 

The sale of the Green Investment Bank

The privatisation of the Green Investment Bank (GIB), which was announced last year, has been completed in 2017. GIB was acquired by Macquarie, the Australian infrastructure investment group, which aims to extend the reach of the fund beyond the UK and to emerging technologies.
 

Looking forward

The removal of government subsidies will continue to impact solar deals next year, but developers are starting to create profitable assets in a subsidy-free regime – for example, by combining solar power with battery storage solutions.

Ofwat’s recent proposals for significant reductions in water sector returns in the next price control are likely to reduce investor enthusiasm in the medium term, and may stimulate exits in the short term.

New types of political risk have emerged in 2017 that may bring longer-term implications for the M&A market. A new draft bill intended to give Ofgem the powers to introduce a price cap on the standard variable tariff may lead to the consolidation of suppliers, in particular among the retail arms of the larger utilities. In addition, the Labour party’s pledge to renationalise key utilities services, such as energy and water, may have a dampening effect on future investor interest in the sector.

Other than reducing the value of Sterling, Brexit has not had any noticeable impact on the volume or value of utility transactions to date. International investors looking for high quality assets remain attracted to the UK, although it will be interesting to see if this appetite continues or investment pauses as the EU exit draws closer.