Sector News

Deloitte: The energy transition shows investment potential

December 3, 2023

Helen McLeod, Assistant Director, and Rachel Hyde, Manager at Deloitte, discuss the energy transition trends, resulting in investment opportunities
The shift towards sustainable energy has opened up numerous merger and acquisition (M&A) investment prospects, which companies are leveraging to meet their sustainability and climate goals. This article explores the present business climate, identifies four main emerging trends, and reviews additional future tendencies that might impact M&A transactions in 2024.

Speaking with experts at Deloitte, they share some insight into the current trends in this space and how this all aligns with corporate sustainability investments and objectives. We hear from Helen McLeod, Assistant Director at Deloitte, and Rachel Hyde, Manager at Deloitte, who cover electrification, circular economy, clean energy, and carbon market consulting. Here’s what they had to say as a collective.

What is the current situation for businesses?
Corporates face a continued concentration of stakeholder pressure on environmental issues. This is driving businesses across all sectors to examine their existing models and determine how to best position themselves for sustainable success. For some businesses the growing emphasis on sustainability is a risk to be mitigated through operational improvements, while others see the pressure to transition as an opportunity for a competitive advantage.

Although all sectors need to rapidly decarbonise to meet global net zero targets, the energy sector is a critical contributor to global emissions. As a result, this market presents a range of attractive opportunities for corporates and investors to deploy capital, develop and diversify their business models, while generating strong investment returns.

In 2022, global energy transition-related investments reached a record US$1.3tn, up 19% from 2021 levels. However, this must increase fourfold by 2030 to over US$5tn annually to finance the climate target of limiting global temperature increases to 1.5℃ above pre-industrial levels.

Consequently, management teams are turning to energy transition-related M&A to tell stakeholders about their commitment to sustainability, gain competitive advantage, accelerate growth, and enter new markets.

How are organisations using M&A to achieve their sustainability objectives?
Our experts at Deloitte have witnessed several transformative stories in M&A over the last six months. They include corporates transitioning their existing business to capitalise on the energy transition while providing customers access to sustainable technologies and services alongside their traditional offering.

We also see financial sponsors chasing deals in this market. Many are looking for investment opportunities to capitalise on sustainability tailwinds, as well as leveraging energy transition-related synergies across their existing portfolios. Traditional sponsors are increasingly willing to lower their ticket sizes to capture this opportunity for growth, while others have raised dedicated climate change and decarbonisation funds with smaller ticket mandates.

We see opportunities in energy transitions that range in scale and maturity—from emerging disruptors to large, developed players, presenting attractive opportunities for investors of all sizes. How investors participate in this market will depend on their investment criteria, hold period, risk appetite, and most importantly, alignment of strategic vision with the existing business/portfolio.

What are the emerging themes that organisations should consider?
We’ve identified four emerging key themes to watch in energy transition-related M&A activity.

Clean energy systems: As we move away from the production of fossil fuels and towards the critical development of cleaner alternatives such as solar, wind, and biofuels, we see that investors are keen to take advantage of this shift. With the uptake in the use of renewables as primary energy sources, battery storage is becoming an increasingly important part of energy systems to overcome issues associated with intermittent supply. Use of low carbon, flexible energy sources such as hydrogen or carbon capture, usage and storage (CCUS) backed generation will also rise as renewable penetration increases.

Electrification and energy efficiency: As more energy end uses become electrified, the share of electricity in total final energy consumption is expected to increase from 20% in 2022 to over 27% in 2030. Successful electrification of residential and industrial activities, as well as mobility (replacing fossil fuel-based technologies like gas boilers with higher-efficiency, electrified equivalents such as heat pumps), is vital given the significant proportion of global emissions from these sectors.

According to our Sustainable Consumer survey, around one in three consumers have invested in energy saving solutions, and 36% have upgraded to more energy efficient appliances. Around one in ten plan to install solar panels or replace their boiler with a heat pump in the year ahead. Businesses that help optimise and monitor energy usage through digitisation also have an important role to play.

As well as businesses directly addressing the energy transition through cleaner energy and energy efficiency measures, investors are also turning their attention to adjacent players. These players provide services and support for the decarbonisation of all sectors, from reducing demand for carbon-intensive production to helping customers navigate and reduce their increasingly complex carbon footprints.

The circular economy: Circular economy practices – such as optimising material usage and prolonging product life cycles—are key to reducing demand for energy intensive raw material extraction, end-product production, and the associated release of harmful pollutants. For example, production of battery systems, wind turbine motors and photovoltaic cells are placing huge pressure on the critical minerals required, such as lithium, nickel, and cobalt. According to the International Energy Agency, a six-fold increase in mineral supply will be required to reach net zero by 2040. Recycling could play a key part in bridging the demand-supply gap, helping to recover metals from used IT and renewable energy equipment. This concept can be extended from mineral resources to other industrial inputs.

Sustainability consulting and carbon markets: Investors are seeking businesses that benefit from sustainability tailwinds while remaining technology agonistic. This puts them in the best position to benefit from the energy transition without taking venture capital-like “bets” on which technology will win out. We expect to see players that offer support and consulting services to businesses on their decarbonisation effort continue being vital enablers of the energy transition.

Deloitte insights show that exposure to the growing voluntary carbon market is of increasing interest. A range of business models, from software-heavy carbon accounting platforms to service-led consultancies and credit brokerage models, make it an attractive market for strategics and sponsors alike.

How will trends impact deal making in 2024?
Despite the recent backdrop of a challenging economic environment for buyouts and general deal-making, the pace of capital flowing into energy transition targets hasn’t slowed down. Deals for businesses in the Energy, Resources, and Industrials sector have risen as a proportion of overall deal value from 20% in 2020 to 31% in 2023 year-to-date. Looking forward, we expect to see ongoing momentum as net zero target dates move closer, especially with regards to investment in those businesses set to benefit from the energy transition. Key themes including those highlighted here are expected to drive deal activity, alongside sustainable transportation, cleaner fuels (such as hydrogen), alternative food and agriculture, and green building solutions.

We also expect to see competition for high-quality, ‘green’ assets continue to grow, pushing up valuations and multiples on future deals. Investors who are interested in entering the space, but feel put off by lofty valuations, may find promising opportunities in lower-valuation sectors with transferable characteristics. Companies with existing expertise, technology, infrastructure, and customer relationships that can be repurposed or redirected for environmentally friendly activities without requiring substantial capital outlays may offer attractive prospects for value creation. This could pave the way for investors to enter the market while meeting their existing investment mandates.

The lack of supply of large-scale opportunities in the space, relative to the capital chasing these deals, has drummed up even more competition for the largest ‘green’ assets. We anticipate seeing some investors turn their focus towards slightly earlier-stage companies that they can rapidly scale through their provision of capital and support. These emerging, fragmented markets offer significant opportunities for buy-and-build strategies to consolidate the market.

By Tom Swallow


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