A new Price Waterhouse Cooper (PwC) report exploring future global business deals in the power industry, predicts a slow turn after 2016 if current business models don’t evolve with new technologies.
The report, Power & Renewables Deals-2016 outlook and 2015 review, also highlights a surge in Asia Pacific power deals and a strong global demand for renewables.
PwC Energy, Utilities and Mining leader Mark Coughlin, said corporate restructuring and network privatisations will keep deal activity high this year, but beyond 2016 the deals pipeline may start to dry up.
The report shows that the NSW Government’s sale of Transgrid to a global consortium last November was the third largest power deal globally in 2015.
However, Mr Coughlin says, a ‘perfect storm’ of economic decarbonisation, technological disruption, changing customer behaviour and government policy makes for a subdued deals outlook beyond 2016.
“The remaining network sales in NSW are the highlight in terms of deal activity for the foreseeable future,” Mr Coughlin said.
“There is also a lot of market talk about Australian corporate restructuring mirroring what has happened with the big utilities in Europe, where we’ve seen demergers and the sale of legacy assets. If this does happen here we expect it to happen quite quickly and most likely during 2016.”
“Outside of this, most Australian power and renewable assets are in the hands of long term players so it is hard to see much new activity coming from these portfolios any time soon.”
Mr Coughlin believes network assets will hold their value over the long term, and will always attract strong interest from domestic and international bidders, but warns that business models will need to evolve to keep pace with technological disruption and changing consumer behaviour.
“The rapid uptake in domestic solar technology has challenged the traditional networks’ business model and we expect advances in battery technology will shortly have a similar impact,” Mr Coughlin said.
“Utility players with network assets will need to work with the grain in regards to emerging technologies. Those that can will thrive.”
The report also highlights a surge in Asia Pacific deals with bidder deal values across the broader region nearly doubling in 2015, accounting for 31 per cent of worldwide power and renewables deal value.
The region’s target deal value rose even more strikingly, from US$24.7billion to US$66.6billion.
Mr Coughlin said Chinese buyers accounted for the majority of the largest deals, with seven out of the ten largest deals in the region being purchases by Chinese entities.
“There’s also strong appetite for renewables deals coming out of India, with the four largest power deals for Indian targets all renewables.
“International money still likes Australia as an investment home – but there is a lot of competition for these dollars from elsewhere in the region.”
The most significant growth in deals within the power industry comes from renewables with worldwide mergers and acquisition activity in renewable energy almost doubling in 2015, reaching a record high of US$55.3billion.
Year-on-year renewables deal value nearly doubled in Europe while activity in North America grew by 18 per cent, with deal values almost trebling across Central and South America.
Renewables deal volume remained steady in 2015 but values increased markedly, driving the share of renewables deals from 12 per cent of the global power deals market in 2014, to 28 per cent in 2015.
According to the report, a number of factors could help generate strong power and renewables deal flow globally during 2016 including ongoing corporate restructuring, a healthy deal pipeline in Europe, consolidation in the US, continuing renewables deal momentum, and the attractiveness of steady returns from regulated assets in the sector to prospective buyers.