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Pace of renewable asset M&A could slow in 2019

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Some project developers see the potential for a slowdown in renewable asset M&A in 2019.
Source: Salt River Project

Renewable asset sales could slow in 2019 compared with the rapid pace of project acquisitions over the prior three years, developers posited during the S&P Global Platts' Global Power Markets conference in Las Vegas.

An abundance of newly developed assets with long-term power purchase agreements fueled renewable mergers and acquisitions activity over the past two to three years, Ray Henger, chief development officer at Sustainable Power Group LLC, or sPower, said during an April 9 M&A-focused panel.

These conditions were ideal for passive equity investors as well as for straight-out buyers and were often more attractive deals than gas-fired investments that would have entailed different challenges, including heightened commodity risk.

"There was a group of, in many cases, international investors that realized this was a place they could do what they loved to do most, heavy infrastructure, long contracts," he said.

This led to a buying frenzy of sorts, in his view. But while an abundance of 100-MW to 500-MW wind and solar assets remain on the market, the dynamics have changed.

"Anybody who had one and didn't intend to own and operate it for life sold it last year. And we see that a little bit this year but this year feels a little more like a garage sale. Last year was like the gem of somebody's portfolio and this year it's a lot of people trying to get last year's valuations. So we'll see how that plays out," he added.

With wind and solar in the mainstream of power generation, and increasing retirements of coal-fired and nuclear plants, renewables now chiefly compete with gas-fired assets, said Henger, who warned against "underestimating the degree of change" these projects represent.

"If you're looking to buy a peaker, the question is not could [renewables] displace a peaker today," Henger said. "If you think we can displace them in 10 years, you shouldn't buy a peaker."

However, waning tax credits for wind and solar projects promise to make renewables investing for new entrants awkward as well, according to Henger.

"We're at the end of what has been a very long, tax-driven cycle in the renewable space," said Henger, acknowledging now may be an awkward moment for new investors to enter the market. "If you're building a wind farm and you're trying to get 100% of the tax credit, you have to have safe-harbored turbines in 2016 and you have to complete construction by the end of 2020. If I wasn’t already in the wind space I don't think I would buy a wind company or wind asset [at this time]."

The same goes for new, major investments in the solar space, according to Henger, whose company has stockpiled safe-harbored equipment: "This would be an abnormal time" to dive into the sector, he said.

Private equity, asset managers still major players

Independent power producers are hardly leading in asset acquisitions, said Vimal Chauhan, Managing Director, US Power at GE Energy Financial Services, noting that the trends of private equity firms, infrastructure funds and Korean and Japanese utilities investing in U.S. generation assets, both conventional and renewable, continues.

Steve Winn, Chief Development Officer at JERA Co. Inc., agreed but pointed out that with Vistra Energy Corp.'s acquisition of Dynegy and NRG Energy Inc.'s sale of its renewables business and yield company, there are only two IPPs left and that "Vistra is the one company acting like a traditional IPP."

Pension and insurance-backed funds are not limiting themselves to utility-scale renewables, according to Priyanka Kandula, Vice President, Strategy at commercial and industrial solar developer Onyx Renewable Partners L.P. Kandula said Onyx, a portfolio company of the Blackstone Group LP, is seeing increased interest from such buyers as they become more comfortable investing in smaller portfolios and projects.