Dive Brief:
The market volatility of the past few years may be behind us, but prompted renewable energy developers to take a more targeted approach in the second half of 2023, said Patrick Worrall, vice president of M&A solutions at LevelTen Energy.
Renewable energy asset acquisitions slowed significantly in late August and early September of 2023, according to LevelTen Energy, which declined to release specific pricing figures on the belief that historical data no longer provide a relevant comparison in today’s markets. The pace of transactions is beginning to pick up again, Worrall said, but renewable markets seem unlikely to return to their previous norms.
Renewable energy developers have historically focused on the numbers game, trying to grow large project pipelines to increase their odds of success, Worrall said. But given the increased cost of capital, developers are now taking a more strategic approach to project acquisitions.
Dive Insight:
Supply chains and capital markets seem likely to stabilize in the coming year, but the volatility of the past few years has left a permanent mark on renewable energy markets, Worrall said.
Historically, renewable energy developers large and small have tried to build and acquire as many renewable energy projects as they can, Worrall said, creating what he described as a “land-grab” mentality among renewable energy companies. While that’s typical of a young industry, he said, the interest rate hikes of the past year prompted developers to take a hard look at this business strategy.
For most of the past decade, developing renewable energy was relatively cheap, Worrall said. Particularly in recent years, renewable energy developers have also had to contend with the low odds of success in interconnections queues. The Lawrence Berkeley National Laboratory estimates that only 20% of projects that enter queues around the nation are ultimately built.
In that kind of environment, Worrall said, it made sense for renewable energy developers to hedge their bets and tee up as many projects as possible, knowing that perhaps one in five will actually see construction.
But last year, interest rates rose 2% in a period of just two months, Worrall said. Developers also face rising interconnection deposits and other costs, which has made maintaining a large pipeline of pre-construction projects much more expensive. And that has renewable energy companies reconsidering the wisdom of large development pipelines, Worrall said.
“All of the sudden both large and small players looked at their pipeline and said wait a second, what are we doing? Should we be more disciplined in where we are focusing our energy?” he said. “You have big developers talking about 30 GW in their pipeline…. Is that a good use of time and capital to be trying to manage a pipeline of that size?”
Although this shift caused developers to pause asset acquisitions last fall, Worrall said there is still demand in the market for certain kinds of projects. Many of the projects that were slated for construction in 2024-2026 were delayed by the volatility of the past few years to 2027 and beyond. This has created a glut of projects with post-2027 construction dates, but a shortage of those that could be completed in the next two to three years. Developers remain interested in these quicker-turn projects, triggering a bidding war that has driven up prices.
For projects that won’t begin construction until 2027 or beyond, prices continue to fall, Worrall said.
