Net-zero grid could spark a flurry of deals in the renewables sector: report

OTTAWA — Decarbonizing Canada’s electricity grid could lead to a significant increase in mergers and acquisitions in the renewable energy sector, a new report shows.

The report, published by PwC Canada, provides a mid-year update on mergers and acquisitions across all sectors of the Canadian economy.

It shows that deal flow remained subdued in the first half of 2024, following a challenging 2023 that saw a decline in both deal volume and value.

However, the report also suggests that deal activity could pick up again over the next six months, with the renewable energy sector being a potential bright spot.

“M&A opportunities are likely to increase as (the renewable energy sector) grows,” said Derek Chu, PwC trading partner.

The PwC report shows that in Canada from January 1 to May 31, 2024, there were 952 corporate mergers or acquisitions in all sectors with a total value of $72 billion.

For comparison, the same period in 2023 saw 1,218 deals with a total value of $85 billion, which itself represents a 17% decline in deal volume compared to the first half of 2022.

M&A activity across industries has been sluggish recently due to rapidly rising interest rates, which has led to a gap in valuation expectations between sellers and buyers, Chu said.

But as inflation declines and central banks begin to cut interest rates, the dealmaking process should start to pick up speed again, Chu said. In particular, buyers who have held equity for the past two or three years will be motivated to deploy that equity as interest rates and financing costs begin to decline.

Chu, who specializes in the renewable energy sector, said he thinks this industry will be worth keeping an eye on. According to federal estimates, approximately $400 billion in investment in Canada’s electricity grid will be needed by 2050 to support the projected increase in demand.

The government’s proposed clean electricity regulations, which aim to bring Canada’s electricity grid to net zero by 2035, aim to ensure that this investment is directed towards greener energy sources.

Chu said renewable energy projects such as wind and solar farms often change hands multiple times between development, construction and operation phases. The rapid development of new green energy sources could trigger a wave of mergers and acquisitions, he said.

He added that there will also be opportunities for international investors because the amount of infrastructure that will need to be built could far exceed the amount of available investment capital in Canada.

“I think one of the challenges that we will face from time to time is whether there will be enough capital to finance all of this (capital spending),” Chu said.

He said many related businesses will also thrive because of Canada’s growing and evolving energy grid. While most renewable energy facilities will be owned by infrastructure investors, he said they are likely to outsource maintenance, repair and operation services to third-party providers.

“These renewables-related companies should be of interest to private equity funds…many are already focusing on scalable opportunities in this space,” the PwC report said.