Earlier this year, IHL and Eversheds Sutherland hosted a roundtable made up of leading in-house counsel to look at navigating energy and renewables in a changing world.
Eric Knai, Eversheds Sutherland: If you look back at 2023, we have had a very depressed M&A market other than in the energy sector. If you think about the two geopolitical events that have dominated 2023, the Ukraine war and the conflict in the Middle East towards the end of the year, those are both conflicts which are in oil and gas regions and which have impacted not only production but also supply chain.
Why does that impact M&A, transactional work and projects in general? It has driven up interest rates as a result of the inflation that those crises have created. But my view is that the issues with the M&A market in 2023 do not have much to do with the level of interest rates. Most of us around this table are old enough to remember doing deals at 6%, 7%, 8% or 9%.
The difference then was that there was visibility on what the rates were going to do. The private equity houses were not sitting there thinking, ‘Am I going to be the one that invests at 9% when it goes down or at 5% when it goes way up?’ That instability in rates due to the geopolitical situation has really been the defining element of the perfect storm that we have been going through since the middle of 2022.
I do not think the Ukraine conflict is going to get settled any time soon. I do not think the conflict in the Middle East has had as much negative impact as it is going to have. We are not at the end of it yet. Consequently, we are still going to have supply chain issues in the Red Sea, which we are seeing more in the New Year now. The impact on the stability of interest rates might still be there.
There is also the US elections and the UK elections. If Trump wins, do you think it will change anything? Do you think the Inflation Reduction Act (IRA), which Biden put into place, which is essentially a play at onshore production in renewables and other sectors, is fundamentally a Trumpian policy which will not be overturned?
I will be interested to see, from an energy perspective, whether or not there will be policies which come to challenge the IRA’s predominance over the last couple of years.
In my 25 years of practice, I have never lived through a geopolitical environment – I might have done from a business perspective – where there is this idea that a shift in world order is really happening. Those shifts in world order historically have provided opportunities: from artificial intelligence to renewable energy or even an actual change in the political order since the end of the Cold War. It is a fascinating time to be doing business. There are some issues, but there are a lot of opportunities.
Stephen Hill, Eversheds Sutherland: Eric was the Eeyore; I will be more Tigger.
There were fewer fundraisings in 2023; the funds that are out there were trading at less than net asset value; and M&A was down. The exception to that is in the energy and energy transition market. We have seen more transactions in this space than we have in previous years. It has continued to grow. We are seeing more investors coming in, more of the utilities, oil and gas majors and major corporates investing.
I think of the energy market as an energy trilemma: decarbonisation, energy security and energy cost as the third point of that triangle.
Since the Ukraine invasion, energy security became the most important piece of the trilemma. How organisations are improving their ability to be self-sufficient has become really important. In Germany, which had already decommissioned its nuclear programme and had no gas going forward, there has been a real programme to improve its resilience and energy security.
There has been a massive increase in the cost of living that is being passed on to consumers. We are seeing all this growth from new projects coming in throughout the value chain, and ultimately someone has to pay for that. It is either directly through tax or indirectly through utility bills. How that is being afforded is an important piece. To be UK-focused for a moment, the government has tried many different ways to do that, through energy certificates and tariffs. At the moment most of it is through CfDs (contracts for difference), but we have seen a number of CfD failures in the last year. How is the government focusing on those?
Irrespective, I have never seen a higher drive for growth and investment in the energy space. Of course, that means those companies that own assets need to invest capital or look at capital recycling, with another investor coming in. Those are M&A transactions in action.
We need to look at where that money is going. I can see it across the full value chain. Huge amounts of generation is being built or are being thought about. In the UK, we have effectively had a moratorium on things like onshore wind for the last five years, but we are now seeing that really increase. Those are the transactions that will build through to more construction, more financing and then more M&A in the future. Solar continues to grow massively. Despite the weather, it is a massive piece!
We are seeing investment in some of the transmission and distribution lines. There has been a lot of investment in interconnectors and in getting that whole cable infrastructure in place. We have seen a lot of investment in the supply chain. You cannot build all of these things without having a secure supply chain. With some of the issues around the overseas supply chain, there has been more investment.
This is also about demand. If you are a high energy demand industrial, how are you looking to decarbonise that? There are more clever ways of dealing with that than just putting solar panels on your roof, although that is growing. This is about onsite but, more importantly, virtual power purchase agreements (PPAs), which allow you to buy your clean energy from many different sources. All of that requires investment; all of that requires M&A to be involved. We talk to energy companies all the time, as you would expect, but increasingly we talk to industrials that are looking at how they can decarbonise their entire industry.
We are also looking at the new technologies that are coming in. Increasingly we are seeing battery storage. The UK is great at being at the forefront of things. We have some of the most advanced offshore wind in Europe.
There is a huge push globally on hydrogen. That will be a real gamechanger in how we will deliver on that. A lot of things are nascent at the moment, but increasingly major projects that can deliver ammonia as well as hydrogen will come through. There are lots of new projects globally, but even in the UK whole areas in Teesside are being set aside to start building that. There is an interesting piece about how we transport hydrogen. There is still a bit of a debate around that. You can see hydrogen potentially being the fuel of
the future.
There is still a transition to get to renewables. We see gas still being an important piece of that as a transition fuel. We cannot forget about that as part of getting us to the end place.
If I were to bet on trends in 2024, I think there will be a lot more coventuring, joint venturing and consortium arrangements coming together. A lot of the investment that is required involves some big numbers, and it is difficult for even some of the largest corporates to invest without some kind of support, not even necessarily financial.
What are your immediate reflections on these themes?
Igor Oliveira, Moove: I can certainly see the conflicts in Ukraine and the Middle East impacting the supply chain going forward. That is a top priority for my board of directors. It is a very topical item in our board meetings.
I can attest to M&A being a very competitive environment at the moment. It is very challenging to scout good opportunities and to have a robust pipeline.
Sonya Rogerson, Novartis: We have seen a shift in the buyers who are interested in some of our sites from private equity to Asian investors to a more diverse range of investors in consortia and other structures. We have seen a shift in how tight business cases might be on the bidder side, given interest rates and changing markets. With the geopolitics and people shoring up supply chains, we have certainly experienced that on the other side of the table.
Stephen Jurgenson, Savannah Energy: We are a UK-listed, Africa-focused energy company with hydrocarbon assets in Nigeria, Niger and Cameroon. We are currently completing a takeover of the upstream assets of Petronas in South Sudan. We have renewable energy projects in development in all those countries in parallel with our hydrocarbon business.
Political change and uncertainty has a big influence on our business given the countries in which we operate This has a major impact on our ability to obtain financing from commercial lenders and DFIs (development finance institutions) necessary to expand our business and develop renewables projects.
Marcel Marquardt, Laing O’Rourke: We work across the UK, Middle East and Australia. We are doing modular nuclear reactors. We are doing Hinkley and Sizewell. We are doing the great grid upgrade and looking [at] offshore wind, carbon capture, new hydrogen projects and battery storage. This is a big shift from traditional construction of commercial or residential buildings; a big focus on infrastructure and renewable energy.
There is a phenomenally large pipeline of work. Every couple of weeks we get a new bid. Some of the biggest issues we are facing at the moment are cost and supply chain.
Nathalie Tidman, Legal Business and The In-House Lawyer: Which geographies and technologies offer the most opportunities to your mind?
Clint Wilson, GuarantCo: We focus on energy transition projects in South Africa, Vietnam and Indonesia. We are seeing a lot of opportunity in generation, transmission, distribution, energy trading and battery storage.
South Africa has had several successful rounds of renewable energy IPPs (independent power procurements) They are almost in the second cycle of refinancing, and there is quite a bit of consolidation and spinoff activity happening. The asset managers are investing more in developers.
Ewen Cairns, Osprey Charging Network: Given the number of accents of similar origin around this table, I would say that Scotland is the world leader in renewable technologies.
Stephen Hill: I would accept that offshore wind is challenging, mostly due to the supply chain. 2023 was a really bad year for offshore wind, if I am honest about it. There was a failed CfD process, with some exceptions around ScotWind, which was quite successful.
There was a real shot in the arm at the end of 2023 with RWE’s acquisition from Vattenfall, which has a pipeline of 4.2GW. You do not make those sorts of acquisitions at the prices that they were paying unless you are backing offshore wind in and around the British Isles in its broadest sense, and the North Sea generally. We continue to see a lot in the Baltic Sea and just off the Netherlands and the German coast.
National Grid are undertaking a large grid upgrade. When you make that sort of investment, it cascades down throughout the entire value chain.
CCUS (carbon capture, usage and storage) could happen in Europe and the UK, but you are really looking for areas where you can store molecules. Canada has the benefit of having much more land and a smaller population.
If we think about how we transition, the elephant in the room on lots of renewables is that it is not baseload. Wind does not work when the wind does not blow; solar does not work when the sun does not shine. That is why storage is becoming increasingly important. Alternatively, we say, ‘We cannot just shut down all of our power plants, but we can abate the carbon dioxide that is coming out of them by storing it in a different way’, and then we store it there for hundreds of years.
Marcel Marquardt: Yes, we are looking at a number of carbon capture and storage projects in the UK and Scotland. It is about capturing carbon, pumping it out into old gas storage places. A number of projects have been greenlit again.
Stephen Hill: It is fair to say that it is a challenging construction piece. There is risk around it, which is why it gets greenlit and then redlit and then greenlit and then redlit. The government has produced a programme in order to look to make that work.
There is talk about a brand new large-scale nuclear project. That might be challenging and is dozens of years away, but there has been a lot of growth in SMR, small modular reactors, and whether you can get smaller ones that you can then, in a modular way, roll out and increase. The benefit of nuclear is that it is baseload, meaning that you are always producing power, a bit like a coal-fired or gas-fired power station, as opposed to the intermittent nature of some, but not all, renewable technologies.
Marcel Marquardt: At the moment there is GBN, Great British Nuclear. You have six SMRs bidding for government work, one of which is Rolls-Royce a UK-based consortium.
Nathalie Tidman: What do you think about the prospects of hydrogen? People are torn about whether it is going to take off, but then people were sceptical about most renewable energy sources 20 years ago.
Stephen Hill: In the medium term, the challenge is around transport. If you could put an ammonia plant on a big industrial estate and use the hydrogen on site, I think that would work well. The transportation of hydrogen in order to make use of it in other areas is more of a challenge.
Stephen Jurgenson: You can transport hydrogen; you can transmit power; you can ship ammonia. What works and what is economic will depend on various factors such as thermal efficiency and economic efficiency. It is going to depend entirely on the location.
Stephen Hill: Yes, and that means it is not quite the panacea that some people think. I definitely get that there should be a focus on it, but I do not think it is quite the solution to everything that some people might think it is.
Ewen Cairns: Our view is that hydrogen is the perfect fuel, but it is about the application. If you are looking at ferry ports – ferries need to be battery operated or renewables operated – it works quite well in that application. Ferry companies do not have the budget to buy new boats that are hydrogen powered. As with a lot of renewables technology, it is a trickle effect.
Also, the public perception of, ‘Hydrogen in my car. Is that safe?’ is still a thing, so the market might skip it on that basis. It might become the MiniDisc.
Eric Knai: There are potentially barriers to entry as a result of the massive investment in EV that we have seen over the last 20 years, in the same way that the train system in the US never got off the ground because the car lobbies were important. I am by no means a scientist, but it seems to me that there is a political aspect to how quickly hydrogen develops as a viable option.
Igor Oliveira: From my perspective investors are really reluctant to make the jump and invest, because the technology is also evolving quite fast. It is not yet proven, and then on top of that the taxonomy is also complex. What is green hydrogen? That is also complex across the supply chain.
Nathalie Tidman: What are your thoughts, Stephen, on how we can monetise the opportunities around ESG?
Stephen Hill: There is a slight danger that ESG actually really focused on the E. The G (governance) had probably the least focus, and is covered by other initiatives. Social should have been more important. One thing I am encouraged about from a social perspective is the increased rigour that has gone into supply chains. We acted for clients who did a full supply chain review because they were concerned about some of the raw materials and where they were coming from.
Greenwashing is a topic that we were talking about a few years ago and about how we would make sure that clients were not doing that, but that has actually risen up the agenda again because a lot of the clients we act for are funds or have backing from funds, and that is a really important piece. There are new regulations – being driven out of the EU, but they are applicable for UK funds as well – that are driving their sustainability agenda; making sure that they are investing in the right way. ESG is now not as front of mind, and if we get a more stable geopolitical scenario I suspect it will then push up again as people realise that things are constantly evolving and shifting.
Nathalie Tidman: What do you think power pricing is going to look like in the next year?
Stephen Hill: I suspect if I knew what the market was doing exactly I would be on an island somewhere, and not in cold London in the middle of winter!
A few years ago we saw power pricing decimate the smaller energy utility companies. They could not underwrite the hedging on it, and the power pricing just went against them and a lot of them went into administration.
The impact that we are then seeing is major corporates looking to fix their power pricing, and therefore you can go out, particularly on PPAs – power purchase agreements – where you enter into the pricing on a long-term basis, and if you can get it right you can cap and floor where your pricing arrangements are going to be, such that you can then mitigate the ever-increasing cost of the power around it. We are increasingly seeing those sorts of PPAs. That gives the generator some issues, and they need to manage that, but some are able to do that to a greater or lesser extent.
If you own a battery storage business you do not just get the power in and then pump it out overnight. There are multiple different contracts that you can play in, and you can revenue stack around that. Optimisation of those sorts of arrangements has become a really important part of that battery storage piece.
We are seeing more and more banks coming into that. We did the first ever debt financing of a battery storage portfolio, and we have done a number since then. We have seen the evolution of that, and the increase in appetite from the banks in relation to that. What we cannot quite get our heads around is whether that is just an increase in risk appetite or a nervousness about missing out on the opportunity.
What some of the battery owners are looking at is creating a hedging arrangement around that, where, while you do not have a hedge price in your underlying contract, you back it off with a hedging arrangement. You can present that to the bank, and the bank effectively then has the floor price. They know they are always going to get that, so they can model accordingly. That is the evolution we are seeing.
Mark Adams, Beaufort Property: Data centres are not seen as being sustainable. That is a major factor. For example, in Ireland, there are major challenges in connecting to the grid linked to the growth in demand for energy from data centres.
Stephen Hill: Every data centre we see has an onsite renewable power supplier and then has a virtual PPA attached to it. They are such a high-demand power that I actually think of them as an energy play, because it is so energy-intensive. The companies that we are talking about are the big companies, so they are insisting that it is 100% green. They are a big power play.
Ewen Cairns: In Ireland it is a tough play, because in order to apply for grid you actually have to have a signed, completed lease. You may not have a project, but you have to go to the relevant grid DNO and say, ‘Here is my lease. My project is ready to go,’ before they will consider a grid application. The grid application will then take years.
Sadly, when I first got into renewables in 2011 the problems then were the planning infrastructure and battery storage, and they are still the problems now.
Stephen Hill: In 2011 there was no solar, for example, and in 2023 there is 14GW in the UK. Something has fundamentally shifted to make that happen. The gripes on each and every project will remain the same, but 13 years ago, if you had said there would be that capacity of solar, you would genuinely have been laughed at. People would have said you were in cloud cuckoo land.
Nathalie Tidman: Where do we think the opportunities lie for AI in renewables?
Mark Adams: In real estate, AI is making a big difference in its intersection with energy, with more intelligent building management systems and smart buildings. For an asset that we own, just reprogramming the building management system using a new AI system would save, anecdotally, something like £300,000 in energy costs over five years.
Part of the problem is that the technology is ahead of the hardware in the building. Many buildings have a single meter. It is ridiculous. How does one introduce multiple metering throughout a building? The answer is, ‘with difficulty’.
Sonya Rogerson: You always need a business case behind AI. Even if the technology is there, there would ordinarily be a cost to it. We factor that into how we optimise our manufacturing, or how we use smart AI systems to better predict or optimise our energy, for example.
Stephen Hill: I can see AI picking up on the optimisation piece, either on a demand or a supply side. When do you need power? You can take it on then, or, if you are a generator, when you push the power out, particularly on things like batteries, and all the different contracts you can play into actually playing around that. Whether that is AI or whether that is just a clever algorithm or a smart system is probably a moot point.
Nathalie Tidman: 2024 is the year of the elections. These inevitably bring political instability and hesitance around M&A. To what extent will this be true of the renewables market?
Stephen Hill: Trump said that, if he got elected again, he would like to be a dictator for a day. One of the things he said he would do, and I quote, is ‘Drill baby, drill.’ That would reverse the renewables piece. I spoke to some of our US colleagues about that and they were much more blasé, saying, ‘It is just politicking, do not worry about it.’
I anticipate that if the Conservatives remain in that the policy that they have in place will remain. Labour has on record stated ambitious – potentially overly ambitious, maybe unfundable – investment in renewable energy, but even if you are sceptical about the number that they are talking about, £28bn, the ambition is there to invest and create the framework.
The panellists
- Nathalie Tidman (co-chair) Legal Business and The In-House Lawyer
- Eric Knai (co-chair) Partner and head of M&A, Eversheds Sutherland
- Stephen Hill (co-chair) Partner and co-head of energy, Eversheds Sutherland
- Mark Adams Legal director, Beaufort Property
- Ewen Cairns General counsel, Osprey Charging Network
- Gunter Eren General counsel and research and development Europe, Konica Minolta
- Bob Henderson Associate general counsel, integrated power and renewables and energy solutions, Shell
- Elaine Hutton General counsel, Japan’s Energy for a New Era (JERA)
- Stephen Jurgenson General counsel, Savannah Energy
- Silbene Lott Corporate governance and company secretarial assistant, SIG plc
- Marcel Marquardt Legal leader, infrastructure, technology and innovation and sustainability, Laing O’Rourke
- Igor Oliveira Head of legal, Europe, Moove
- Sonya Rogerson Head of legal transformation and real estate, Novartis Operations
- Clint Wilson Co-head of legal, GuarantCo