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Is the current wave of M&A among German project developers slowing down needed innovation in the power market for battery storage?

image credit: Felix Hübner
Felix Hübner's picture
Independent consultant, Self-employed

Driven by a passion for sustainability, my overarching motivation is to develop and promote innovative tech applications and business solutions for a transition towards a low carbon...

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  • Nov 17, 2022
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Press releases such as "Strategic investor taking stake in project developer" have become more and more frequent this year. As an example, in September this year the Danish utility Ørsted took over the German wind and solar developer Ostwind completely. What is the background? Which effects can already be observed in the German market? And which ones are to be expected in the near future? This will be briefly discussed here, especially with respect to projects with battery storage.

Developer

Investor

Year

Share

Windwärts

MVV

2014

100,00%

juwi *

MVV

2018

100,00%

PNE

Morgan Stanley Infrastructure Partners

2019

39,66%

VSB

Partners Group

2020

80,00%

ib vogt

DIF

2021

51,00%

BayWa re

EIP

2021

49,00%

Sunovis

Brookfield

2021

100,00%

Belectric

Elevion

2021

100,00%

Green City

Qair

2022

100,00%

Ostwind

Ørsted

2022

100,00%

MaxSolar

Nature Infrastructure Capital

2022

65,00%

WPD offshore

Global Infrastructure Partners

2022

100,00%

WES Green

Enovos Renewables

2022

100,00%

       

* Multi-stage acquisition process

   

This overview neither claims to be complete nor to take into account all current developments.

An active merger & acquisition (M&A) level in a market as dynamic and fast-growing as renewables is not unusual as such. However, in 2021 and 2022, this development has seemingly accelerated considerably. Striking is the fact that there are two types of investors involved: Investment companies with existing portfolios of wind and solar farms and utilities. For both groups, the main interest is likely to gain access to the acquisition of projects rather than the prospect of regular dividend payments or an exit strategy with a high cash-out. The advantages for project developers are obvious, too. In addition to additional liquidity for a growth strategy, a partner with a strong financial rating stabilizes the company in the volatile development business, reduces financing costs, providing overall more visibility for financial planning.

But what are the implications for the rest of the market?

i) The supply, i.e., the number of completed projects is tightening on the open market as investors make use of their right of first refusal with project developers.

ii) Presumably, however, demand is not declining to the same extent. In most cases, strategic investors still have a lot of capital and will seek to continue acquiring projects in the market.

iii) Interested companies without shares in a project developer, framework agreements or joint ventures will find themselves in increasingly larger and more competitive bidding rounds.

iv) Market entry for new investors is even more difficult, especially if the network in the industry is missing.

Another observation is that bidding rounds for solar parks are increasingly taking place at an earlier stage. The standard used to be either ready-to-build or turnkey, whereas today more and more projects are offered only with a preliminary incomplete permit (Aufstellungsbeschluss) from municipalities. Who could blame project developers for transferring the risk earlier and still achieving similar prices? It is simply another sign of the strong supply market we are currently seeing.

Although perhaps not immediately apparent at first glance, this market situation also exerts influence on the design and success of the German energy transition. Politically, there is now broad consensus among German political parties on the further expansion and support of renewables. Even the governing FDP, the liberal democrats historically skeptical of a government push for renewables, has come out in favor of "strengthening free energies”.

However, in addition to installed capacity, grid expansion and storage technologies play a key role in the success of the energy transition. And there are still many problems with the latter. Unclear requirements in regulation or restrictions in the innovation tendering process are not the subject of this discussion, but the current market situation.

What do a beautiful apartment in a quiet location in the center of Munich, London or San Francisco have in common with a ground-mounted photovoltaic plant with guaranteed feed-in-tariff? Buyers queue up on their own and outbid each other in their price offers. And in this comfortable position, where many project developers are able to choose the time in the development cycle and buyers, the incentives for innovation decrease.

Thus, it seems more attractive at the moment to get a sale with an established process done quickly than to put a little extra work into developing hybrid projects for marketing outside the EEG (the German Renewable Energy Sources Act). This is despite the fact that such projects offer additional sources of revenue (PPAs, balancing energy, arbitrage trading) and there is a high level of interest among industrial and commercial companies, especially at current market prices.

What could be the way forward here? There is no sign of a slowdown in demand for renewable assets and thus increasing pressure from the market on project developers. More clarity in regulation and more freedom in the operation of hybrid plants under the EEG can certainly create additional incentives for both project developers and investors to address this issue.

We can only hope that the market will come to realize that more flexible storage is essential. In the first half of 2022, renewables accounted for just under half of electricity generation in Germany. But that is only half the truth. Because all system services in the grid, which are still predominantly provided by conventional power plants, must also be taken into account in the complete decarbonization of power generation. Flexible storage concepts are urgently needed for this.

Discussions
Matt Chester's picture
Matt Chester on Nov 17, 2022

More clarity in regulation and more freedom in the operation of hybrid plants under the EEG can certainly create additional incentives for both project developers and investors to address this iss

Are there any other countries/regions that you think have figured out this clarity in regulation better in a way that perhaps Germany can replicate? 

Felix Hübner's picture
Felix Hübner on Nov 17, 2022

With respect to battery storage the regulation in France is more harmonized than it is the case in Germany, for example. Overall, the Nordic markets have an edge.

Felix Hübner's picture
Thank Felix for the Post!
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