From Tax Credits to ESG Opportunities: What is the Renewable M&A Market like in 2023?

inflation reduction act

David Bader | Merger and Acquisitions (M&A) Manager at EDPR NA Distributed Generation

2022 was a year of uncertainty in the Renewables M&A Market. There were supply chain issues, trade policy changes, rising interest rates to combat inflation, and a land war in Europe. Each may have been disruptive in their own right; however, when combined, they equated to more expensive renewable projects throughout the first half of 2022. In August 2022, the announcement of the Inflation Reduction Act (IRA) changed the outlook for both the rest of the year and the foreseeable future in the U.S. renewable energy sector. To the industry’s celebration, the IRA expanded and extended the Federal Investment Tax Credit (ITC), reinforcing the Federal government’s long-term commitment to a green economy and providing a short-term stimulus to aid against rising inflation.

Global supply chain issues, such as reliance on foreign sources for procurement of solar panels leading to construction delays and the rising cost of steel, are still expected to be present throughout 2023, putting supply chain risk as a top concern for both investors and developers. In keeping with the spirit of the IRA—and in an effort to beat out their competitors who may be subject to tariffs—top equipment manufacturers have announced plans to open U.S.-based facilities to keep up with the increased demand of the U.S. solar market. Additionally, these strategic moves allow developers and sponsors (long-term owners of these projects) to achieve higher levels of the ITC under the IRA through the utilization of ‘Domestic Content’ (equipment manufactured in the U.S.). These factories, though a great step forward for the U.S. solar market, are not expected to be operational for a minimum of two to three years putting additional pressure on the existing PV module, racking, and inverter manufacturers to supply investors looking to achieve the Domestic Content adder. In addition to the PV equipment manufacturing, various battery manufacturers are also planning to open their own U.S.-based facilities due to the expansion of ITC to cover standalone storage technologies and the rise of electric vehicle sales in the U.S. This storage ITC coverage will spur growth in both standalone storage and solar-plus-storage projects—all with the expectation that the levelized cost of energy, or the average value of energy produced over a plant’s lifetime, produced by these technologies will continue to decrease.

For corporations looking to make good on their environmental, social, and governance (ESG) commitments, the IRA presents an exciting opportunity to further their initiatives with concepts like direct pay and the benefit of enhanced ITC. The Environmental Justice ITC provision allows projects the ability achieve an additional 10% to 20% of ITC if the project is built within a specific area. Companies see the value in a more profitable project and also help by giving back to areas in need. Following ESG initiatives and government backing at both Federal and State levels, interest has been sparked in the market by investors and corporations alike who might not have had previous involvement in the renewables market. This interest and the increasing emphasis on the importance of ESG has led to a rise in memberships in RE100, a global initiative of companies with the ultimate goal of operating using 100% renewable energy. 399 companies currently make up RE1001 and are joined by 23 U.S. states that have already targeted to become carbon neutral in the next 30 years. We expect that these goals are not only going to spark M&A transactions for the next 10+ years, but also increase investment across the entire renewables market, including greenfield development and R&D into new technologies.

Given the state of the economy in 2023 — and the question of whether a recession is imminent — energy transition investors, like EDPR, see great opportunity in renewables investments. Partly because solar energy investments are asset-backed and partly because their returns are ‘solid state’ (that is, fairly predictable and low maintenance), solar investments tend to expand despite tough economic climates. Despite lingering supply chain issues and economic uncertainty, the IRA creates an opportunity to make 2023 a massive year for both development and M&A growth. With continued government support, we expect that investment across all facets of renewables will increase for the foreseeable future and will accelerate the timeline for transitioning into a fully carbon neutral electricity grid.

Contact information:
David Bader
M&A Manager
EDPR NA Distributed Generation