10 key trends in transition M&A

A in new jurisdictions or sub-sectors needs robust diligence, appropriate deal structuring and contractual protections. Allocate more time to scenario planning and contingent downside risk evaluation.

The commitment by more than 100 countries at COP28 to triple renewable energy capacity by 2030 to at least 11,000 GW will require a colossal funding effort from governments and investors alike, potentially $12tn of investment in the power system up until 2030 – an average of $2tn per year starting in 2024.

Increasing renewable energy capacity will also require an unblocking of logistical, inter-connection, supply chain, resource and regulatory bottlenecks which have already led to the abandonment of a number of material new development projects globally, says James Chapman, a Freshfields Partner advising on the energy transition, including project development and investment.

An increased proportion of renewables in the primary energy mix is clearly a core component of global efforts to decarbonise.

'One inevitable global trend, both as a feature of the project development and M&A landscape for renewables – and with that, green hydrogen production – is that project sponsors are looking to invest in, and to acquire assets in, jurisdictions with the highest availability of the required climatic conditions for electricity generation,' James explains. 'These are not necessarily countries with proximity to growing electricity demand.'

Countries and areas, such as Western Australia or Oman, which have both high availability of sunlight (during the day) and significant wind (typically at night), have been a key focus of green hydrogen developers, even though they are some distance from major population centres.

The same applies for geothermal and hydropower.

The fact that green hydrogen appears to be capable of ship-bound transfer using a number of possible vectors makes this distance less of a boundary than it would be for renewables that solely produce green electricity for the relevant grid. Thus, there is increased focus on investment in more remote and unfamiliar, potentially emerging market, jurisdictions.

For carbon sequestration, conditions below the Earth’s surface, as opposed to above it, are what matters. At this stage, carbon storage developers need the right geology, typically either depleted hydrocarbon reservoirs or deep saline aquifers, in which to store carbon dioxide.

Such geological structures may not be located near to end power or industrial emitters and carbon dioxide may need to be transported considerable distances, potentially cross-border, by pipeline or by ship, for sequestration.

This may lead to the creation of regional CCS hubs, as we are already seeing to some extent in Europe, and as is being contemplated by, for example, Japanese emitters in a series of early-stage agreements entered into with Malaysia.

With the potential for a significant number of large-scale investments (and follow-on M&A), in what may be new or untested jurisdictions (not to mention sub-sectors) for some investors and acquirors, companies will need robust diligence, appropriate deal structuring, and contractual protections to mitigate a range of possible new exposures. Even more time should be allocated than normal to forward scenario planning and contingent downside risk evaluation.

On a smaller geographic scale, there is a trend for locating renewable generation near to infrastructure with high energy demand such as data centres, says James Chapman. This has been pioneered by large tech companies such as Google and Microsoft but is increasingly used across many industries, including generating power for mining operations.

'Co-location often involves setting up a local microgrid which includes batteries, back-up generators and load-shifting capabilities in addition to the renewable generation,' James adds. 'Therefore, in addition to the environmental benefits and minimisation of transmission losses, the flexibility can be used to help balance the electricity grid and even earn revenue through grid balancing programmes.'