Energy & Infrastructure M&A 2024

Energy and Infrastructure M&A: An Introduction

This Practice Guide will focus on the current key topics in energy and infrastructure M&A in 2023 and 2024. In this series of articles, legal practitioners from various jurisdictions will analyse the law and practice as well as the trends and developments in the energy and infrastructure markets in their home country.

Global Trends in Energy and Infrastructure M&A

The global energy and infrastructure sectors are undergoing profound changes, driven by technological innovation, the transition to renewable energy, regulatory shifts and evolving investor preferences. M&A has become pivotal in this transformation as companies seek to optimise their portfolios, scale renewable investments and respond to new challenges.

Energy transition accelerating renewable M&A

The global shift towards decarbonisation and net-zero targets is a major catalyst for M&A in the energy sector. Governments worldwide have committed to reducing greenhouse gas emissions, with significant investments in renewable energy projects like wind, solar and energy storage. The move to phase out fossil fuels has also led to divestments in carbon-intensive assets, creating opportunities for M&A in both green and traditional energy spaces.

Renewable energy M&A has surged as large energy companies aim to increase their share of renewable assets. In 2022, renewable energy deals reached record levels as companies raced to align their portfolios with sustainable energy mandates. For example, large oil and gas companies have been acquiring renewable energy assets to diversify away from fossil fuels, while utilities are buying wind and solar projects to meet regulatory requirements and investor expectations.

According to a PWC study, renewable energy M&A deals grew by over 45% from 2021 to 2023, and this momentum is expected to continue as governments push for faster decarbonisation. This trend is particularly evident in Europe, where the European Green Deal is spurring investments in clean energy and energy storage infrastructure, and in the US following the passage of the Inflation Reduction Act, which provides financial incentives for clean energy investments.

Energy storage and grid modernisation

The increasing reliance on intermittent renewable energy sources has driven a parallel demand for energy storage solutions and grid modernisation. Battery storage and other forms of energy storage are critical for integrating renewables into the grid and ensuring stability. M&A activity in the energy storage sector is booming as companies seek to acquire technologies that will help balance supply and demand in renewable-dominant energy markets.

Furthermore, aging energy infrastructure and the need for smart grids to accommodate renewable energy generation and electric vehicles are prompting utilities and investors to pursue M&A opportunities in grid modernisation. The integration of digital technologies such as smart meters, demand response systems, grid management software and AI systems is crucial to enhancing efficiency and resilience.

Looking ahead, M&A in energy storage and grid modernisation is expected to remain strong, driven by technological advancements and increasing regulatory pressures for grid reliability. The need for enhanced infrastructure to support the electrification of transport will further bolster this trend.

Consolidation in oil and gas

While the energy transition accelerates, oil and gas companies are also consolidating to improve efficiency and optimise their portfolios. High oil prices, driven by geopolitical tensions (especially the Russia-Ukraine conflict) and global supply chain disruptions, have spurred cash flow surpluses for many oil and gas producers. These companies are using this liquidity to acquire competitors, streamline operations and shift focus towards natural gas and low-carbon energy sources.

In the past two years, the global oil and gas sector has seen significant consolidation, and more M&A in the oil and gas sector is expected as companies look to adapt to long-term market shifts and create economies of scale. Some oil companies are also pursuing M&A in adjacent industries, such as carbon capture and storage (CCS), hydrogen and biofuels, as part of their energy transition strategies.

Private equity’s role in infrastructure

Private equity is playing an increasingly vital role in infrastructure development, driven by the sector’s need for substantial capital investments in areas such as transportation, energy, telecommunications and water systems. With traditional public funding sources often constrained, private equity provides a flexible, long-term investment model, helping to close financing gaps and accelerate essential infrastructure projects. In addition, the stable, long-term cash flows characteristic of infrastructure assets align well with private equity’s objectives, making infrastructure an attractive sector for growth-focused funds seeking stable, inflation-hedged returns over extended periods. This trend is particularly strong in renewable energy, where private equity is backing the development of solar farms, wind parks and energy storage projects.

Private equity’s ability to deploy large amounts of capital will be crucial for financing future infrastructure investments. Many institutional investors, such as pension funds and sovereign wealth funds, are also expanding their infrastructure portfolios as they seek inflation-protected assets with steady yields. They are increasingly partnering with private equity firms to access these opportunities.

Looking ahead, private equity involvement in infrastructure M&A is expected to remain strong, with many private equity funds focusing on digital infrastructure, such as data centres and broadband, as well as energy transition assets.

Emerging markets and infrastructure expansion

Emerging markets, particularly in Asia, Africa and Latin America, are experiencing rapid infrastructure development to meet growing energy demand, urbanisation and economic growth. Infrastructure investment is critical for providing reliable energy, improving transportation and building smart cities in these regions.

M&A in emerging markets is set to grow as global investors tap into the increasing need for power generation, transmission and transport infrastructure. For example, energy transition financing in Southeast Asia, such as Indonesia’s push for renewable energy, and infrastructure modernisation in Africa will likely drive M&A activity. Furthermore, China’s Belt and Road Initiative continues to promote infrastructure investment in developing countries, creating opportunities for cross-border M&A.

Key Challenges Facing Energy and Infrastructure M&A

Regulatory and policy uncertainty

Regulatory frameworks governing energy and infrastructure vary widely across countries, and policy shifts can have a major impact on deal flow. For instance, the changing regulatory landscape in Europe due to the European Green Deal and new emissions targets presents both opportunities and risks for energy M&A. In the US, policy changes under different administrations, such as tax credits for renewables or restrictions on fossil fuels, can alter the attractiveness of certain sectors for M&A.

Moreover, geopolitical risks, such as the war in Ukraine and escalating tensions between the US and China, are creating new layers of complexity in cross-border deals. As protectionist policies grow and national security concerns rise, foreign investments, especially in critical infrastructure, may face more scrutiny, particularly in sectors like energy, telecoms and transport.

Supply chain and inflation pressures

Global supply chain disruptions, compounded by the COVID-19 pandemic and geopolitical tensions and challenges, are affecting the cost and timing of energy and infrastructure projects. Rising material costs, shipping delays and labour shortages are creating significant challenges for companies looking to acquire new projects or integrate newly acquired assets. These disruptions have also led to increased construction costs and project delays, affecting the overall value proposition for M&A transactions.

Inflationary pressures, particularly in energy and raw materials, are also squeezing margins in both traditional and renewable energy sectors. Rising interest rates in 2023 and the first half of 2024, aimed at curbing inflation, made financing for infrastructure projects more expensive, adding a layer of complexity to M&A negotiations.

Sustainability and ESG considerations

Environmental, social and governance (ESG) factors are becoming increasingly critical in M&A decision-making. Investors, especially institutional ones, are prioritising ESG-compliant assets, and companies with strong ESG credentials are commanding higher valuations. This is particularly evident in the energy transition, where green assets such as wind farms, solar parks and energy storage projects are in high demand.

However, balancing ESG goals with financial returns can be challenging. There is growing pressure to phase out fossil fuel-based assets, but the financial viability of many renewables depends on regulatory support, and achieving large-scale decarbonisation requires significant investment in infrastructure. Players engaged in M&A must navigate these challenges to strike a balance between profitability and sustainability.

Outlook for 2025

As we move towards 2025, several factors are expected to continue driving energy and infrastructure M&A, as follows.

• Renewable energy will remain a focal point for M&A, driven by government mandates, corporate sustainability targets and the increasing competitiveness of renewables compared to fossil fuels. More M&A deals involving energy storage, hydrogen and carbon capture technologies are expected.
• Despite the long-term decline of fossil fuels, high oil prices and the need for scale in a low-carbon future will lead to further consolidation in the oil and gas sector. Companies will continue to focus on natural gas and low-carbon alternatives to adapt to the energy transition.
• Digital infrastructure, including broadband, data centres and smart grids, will be an attractive target for M&A as economies become more digitalised and energy systems more decentralised.
• Emerging markets, particularly in Asia, Africa and Latin America, will be a hotbed of infrastructure M&A as countries invest in energy, transport and digital infrastructure to support economic growth and urbanisation.

Conclusion

While the global energy and infrastructure M&A landscape presents significant opportunities, companies and investors must navigate a complex array of challenges. By focusing on sustainability, innovation and strategic partnerships, market players will be well positioned to capitalise on the emerging trends shaping the energy and infrastructure sectors through 2025 and beyond.