Renewables: How private equity can contribute to the UK goal of net zero
The UK is aiming to reach net zero by 2050 and transition to an electricity system with 100% zero-carbon generation. This is expected to come from renewable energy – wind, solar, hydroelectric and bioenergy.
Renewables already play an important role in the UK’s energy strategy. In 2022 wind power contributed 26.8% of the UK’s total electricity generation; biomass energy, the burning of renewable organic materials, contributed 5.2% to the renewable mix; solar power contributed 4.4% to the renewable mix; and hydropower, including tidal, contributed 1.8% to the renewable mix (Source: National Grid).
Renewables have similarly been creeping up the investor agenda. 28 deals have successfully completed in the first few months of 2023 pointing to an upward trend. According to Pitchbook there were 165 deals in 2022 (up from 148 in 2021) suggesting an upward trend, and we think there is more out there. PE is well positioned to bring the funding, discipline and commercial experience needed to maintain the UK’s lead in renewables.
Do the due diligence
Saying that… forget the feel-good factor, proper robust due diligence is essential. This is a fragmented, fast-growing, complex market and you’ll need experts to help you navigate through it.
Here are some of the things you need to get comfort on:
Market demand: Is the end market growing, or at least stable? Is organic growth achievable? What impact will changing dynamics have on the market (e.g. new regulations, technology, adoption)? How easily could the business move into adjacent sub-sectors and/or verticals? Is this necessary to expand the addressable opportunity?
Resilience: Is this area of renewables resilient? Are other renewable sources likely to become more attractive, cheaper, more reliable?
Differentiation: How does the business differentiate, and how sustainable are its differentiators? How does its ESG credentials compare to competitors? How does it compare on customer service and price?
Operational model: How spread out geographically are the company’s customers, and what does this mean for access to services and staff utilisation? How does the company manage the risks in its supply chain (direct vs distributor)?
Technology: Is there opportunity for technology disruption in this area? If so, does the business have plans to develop their tech? How well developed are these plans? Can the business leverage technology to extend its service offering within existing customers, or to deliver it ‘better, faster, cheaper’?
Organic growth: How is the business going to grow organically? How difficult is it for customers to switch? What drives their buying decisions beyond price? Is there a danger of commoditisation?
Buy and build strategy: Many providers of renewable services are regional specialist businesses – it may make sense on paper to combine these niche services, but bolt-ons need a platform to grow from. Is the business suitable as a platform? What complementary services could be added to the business, or how could it extend its geographical footprint? Are the buy and build targets attractive to bolt on to a larger platform, and can management/PE focus improve them?
We have recently worked on deals in the ESG space including Stonbury, Anthesis, Cura Terrae and GEV.
Speak to a member of the team about opportunities in this sector.
Brandon Matthews, Senior Consultant
+44 7771 401 723