MARKET CONSOLIDATION

A mixture of rising M&A activity and an increasing focus on strategic alliances and joint ventures is set to reshape the UK energy sector in the coming 12 months.

M&A moves

Energy sector M&A activity has been fairly low in recent years. 42% of UK investors and suppliers expect these levels to be maintained in the coming 12 months. However, notably, the majority (47%) are expecting to see substantial increases, pointing to at least a modest rise in transactions, with only 7% expecting any kind of decrease.

There are a number of potential drivers behind this, from businesses starting to crystallise their strategies to an easing of geopolitical uncertainty, all creating an improving environment which has encouraged businesses to press on with their growth plans. The trend may also be an indicator of smaller players combining forces to achieve the scale necessary to deliver on bigger projects. Again, there’s a story to tell here for green hydrogen, where smaller operators and start-ups have struggled to meet the demands of getting the technology off the ground. Consolidation allows these companies to go in at scale with a more credible proposition.

Recent M&A and joint venture activity in the UK energy sector is booming, driven by a perfect storm of factors. The political landscape is playing a crucial role. The Labour government’s recent removal of stringent planning policies means the path is clearer for future developments, providing a significant boost to the sector.

Moreover, the repowering of early wind projects, which are reaching the end of their lifespan, is driving increased onshore wind activity. These projects require new planning approvals, land deals, and grid connections, but the groundwork laid by initial developments makes repowering a promising avenue for growth.

The Connections Action Plan by Ofgem is also a potential game-changer. Previously, the grid connection process was overwhelmed, with companies able to apply without readiness, causing significant delays. The new plan aims to streamline this queue, ensuring only development ready projects move forward. As a result, there’s a reduction in uncertainty and increasing confidence among landowners and developers.

What’s more, Labour’s commitment to increasing support mechanisms, such as allowing developers to bid for government contracts that set electricity prices, further enhances the economic viability of renewable projects. The latest allocation round has seen a significant increase in funding, particularly for offshore wind, making the economics of these projects much clearer and more attractive.

All these elements are making the UK an increasingly attractive market for investors, ensuring a robust and dynamic energy transition.

Sebastian Briggs, Partner, Womble Bond Dickinson

Power partnerships

In addition to M&A, strategic alliances and joint ventures are also set to rise with 52% of UK suppliers and investors considering partnering with others to grow their energy technology portfolio.

Joint ventures allow like-minded organisations to share knowledge or create the scale required to drive energy transition and decarbonisation. A good example of this is our work with Hygen on the Bradford Low Carbon Hydrogen (BLCH) green hydrogen production facility.

The BLCH facility is being developed by Hygen with its joint venture partner N-Gen and is the biggest scheme to be awarded funding through the government’s Hydrogen Production Business Model.

Commercial consumers

As previously mentioned, commercial consumers of energy primarily expect to fund decarbonising activities through their own funds. However, 17% are considering M&A, joint ventures and strategic alliances as routes to funding. The government will also be hoping to see an increase in public-private sector alliances for large infrastructure projects having identified a £22bn black hole in public finances since coming to power.

Another area where we are expecting to see alliances increase is with international partners.

For example, some of the Gulf States are particularly focused on mutually beneficial agreements to develop cleantech opportunities.

This could be an interesting route to explore for UK businesses struggling to find suitable funding options locally. If there’s an opportunity for the technology to be used in the Middle East too, having investors from the region on your radar might offer a good way to access finance quickly.

Peter Snaith, Partner, Womble Bond Dickinson

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