Utility Week

UTILITY WEEK | 14TH - 20TH FEBRUARY 2020 | 23 Finance & Investment scheme to all new generating capacity at the end of March 2017. This caused a spike in deal numbers in 2017, coupled with the lack of participation by both solar and onshore wind in the contracts for difference (CfD) auctions. While these continued to hinder investment in developing and building new farms, interest by institutional investors in operating assets continued during the year. In solar, nearly all deals were sales of operating assets, with NextEnergy Solar Fund, Greencoat Capital and Arjun Infra- structure Partners all adding solar assets to their portfolios. In wind, one of the largest acquisitions of the year related to the purchase of Iberdrola's 40 per cent stake in the East Anglia ONE offshore wind farm by the Green Investment Group. While Equitix, Greencoat UK Wind, and Pensions Infrastructure Platform also acquired wind farm assets, three transac- tions focused on investing in companies that develop, construct and operate assets or pro- vide equipment parts and services to wind farm manufacturers and operators. The water sector also saw lower M&A activity during the year. While those inter- ested in the sector wait for PR19 to conclude, deals in 2019 were modest and focused on companies that provide water services, treat- ment products and systems. Attracting foreign investment Two major energy network assets attracted interest from foreign investors in 2019. One was the Electricity North West electricity distribution business, whose new owners include a Japan-based consortium of companies. The second asset was Cadent Gas, in which National Gas sold the remaining stake to a Macquarie-led consortium of investors called Quadgas. A˜er acquiring 61 per cent of the company three years ago, Quadgas is now the full owner of Cadent Gas, a network that distributes natural gas to 11 million UK homes and businesses. Consolidating energy retailers The UK energy retail sector is facing several pressures currently, including customer per- formance, increased price competition and the default tariff price cap. These pressures have led to an increase in M&A activity in the sector as investors, challengers and incum- bents wrestle with the new environment. There were a number of company insol- vencies in the sector – which do not count as M&A deals under the Supplier of Last Resort arrangements – but challenger retailers who are breaking into the "big six" also started to emerge, as Octopus Energy's acquisition of Co-operative Energy and Ovo Energy's purchase of SSE Energy Services show. Mitsubishi's acquisition of a 20 per cent stake in Ovo Energy and Shell's purchase of Hudson Energy Supply are signs of busi- nesses aiming to participate in the UK's low-carbon transformation. The EnTech deals, which are still modest in volume and numbers, include the acquisition of Charge Point Services, which provides charging equipment for EVs, and that of Harmony HB, which operates a battery storage facility. Outlook for the sector While the outlook for the sector as a whole is strong, the coming year could be another quiet one from an M&A perspective as the regulatory and political headwinds will continue to exist. Deloitte does not anticipate significant investment into developing and build- ing new solar and onshore wind farms, so expects the number of such deals to remain low in 2020. However, developers are now looking to create assets that can be profitable subsidy-free – for example, by combining solar power with battery storage solutions. The water sector is also likely to see a sub- dued level of M&A activity in 2020 until the PR19 process is finalised. 2019 saw a number of transactions driven by the increasing interest in energy transi- tion. With the UK's commitment to shi˜ the economy to being net zero by 2050, a world of opportunities will open up for busi- nesses to participate. What companies need now is political and regulatory guidance on timelines and direction of travel to start unpacking the business case for investment. Dan Gambles is a director in Deloitte's Financial Advisory practice One of the largest wind purchases of the year related to a stake in the East Anglia ONE offshore wind farm ANALYSIS OF M&A DEALS IN THE UK UTILITIES SECTOR Wind Generation (hydro) Nuclear Biofuel/waste-to-energy Water EnTech Solar Energy retail and TPIs Other Generation (coal and gas) Energy networks Number of transactions 90 80 70 60 50 40 30 20 10 0 2015 2016 2017 2018 2019 Source: Deloitte analysis based on MergerMarket data Note: 'Other' includes deals that do not fit into any other category, for example utility services or investment vehicles

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