We are seeing a significant increase in M&A activity in the renewable energy space in Australia as global companies become more aware of the potential opportunities and the sector begins to mature.

Even in the absence of ambitious renewable energy targets or incentives at a federal level, the favourable economics of renewables, when compared with non-renewables, has resulted in a large increase in renewables projects in Australia.

The space is exciting given Australia’s stability and abundant wind and sunshine. However there are significant logistical hurdles, in addition to a lack of clear federal government policy on energy in general, that potential buyers need to be aware of.

Policy

Current federal government policy is, broadly speaking, limited and, in a solar and wind context, will wind down from 2020. The policy focuses on lowering power prices and supporting firm generation.

Current Victorian government policy includes:

• Raising the Victorian Renewable Energy Targets (VRET) to 50% by 2030.

• The Victorian Renewable Energy Auction Scheme (VREAS). The Victorian Government established the VREAS to support achievement of the VRET which should continue to operate until 2030 under the Renewable Energy (Electricity) Act 2000 (Cth).

Many Australian states and territories have similar programs.

M&A Targets

The target structures range from greenfields sites held by hopeful developers, to “shovel ready” sites and finally to the acquisition of mature assets.

What we have found is that targets are being selected based on the profile of the acquirer. The target will usually have an attribute attractive to the acquirer. For example, power companies often look to acquire mature sites, whilst shovel ready sites are sometimes being purchased by international component suppliers and EPC contractors, providing a platform for them to utilise their particular specialism in an Australian context.

This article focuses on targets at greenfields to a shovel ready stage.

Process

From a legal perspective, the acquisition of renewables projects is complicated. Expertise needs to be drawn from corporate, projects, real estate, planning, construction, banking, tax and regulatory disciplines.

Foreign investors need to navigate Australia’s complex foreign investment regime and, in some cases, seek Foreign Investment Review Board (FIRB) approval, as the long term leases usually associated with such projects are often over agricultural land and are themselves considered interests in land. The process of receiving approval is lengthy, and significant fees are payable to the government in connection with the process which need to be incorporated into any financial model.

The work required depends on the phase of development of the particular project, but usually involves the acquisition of an opco/propco style unit trust structure which has certain tax and stamp duty benefits.

Critical issues to consider include:

• The progress and status of development approvals, to be matched with capacity, and the cost of complying with any conditions.

• The feasibility of the underlying land rights that have been negotiated for the particular project (usually contained in an agreement between the developer and the current landowner).

• The cost associated with grid connection. Connection agreements with Network Service Providers (NSPs) can be negotiated to some extent and there are standard positions which can be achieved. However the costs associated with connection can vary from site to site and need to be precisely identified. Discussions with the NSP and, if applicable, the Australian Energy Market Operator (AEMO) should commence early and continue throughout the acquisition process, given the timing for connection of projects is constantly changing as new projects apply for and are connected to the grid.

• Logistical due diligence to ensure site access, both physical and for connection purposes, with adequate protections contained in leases. Barriers to construction and connection need to be identified early on in the process.

• Grid quality in the surrounding areas.

• The overall economics of the site.

We have been involved with the development and acquisition of a number of renewable energy sites right around Australia over the past year.

Whilst navigating the issues is complicated, we are confident the overall economics of renewable energy in Australia will continue to improve creating M&A opportunities.