The Paris Agreement on climate change, with its goal of limiting a global temperature rise to less than 2 degrees Celsius compared to pre-industrial levels, has seen a slump in profits for traditional energy and sparked more global interest in renewable energy sources. This global transition to cleaner, renewable energy sources and away from fossil fuels has spurred a trend for more Mergers and Acquisitions and is driving growth for innovative businesses seeking to capitalize on market opportunity.
Despite the impact of Covid-19 on the economy, global investment in renewables reached $137 billion in mid-2020. BloombergNEF (New Energy Finance) estimates that $64 trillion will need to be invested in the power and grid infrastructure for the newer forms of energy. The Biden-Harris administration is backing investments in renewables, and renewables are becoming more cost competitive with traditional energy sources.
Transitioning to renewables is going to be a decades long process, during which time oil will continue to be a major energy source. Natural gas use will continue to increase through 2050, oil is expected to peak in 2035 and coal will continue its decline. Increased environmental, social and governance (ESG) focus from oil and gas companies seeking to operate more sustainably will create opportunities for companies with plans to help them.
According to Bloomberg, utilities may look to sell their natural gas assets in 2021. Even though natural gas will continue to increase in use, power providers are facing pressure to reduce emissions. Investors and government are both applying pressure to carbon intensive operations. One result is that companies are planning to divest themselves of non-core energy businesses that might be better for other investors, to concentrate on their core business.
PwC anticipates an uptick in M&A in the energy sector in 2021 because of increased investor confidence. In addition, companies are rethinking their portfolios as commitments to net zero targets increase and governments create incentive plans for renewables. Oil and gas will continue their M&A activity to restructure distressed sectors facing closures.
The outlook for renewable energy M&As is good, with investors looking favorably on the sector, governments creating energy plans promoting renewables, and companies making date specific commitments to carbon neutrality or net zero. Oil and gas valuations continue to decline, and some of those companies are adding renewables, energy storage and carbon capture to diversify their vulnerability. Creating value as the global economy continues the transition to cleaner power will happen in many ways and mergers and acquisitions are a valuable component.