By Irina Slav
Environmental, social, and governance investment is inarguably one of the hottest trends in financial markets. Investors are pressuring companies into reducing their carbon footprint, and asset managers and banks are devising ways to maximize this pressure to drive emissions down. The ESG trend spans all industries, but one place where its impact is particularly visible is power utilities. Renewable energy is in, fossil fuels are out: this seems to be the dominant trend these days. It is likely to, at the very least, remain stable over the coming years, although it is more likely to accelerate with all the government support for renewable energy in key markets.
Renewables were the driver of most mergers and acquisitions in the power utility sector last year, according to a recent report by EY. Investors looked to reduce their exposure to “carbon-heavy” assets and reorient themselves to more environmentally friendly operations.
Of course, cost reduction was also a factor in dealmaking during the first year of the pandemic, but the shift from fossil fuels to renewables was as evident as it is among Big Oil majors, with the pandemic likely only accelerating trends already present in the industry. And with ESG investing the new black, we might see a change in the utilities sector similar to the change we are seeing in Big Oil.
Comparisons between fossil fuel-powered electricity generation and renewable installations recently hogged headlines amid the Texas Freeze. Some blamed wind turbines, which froze in the uncharacteristic sub-zero temperatures that hit the Lone Star state earlier this month. Others blamed gas-fired power plants that were not calibrated for such weather. Both camps brushed off the other’s arguments.
The truth is that both renewable and fossil fuels failed. Wind turbines did freeze, and gas-fired plants—and coal plants, and nuclear plants—did suffer outages because of the cold. As a result, the Texas grid came close to a complete collapse, ERCOT revealed this week. This should highlight the crucial importance of grid security, especially with an increasingly diversified energy mix, because renewables are not going anywhere. “The low-carbon energy transition shows no signs of abating,” Miles Huq, partner, Strategy and Transactions at EY, told Oilprice. “If we look at the big picture, the intensifying appetite for renewable energy and ESG investments will endure in the aftermath of the winter storms in Texas.”
In other words, the ESG momentum is strong enough to ignore frozen turbines and focus on the equally frozen thermal power plants, which, in addition to revealing themselves as unreliable during winter weather, have a bad rep that investors increasingly intensely dislike.
Mergers and acquisition deals in renewable energy in the Americas last year hit a total $17.3 billion last year, the EY report noted. In comparison, the value of deals in oil and gas was just $2.4 billion, and not all of it was exposure growth: the number includes both acquisitions and divestments in the industry.
So, renewable energy is here to stay and will grow strongly as investors cannot get enough of this market darling and its twin, electric vehicles. But bad rep or not, fossil fuels tend to be more reliable—extreme weather excepted—because they can produce electricity continuously rather than while the sun is shining and the wind is blowing. Many green energy skeptics have noted that renewables’ intermittent nature as problem number-one for their transformation into the dominant form of generation.
It doesn’t necessarily need to be such a problem, however, if the grid is being adapted to the changing energy mix—and to changing weather.
“As severe weather events have increased, utilities have had to invest in both grid hardening programs while also making investments in grid modernization,” EY’s Huq says. “As an example, after Hurricane Sandy, which caused unprecedented customer outages in New York, the energy policy focus has been on fortifying and future storm hardening of the overall system while investing in the energy system of the future.”
Grid fortification is—or at least should be—a major consideration in the energy transition. It is not enough to just praise solar and wind for their near-zero-emission style of operation. The security of power supply depends on planning for emergencies such as Arctic blasts or heatwaves and preparing generation assets for them. After all, weather forecasting has become quote accurate thanks to modern technology.
By the same token, it is not enough to praise the reliability of fossil fuels because, as we saw in Texas, this reliability is conditional. Obviously, utilities can’t prepare dozens of power plants for a freeze just days in advance, but they can plan for the long term.
ESG investing is changing the face of the power utility industry as billions flow into renewable generation capacity. But those sending the flow might want to add grid security and fortification to their priorities. Many seem to be doing just that: although renewable M&A activity accounted for the most deals in terms of value, integrated utilities were a close second, with deals worth $15 billion.