EY Power and Utilities has released its Q3 transactions and trends report for 2016 and found investment in disruptive technologies is growing while overall deal value continues to decline.

Deal value for the sector declined for the fourth consecutive quarter — falling 8 per cent to $39.7bn in Q3 2016 compared to the previous three months.

Regulated network assets remained the investment of choice for buyers across regional markets seeking stable long-term returns. Transmission and distribution assets accounted for more than half of total deal value in the third quarter at US$23.6bn. The average deal size for these assets increased by 200 per cent to $3.9bn in Q3.

Deal volume also experienced a minor decline quarter-over-quarter with 102 deals in Q3, down from 128 in the second quarter of the year. Fifty-three per cent of total global deal volume came in the form of renewable energy assets valued at $$7.9bn.

Matt Rennie, EY Global Power & Utilities Transactions Leader, says: “Regulated network and grid assets offer stable cash flows to investors looking to weather short-term uncertainty caused by ongoing commodity price volatility and recent depressed electricity demand. A closer look at smaller transactions in the sector reveal, however, that major utilities are looking beyond safe bets and investing in a new energy future.”
Rennie was pointing to the growing enthusiasm for disruptive technologies, particularly in Europe and Asia-Pacific. During the first nine months of 2016, he said there was close to $2bn worth of disruptive deals involving acquisition of rooftop solar, battery storage and smart meter assets by both corporate and financial investors. Oil and gas companies too are increasingly diversifying into the P&U sector, particularly into the battery storage segment, contributing over US$1b of the total deal value attributable to disruptive technologies this quarter.

According to the EY Power & Utilities Capital Confidence Barometer, the appetite to invest in disruptive technologies stems from digitization and sector convergence, increased competition from companies outside the sector — cited as the first and second most prominent items on utilities’ boardroom agendas over the next six months.

Rennie says: “Utilities are facing competition from new players in areas such as energy management and the connected home. That, coupled with the emergence of innovative products and business models, is persuading utilities to explore mergers and acquisitions opportunities to acquire the necessary capabilities to stay competitive. Battery storage, big data analytics and home automation are just some of the areas where we expect utilities to target acquisitions.”

Investment in the areas of battery storage and software solutions start-up is expected to continue as utilities seek to optimize their business portfolios in response to transformation within the sector. Forty-seven percent of utilities plan to actively pursue acquisitions over the next 12 months.