The global power and utility sector is set for robust merger and acquisition activity in 2013 following a decline last year, according to new figures.

While 2012 was a year of “transformation” which resulted in a “tougher landscape”, analysts at Ernst & Young believe that “the ingredients are in place for a steady deal-making environment in 2013”.

In its Power Transactions and Trends report which is published today, Ernst & Young reveals that M&A deals fell in 2012 to $120.4bn, compared with $144.7bn in 2011.

It states that a weak macro environment prompted buyers to focus on lower-risk transactions and internal cost cutting programmes. While the first half of the year remained in line with 2011, the second half depressed the average deal value, with more deals under $100m reflecting a greater emphasis on smaller deals and an increase in renewable transactions.

Joseph Fontana, Ernst & Young’s Global Transactions Power & Utilities Leader, said the tougher landscape in 2012 was caused by “decade-low natural gas prices in North America, aggressive European environmental regulations, continued Eurozone economic uncertainty and over-leveraged balance sheets at some of the larger European players”.

Europe contributed almost half of 2012’s global deal volume and value. Divestment and privatisation programmes accounted for nearly 20 per cent of European activity as a number of utilities sold non-core assets to strengthen their core businesses and expand in emerging markets.

Europe was also the focus for renewable energy transactions, with wind the most active segment. While subsidy cut announcements curtailed some activity, momentum was maintained as utilities struggled to balance capital allocation and portfolio management while complying with aggressive environmental mandates.

This strong European performance will continue in 2013, states Ernst & Young. It predicts “billion-dollar deals to come out of European utility divestment programmes, particularly on the regulated side, where there is strong buyer interest”.

Last year, Europe was also the “favourite destination” for Asian investors, who were attracted by favorable regulatory policies and availability of high-quality assets.

In the Asia-Pacific, major transactions in China and Australia increased the region’s 2012 deal value to $30.bn compared to $11.3bn in 2011.

In the Americas, the US became one of the most active countries for generation deals during 2012, thanks to depressed natural gas prices, while in Latin America, Brazil continued to attract foreign investors on the back of its strong economic growth and significant energy infrastructure investment needs.

Looking to deals this year, Joseph Rodriquez of Ernst & Young’s Global Power & Utilities Sector, said: “The ingredients are in place for a steady deal-making environment in 2013. Access to credit remains relatively strong, and there is a war chest of sovereign wealth capital ready to be put to work. The valuation gap between buyers and sellers that held up some deals in 2012 will narrow as sellers act on investor pressure to redeploy capital.”

Fontana added: “As global power and utility companies continue to operate in a fluid market, transaction opportunities will naturally follow. Whether the aim is to rebalance the mix of competitive and regulated businesses, reduce debt, focus core operations, or free up capital to invest in emerging markets, there will be robust activity in 2013.”