Rising Market Cap Fuels Acquisition Ambitions For US Renewable Energy Firms

Early in October this year, NextEra Energy, a renewable energy firm with almost 18 GW of solar and wind plants till last year, overtook Exxon Mobil in market cap for the first time ever. The event marked both the rising tide for renewable energy firms seen as leading the new energy transition, and the mark down of traditional energy giants, seen as too slow to change.

NextEra joined a select band of firms across the spectrum, like Tesla in Auto and Storage (market cap of $400 billion on revenues of under $25 billion in 2019), to SolarEdge and Enphase in the inverter space, that have benefited from the sort of rerating that can give an all new momentum to a sector. In this case, the higher market cap means that the firms can use stock to purchase unlisted rivals or even older, legacy firms in the business. With a market cap of approximately $145 billion, on revenues of just over  $19 billion in 2019, the firm enjoys a sales multiple that would be the envy of some tech firms even. Compare that to Evergy’s market cap of $13 billion on revenues of $5.1 billion in 2019.

Which explains the reports of NextEra Inc going for U.S. power utility Evergy Inc in an all stock  $15 billion offer. While Evergy  has turned down this offer for now, there is no doubt that NextEra, and other firms enjoying valuations of a lifetime, will not be slowing down anytime soon. 

Utilities in the US offer a particularly tempting target as they sit over ageing infrastructure that needs replacement, and shifting to cleaner energy production at the same time. Utility firms have also been squarely blamed for their role in disasters like the forest fires in California for instance, where Pacific Gas and utility was blamed for not investing enough in maintaining its grid, sparking fires due to short circuiting wires in cases.

Evergy itself was formed only in 2018, after the merger of Great Plains Energy and Westar Energy. With 1.6 million ‘captive’ customers in Kansas and Missouri, the utility is an obvious bet for acquirers, looking for the next big consuming markets for clean energy. Like all monopoly or quasi monopoly markets, regulatory issues are a major hurdle, as regulators worry about higher prices for consumers and/or lack of choice.  

Another plus for the new firms is that as the US  economy electrifies faster with transportation increasingly moving towards electricity, firms like NextEra benefits from both a growing population and utility customer  base and more demand for electricity in the future.

In India, the situation is yet to pan out the same way simply because our developers have been unable to tap the capital markets as effectively. Other than the rare case of Azure Power, or Adani Green, the largest renewable energy developers have tended to be the traditional power producers, with firms like NTPC and Tata Power doing a better job of starting to adapt than their US counterparts so far. However, so far, these legacy firms have received none of the benefits of a high valuation, thanks to their legacy costs. For Tata Power, it might be a Mundra thermal plant, for NTPC, a whole host of ageing thermal plants whose future is never too certain, thanks to issues ranging from air pollution, to low power demand to quality coal supplies. That also explains the plans at each of the these firms to hive off their renewable energy divisions as separate subsidiaries, with plans to list them too. Tata Power has already started work on its first inVIT (Infrastructure Investment trust) to hold its renewable assets, with the parent firm holding an equity stake in it.

Leaving our energy transition to these largely legacy firms with a huge stake in the existing energy architecture has been one of the key reasons for the slower pace of development.