The percentage of power and utilities companies expecting their deal pipelines to increase over the next 12 months has risen from 28% in April to 63% in October 2014, according to EY’s Power & Utilities Capital Confidence Barometer.
“The increase in the deal pipeline isn’t surprising,” says Gerard McInnis, EY’s Power & Utilities leader in Alberta. “What’s shifting, though, is the type of deals companies expect to undertake. They’re moving away from billion-dollar-plus deals, and looking at more middle-market deals.”
The shift comes amid sustained economic confidence, portfolio realignment and digital transformation agendas that are all influencing investment decisions.
“Power and utilities companies globally face the triple challenge of improving environmental performance, keeping consumers’ costs down and maintaining system reliability,” says McInnis. “These pressures – combined with the huge capital intensity of the sector overall – are forcing companies to rethink their energy mixes. The status quo isn’t necessarily sustainable, and, for some, mergers and acquisitions can help them diversify.”
At the same time, McInnis says things like the introduction of smart technology present an immediate challenge, in terms of funding and making the right technology choices.
“While the dynamics around regulation vary by jurisdiction, one thing is for sure across the sector – technology is causing major disruptions to existing business models,” he says. “Companies can’t afford to view smart technology as simply an infrastructure upgrade. They need to get ready for the reality of ‘big data’.”
Smart roll-outs will result in huge increases in data, while smart grids will enable two-way energy flows, encouraging customers to play a new role in determining their energy consumption and putting new strain on existing network assets and mechanisms.
“It’s an exciting time for the power and utilities sector,” says McInnis. “With strong confidence in the global economy, and optimism around corporate earnings and employment expectations, companies are ready to make deals to help them achieve the transformations they need to thrive now, and in the future.”