The US made its energy transition intentions clear when the administration announced its commitment to reach net-zero emissions by 2050—the clock is ticking, but how will M&A play a part?
Sustainable energy companies from renewable natural gas to renewable methane are being bought up by oil & gas super-majors, whose balance sheets have expanded thanks to the surging price of energy and fossil fuels in the past two years.
In December 2021, President Biden announced a new target for the country to achieve "a 50-52 percent reduction from 2005 levels in economy-wide net greenhouse gas pollution in 2030." To put that into context, in 2020, net greenhouse gas (GHG) emissions were approximately 17 percent below 2005 levels.
As a result, fossil fuel operators are now aggressively trying to reduce their emissions. Sustainable energy companies from renewable natural gas to renewable methane are being bought up by oil & gas super-majors, whose balance sheets have expanded thanks to the surging price of energy and fossil fuels in the past two years.
By acquiring these assets and incorporating them into their existing infrastructure, thereby creating larger diversified energy companies, these groups have the potential to establish profitable renewables businesses. The bottom line is that fossil fuel companies are adapting to this new environment, and one of the fastest ways to achieve this transformation is through buying rather than building, meaning that there is likely to be substantial M&A activity in this sector. Case in point: Chevron Corp made its biggest investment to date in alternative fuels when it acquired biodiesel maker Renewable Energy Group for US$3.15 billion in February 2022.
A game-changing law
A major catalyst for investment in energy transition is the landmark Inflation Reduction Act (IRA), which Congress passed in August 2022. It is the most sweeping legislative development in the history of renewable energy income tax incentives. The IRA has reset existing tax credits while introducing new incentives for a variety of renewable energy sources and projects in what will amount to an expenditure of more than US$400 billion.
Under the IRA, extant tax credits for traditional solar and wind projects (the value of which, under prior law, had begun to taper off significantly), have been restored to their original dollar value and extended until 2032—and potentially later if emission targets are not achieved in that time. The tax credits are available on the condition that claimants comply with new "wage and apprenticeship" requirements designed to ensure that construction workers are paid prevailing wages, and qualified apprentices registered with the US Department of Labor are used for projects. Moreover, in what will likely serve as a significant boon to the burgeoning carbon-capture, utilization and storage (CCUS) industry, under the IRA, tax credits associated with carbon oxide sequestration will enjoy both significant increases in credit value and significant decreases to applicable minimum capture thresholds.
Additional incentives under the IRA include tax credits for standalone battery storage, clean hydrogen, and manufacturers of components for qualifying clean energy projects and facilities. The legislation also provides for new and potentially game-changing ways to monetize tax credits. This includes transferability provisions—which, for the first time, allow tax credits to be bought and sold between taxpayers—as well as so-called "direct pay" provisions, which allow for taxpayers in loss positions to simply collect cash from the Treasury Department rather than being forced to wait until they have taxable income in order to make tax credit claims.
Focus on energy security
There is a notably different emphasis in how US energy incumbents are attempting to decarbonize. Unlike in Europe, where companies are far more focused on renewables, US businesses are directing more investment toward CCUS. This extends beyond the energy sector into adjacent applications.
For example, in December 2022, ExxonMobil, the largest oil & gas company in the US by market capitalization, partnered with Mitsubishi Heavy Industries to deploy the latter's carbon-capture technology as part of ExxonMobil's end-to-end carbon-capture and storage services for heavy-emitting industrial customers.
There are two key reasons for the growing investment in CCUS. Rapidly weaning the world off carbon-based fuels will be incredibly challenging because of their widespread accessibility and lower cost relative to renewables.
Then there is the question of energy security—renewables continue to face energy storage constraints. Prevailing battery technology, lithium-ion cells, are limited by raw material scarcity and have a relatively short effective operating life.
Private financing is working to solve this. For example, in December 2022 Houston-headquartered energy infrastructure company Schlumberger and Saudi Aramco's corporate venture arm backed a US$100 million Series A round for EnerVenue, a Californian startup developing long-life nickel-hydrogen batteries. In due course, advanced battery technologies have the potential to further unlock renewables' contribution to the overall energy mix.
In the shorter term, CCUS offers a timely solution for reducing carbon emissions to help offset the impact of the continued use of traditional energy sources. Like renewables, the space has received a substantial boost from the IRA, which has significantly increased the tax credit value and decreased the applicable minimum capture thresholds for carbon-capture projects. All of this will go a long way toward the government's goal of achieving net-zero by 2050.
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