In Japan, the ambitious decarbonisation targets and high investment returns are drawing interest from both local and international buyers.
Mergers and acquisitions in Japan’s energy and utilities sectors have reached a new peak in recent years. 24 done deals in 2021 alone represents a new high since 2006. Not just this, but the value of deals are also on the rise – $2.62 billion in deals were announced in 2021.
This is the highest annual deal value in five years.
Clearly things are going well for the Japanese energy sector and economy.
Oil firms back decarbonisation
It maybe seems a little bit of an oxymoronic statement. But it will be explained.
Dealmaking targeting Japan’s alternative energy sector has so far been a major driver of activity. In October of 2021, the Japanese oil firm ENEOS struck a $1.7 billion deal to acquire the local renewable project developer Japan Renewable Energy from Goldman Sachs/GIC.
This was the largest Japanese energy deal announced throughout 2021 and will certainly help the country’s largest oil firm hit its renewable energy target of expanding renewable power generation capacity to more than 1GW by the end of the 2022 fiscal year. This is much earlier than scheduled.
The interest of oil companies in alternative energy assets is driven by two trends. Falling domestic oil demand and governmental pressure to reduce carbon emissions. According to the US Energy Information Administration there is a long-term trend of Japan’s domestic oil demand decreasing due to structural factors such as declining and aging population, high energy efficiency measures, and an expanding number of hybrid/electric vehicles. Due to this, daily oil consumption dropped by almost 1 million barrels in the period of 2012 to 2019. As a result, oil firms are highly motivated to explore alternative avenues to boost profits.
The Japanese government too has a role to play, encouraging a transition from fossil fuels. They recently set the lofty target of reaching carbon neutrality by 2050 and as part of this goal want renewable energy to account for 36-38% of Japan’s electricity mix in 2030. In March 2020 the renewables rate stood at around 18%.
US and European buyers enter the market
Japan’s growing renewables market is not just attracting interest from internal buyers but also from global players looking to gain a foothold. A recent example of this global interest is the acquisition of the 250GW solar power portfolio by Enfinity – a US-based renewable energy and sustainability services company valued at $1 billion
Announced in February, is the deal is the largest renewable acquisition in Japan for more than five years. European buyers are also interested in Japanese renewable assets. In August 2021, SSE Renewables entered the Japanese offshore wind market through their purchase of Pacifico Energy’s offshore energy platform. This acquisition was valued at $208 million and created a joint ownership company that will pursue offshore wind energy development project throughout Japan.
To reach decarbonisation goals and achieve greater energy independence (a goal underlined by the effects of Russia invading Ukraine on energy markets), the Japanese government has set a firm target of producing 30-45GW of installed offshore wind capacity by 2040.
Infrastructure funds strongly back solar
Investment into domestic solar assets by local Japanese firms has been a renowned feature of Japanese energy dealmaking in 2021 and early 2022. Infrastructure funds have been particularly active here, as seen in Enex Infrastructure Investment Corporation’s purchase of the Monbetsu solar power plant, valued at $58 million.
A further appreciation of the expanding potential of Japan’s solar assets can be gained from looking at the litany of case studies. Tokyo Infrastructure Asset Management acquired a full 100% stake in two solar power plant operators in Japan – Eco Solar Aizu and Ibaraki Ushiku 1. These were acquired from Thai solar power plant operator Thai Solar Energy in September 2021 for $31 milllion.
These actions reflect the attractive returns that solar energy is set to offer in the long-term. These local infrastructure funds will likely face stiffening competition from corporations and private equity funds as the market heats up.
What does the future hold
As Japan’s aim for 36-38% of energy production to come from renewables by 2030 is so ambitious, the lofty target holds the potential to spark a shopping spree among dealmakers over the next few years.
International buyers will not stand idly by and watch the action, already seen by the actions of Enfinity and SSE Renewables. Cross-border dealmaking will certainly continue as international firms look to gain their footholds into an exciting market.
Local firms will have their role to play in investing in the capabilities of local assets. Infrastructure funds are already active in this regard, particularly early-stage investments. Perhaps in time larger international funds and firms will make their presence felt.
Decarbonisation Investment
Japan’s public and private sectors will need to invest a total of 150 trillion yen (about £900 billion) in decarbonisation over the course of the next 10 years to achieve their 2050 carbon neutrality goals, according to the industry ministry.
This revelation was made as part of an interim report on the country’s clean energy strategy which is expected to be finalised in the later portion of this year.
Speaking to a panel of specialists, Koichi Hagiuda, Japan’s Minister of Economy, said this –
“A great competition has already begun in which first movers have an advantage in the decarbonisation area.
It is essential for the government to offer support measures not only for research and development but also in various other areas on an unprecedented scale, allowing the private sector to make investment decisions with foresight.”
It was only in April that the ministry said a 17 trillion yen investment would be needed for 2030 alone, by which time Japan aims to cut its emissions by 46% compared to 2013 levels. Decarbonisation in general includes renewable energy, cleaner fuels such as ammonia and hydrogen, rechargeable batteries, energy-efficient buildings, and electric vehicles.
The government plans to provide support through subsidies, regulation and financing, and other measures. This support will be provided for new technology to help reduce carbon dioxide emissions and the creation of global supply chains for next-generation fuels.
They will look into the possible issuance of transition bonds, typically used to fund environment-related projects, and will also set up a new panel under the Cabinet Office in summer to deepen discussions over how to pursue a decarbonised society.
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