Merger and acquisition (M&A) activity in the renewable energy sector is growing, but precise asset valuation is essential for successful investing.

Valuing renewable energy assets requires analytical rigour and qualitative insight. A structured approach – as well as an in-depth understanding of key value drivers in renewables – is required to establish an informed view of project cash flows, ancillary revenues and optimisation potential. A tailored valuation approach that aligns with specific investor risk appetite is essential to avoid mispricing and ensure the long-term success of renewable energy investments.

Renewable energy investments offer stable, long-term returns, hedge against fossil fuel volatility, and enhance environmental, social and governance (ESG) credentials. Investor interest in the sector continues to grow, driving increased capital inflows and investment activity. As a result, M&A activity in the sector is accelerating, fuelled by capital recycling, as well as new investors and alternative pools of capital entering the sector. In South Africa, M&A activity in renewable energy is gaining momentum as companies seek to diversify portfolios and scale operating capacity amid grid constraints and project delays, positioning acquisitions as a strategic route to meet clean energy targets.

Operational assets versus development pipelines

Renewable investments typically fall into two categories: operational assets and development pipelines. Valuing operational assets carries less risk, as these projects are supported by established power purchase agreements (PPAs) and underpinned by predictable cash flows. These assets are typically valued using discounted cash flow (DCF) analysis, applying an equity discount rate aligned with the asset’s risk profile.

Development pipelines, by contrast, generally comprise pre-financial close projects that are not yet operational and carry varying degrees of risk. The likelihood of a development project reaching financial close is primarily determined by its stage in the lifecycle, and the strength of its underlying fundamentals, such as technical feasibility, permitting status, offtake certainty, location, and grid access. The valuation of development pipelines is complex, and highly sensitive to the market dynamics that drive key inputs.

Valuation methodologies

The DCF methodology is the primary valuation approach for operational and under construction assets. It projects future cash flows, covering revenue, operating expenses, working capital, finance costs, taxes and capital expenditure, and discounts these cash flows to present value using an equity discount rate aligned with the asset’s risk profile. For operational utility-scale renewable assets in South Africa, the ZAR-denominated cost of equity typically falls in the low teens.

When valuing vertically integrated Independent Power Producers (IPPs), additional complexities arise beyond standalone project valuation. Intragroup cash flows from Operations and Maintenance (O&M), EPC, asset management, and development fees (typically costs at the SPV level, but revenues at the HoldCo or AssetCo level) must be carefully assessed. Valuing an integrated platform on a sum-of-the-parts basis is essential to accurately reflect its component contributions, with profit margins validated through due diligence and by comparing against relevant market benchmarks. Crucially, different owners may be able to extract different levels of valuation upside, meaning the same asset could hold fundamentally different value depending on the investor’s strategic positioning, capabilities, and operational synergies.

Multiples-based valuation

Market-based approaches like EV/EBITDA or ZAR per megawatt of generation capacity offer valuation benchmarks to cross-check DCF results. However, they may overlook nuances in the local market, such as regulation or grid constraints.

Valuing development assets requires a tailored approach, as each stage – from early concept to near financial close – carries distinct risks that call for stage-specific discounting and probability adjustments. Grouping projects by key milestones (e.g. grid connection or permitting) provides a practical framework for assessing pipeline value. Development premiums vary based on factors such as technology, location, grid access, and whether the project is acquired as a standalone asset or as part of an integrated IPP group with a project pipeline.

Debt refinancing

Debt refinancing can unlock valuation upside. Projects that are performing and exceeding modelled benchmarks often qualify for upsized facilities, enabling incremental debt to support dividend recapitalisations. Additional value levers associated with debt refinancing include lower interest rate margins, reserve releases, and extended tenors. Refinancing REIPPPP project debt requires DMRE approval, which is typically contingent on a gain-share mechanism where part of the refinancing benefit is shared with Eskom through a tariff reduction mechanism.

Post-PPA cash flows and valuation considerations

Including post-PPA cash flows in a project valuation requires a thorough assessment of life extension capex. Financial projections must incorporate an appropriate level of annual maintenance expenditure to prevent major component failures, maximise plant availability, and extend the asset’s operational life. When determining appropriate post-PPA tariffs, it’s important to consider the broader shift from long-term fixed pricing to market-based pricing dynamics. This transition will expose projects to real-time electricity prices and increase revenue volatility, underscoring the need for tariff assumptions that are grounded in robust market analysis.

For onshore wind, life extension capex (like blade repairs, bolt replacements and foundation checks) should be weighed against the higher cost-option of repowering, although the repowering alternative will substantially enhance performance, capacity and output.

In the case of utility-scale solar PV, life extension often means replacing inverters, motors, and/or trackers. A cost-benefit analysis should determine whether panel replacement or refurbishment delivers more value on a net present value basis.

Battery Energy Storage System (BESS) retrofits can enhance grid integration and unlock value through load shifting, namely storing excess energy for discharge during peak pricing. A BESS solution will also reduce clipping losses by capturing surplus DC power that would otherwise be wasted, helping to maximise yield and the overall performance of a solar PV plant.

Intangible value and strategic considerations

Beyond financial metrics, human capital is a critical value driver in renewable energy platforms. Expertise across development, permitting, grid connection, structuring and financing can materially enhance platform value, as skilled teams convert pipelines into operational assets, optimise performance, and oversee all aspects of plant operations.

M&A as an enabler of growth

In South Africa’s congested grid environment, where competition for sites is fierce, greenfield developments face mounting competition and uncertainty. This dynamic is driving M&A activity in the sector, as it is increasingly viewed as a strategic pathway to scale operational megawatts. In addition, M&A can facilitate portfolio diversification and balance risk by combining cash-generative operational assets with high-growth pipelines to improve capital efficiency and reduce earnings volatility.

Valuing renewable energy assets is a complex and highly technical process that demands specialised experience and deep domain knowledge. As a result, there is a heightened risk of mispricing and overpaying for assets. Engaging an experienced adviser when evaluating a renewable energy M&A transaction is a sound strategic decision.

Willem Du Toit is Senior Vice President, Advisory, Investment Banking | Standard Bank CIB

This article first appeared in DealMakers, SA’s quarterly M&A publication.

DealMakers is SA’s M&A publication.
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