Investors have set their sights on the Australian renewable energy sector with solar and wind projects continuing to capture most of the new investment.
This kind of investment is not just exciting for those within the industry but should also excite the whole business community. A competitive solar & renewable energy industry has wider implications on industry and consumers alike.
Solar Industry Australia: Growth, Life Cycle and Forward Outlook
In a robust five-year period, from 2016, the solar energy sector has enjoyed an impressive 46.5% annualised growth rate.
Total revenues for that five-year period reached $415.8 million, with annual profit averaging $49.5 million.
For the next five years, it is predicted the solar energy sector will continue to post a double-digit growth of over 19% from 2021 to 2026.
The solar energy generation capacity in Australia has grown ten fold from five years ago – 450 GWh in 2016 to over 5500 GWh in 2021. According to the Department of Energy, demand for solar generated electricity (solar photovoltaics) has been growing at an average rate of 48.4% over the last ten years.
Demand continues to be driven by the cost of electricity and societal shifts toward sustainability and a greener economy. As a result, From this, solar accounts for 7%, wind is 7%, and hydro is 5%. But solar continues to show greater promise. According to the Energy Department, large-scale solar generation has grown by 825% over a period of three years, from 2016 to 2019.
An Industry In its Growth Phase of the Life Cycle
In terms of its economic life cycle, the solar industry is in growth phase as measured by IVA (industry value added) growth. IVA growth tracks an industry's contribution to the wider economy.
The IVA growth for the solar sector is set to increase at an annualised 32.1% over the ten years through 2025-26.
When compared to the forecast for real GDP over the same period, which is predicted to rise at an annualised 1.8%, you can see that the solar industry will significantly outperform the overall economy.
Key Reasons Solar is in Growth Life Cycle Stage
- Industry revenue and establishments are growing at a rapid pace
- Technological change in the industry is high
- IVA growth is outperforming GDP growth
Challenges for the Solar Energy Industry
The solar energy sector still faces two major challenges. These are:
- energy storage issue; and,
- high upfront development costs.
During the 2021 Clean Energy Council’s Large-scale Solar Forum (March 12), the message was clear. We are getting there in terms of having the solar energy storage technology that is needed, but we have to sustain investment on technology development. While installation energy storage has been pretty impressive, from a mere 2.3GW capacity in 2018 to a 29GW capacity today, there is still significant work to be done.
Funding assistance, with competitive rates, from the Australian Renewable Energy Agency and the Clean Energy Finance Corporation are helping industry players with the high upfront development costs. Government interventions, such as the Renewable Energy Target (RET), provide for mechanisms like the market for large-scale generation certificates (LGCs) - a major source of revenue for industry players in the solar energy sector.
With government support, and improvements in energy storage technology, there will be continued growth and opportunity in the solar energy market.
M&A for Solar Energy in Australia: Investments Heating Up
AGL’s acquisition of Tilt Renewables is a strong indicator of the sentiment and appetite for renewable energy M&A. There was no lack of competition at the table to secure Tilt, with a number of final offers submitted before the deal was completed.
This is a cue for the rest of the industry players, including small-to-medium enterprises, to be aware of what is happening in the market and think about how they can make the most of these market conditions.
This deal is a good follow through after an equally busy 2020 where the news of Spain’s Iberdrola acquiring Infigen Energy for $893 million also dominated headlines. Several other smaller M&A transactions completed the year, and there is much to watch for in 2021. Interestingly, New Energy Solar is exiting its Australian solar farms portfolio as well as other assets on notice to sale. It will be interesting to see how these deals unfold, and how they may impact overall sentiment in the market.
The solar energy sector is driven by the federal renewable energy target that is supported by state-wide renewable energy goals. All are directed towards achieving net zero emission by 2050. Incentives such as the large-scale generation certificates (LGCs) and small-scale renewable energy scheme continue to provide financial incentives for businesses who may be targeting their own emission goals.
Similarly, wholesalers and retailers will continue to look at price as a driver of choice, and the bottom line is that renewable energy has a competitive cost structure that will be attractive to consumers.
Furthermore, the social drivers toward cleaner energy sources will add to the overall demand trends with projected revenue to top $415.8 million in 2021.
Business Owners in SME Solar Companies - How to build company value and position yourself for opportunities in your industry
You’re in an industry that has experienced strong growth over the last decade and has a very positive forward outlook. As a business owner, how can you best position your company for growth and building real value in your business as you move forward?
Always start with your personal goals
First and foremost, get clear on your personal goals. Where do you see yourself in the next 12 months, or the next 3 years? What sort of lifestyle do you want?
Do you still want to be in the business? Or are you considering the next step in your life, perhaps retirement, stepping out of the ‘day-to-day’ operations, or a maybe even a new venture?
When you are running a business, there’s no doubt you are juggling a lot, so your exit plan may not be top of your agenda. However, making a few strategic decisions now, may have a dramatic impact on your company, lifestyle and financial freedom in the future.
Design your business to help you achieve your personal goals
After identifying your personal goals, you can then decide how to position your business to support your ideal life.
Some people have dreams of building an empire and listing on the stock exchange. Others just want to have a great lifestyle and know they are building an asset that they can sell one day.
Whatever your life goals are, let your business be the vehicle to help you achieve them.
Build an asset that helps you achieve what you want in life
If you are planning to be in business for the next 2-5 years, then you want to put strategies in place that bolster your growth. However, at the same time you should also be increasing the worth of your business in the eyes of potential investors and/or buyers.
The hallmark of a valuable business is one that’s ‘built to sell’ – as this means you have options. You can hold onto it, and it will be in great shape making it less stressful to run, or you can choose to sell it when you desire.
A valuable business is a sought-after asset, these are the kinds of businesses that get unsolicited offers from acquirers, which means you have the upper hand in negotiations should you decide to sell.
Considering the growth and M&A activity in the Australian solar industry, here are the top three things we recommend you focus on:
1. Get really clear on your business model
In the solar industry, there are many different business models. Companies differentiate based on their customer base (residential, commercial, hybrid), products and services, different revenue models, financing, leasing, brand specific vs brand agnostic approaches and much more.
Your model matters.
In its most simplistic terms, your business model refers to how your company deploys resources to achieve its goals…normally profit. The relative success of your company is dependent on your value proposition which is about asking two key questions: are you different, and does the customer actually care? If you did not answer ‘yes’ to both these questions, then it is highly likely you are not fulfilling your potential. But it’s not all bad news, you can change your model.
While there are numerous pathways to success, the key message here is to understand what model will give you a competitive edge. This will allow you to outperform your peers and make you far more attractive to potential suitors.
2. Start looking at your business through the eyes of an acquirer
Building a company that has value means you need to think of your business as an asset, rather than a job, or an extension of your personality.
One key factor to consider as a business owner, is to create a company that is not reliant on you. This makes the business a lot more enjoyable to run and a lot more valuable to an acquirer.
Either way, you’re increasing the value of your company. Why? Because acquirers look for specific levers in a business that predict growth or incur risk. Dependence on the owner is always going to present as a major risk, and it inhibits growth. But even if you’re not looking to sell, your business can become all-consuming and significantly impact your lifestyle.
By looking at your business through the eyes of an acquirer, you are essentially optimising your company’s performance & saleability – meaning you are building a better company that affords you more options in the future.
In addition to owner dependence, there are a range of other factors that buyers regard as the most important when valuing a business, and they will pay a premium for a business that measures well against these.
If you would like to measure your business against these 8 Drivers of Value, you can access our complimentary tool which will rate your business and provide you with a scorecard. You’ll see exactly how your business stacks up against each driver.
You can access the tool here.
3. Benchmark your business against the industry
Benchmarking is an exercise that helps business owners understand what they are worth today, while identifying the steps they need to take to increase business value.
There is a reason that company share prices are some of the most publicised numbers on the planet. This is because they tell you what the company is worth, and whether that value has increased or decreased over a period of time. As such, the value of a business is a true measure of performance.
This is not just applicable to listed companies. In fact, your business may actually be the largest asset you own, so it is critical to know if you are improving the value of this asset. Especially if you are relying on this for your next stage of life.
So how does a benchmark valuation work? This process looks at all the financial and non-financial elements of a business to determine what are all the factors that are driving or inhibiting business value. It compares you to your industry peers, and gives you a sense of perspective around your current performance, and some deep insights into where you could take things. But specifically details what value can be added by taking specific steps.
There has never been a better time to be in renewable energy, but unless you get clear on where you want to go, and how you’re going to get there, you may find your business is worth very little, and you cannot live the life you want.
At Exit Advisory Group we help business owners maximise the value of their company and exit at the top of their game.
Here’s how we can help you:
- Discover what your business is worth: Knowing what your business is worth is the first step in unlocking the value.
- Understand your exit options: There are many ways to exit a business. We'll help you discover the option that matches your business, lifestyle, and personal goals.
- Increase the value of your company: Whether you want to exit in a specific time-frame or reach a desired valuation. We'll give you a game plan to maximise company value and achieve your goals.
- Sell your business: If your desired exit option is to sell, we are a licensed business broker and can take your business to the market. Find out how we do things differently to most other brokers to get the best results.
Find out more here: www.exitadvisory.com.au
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