Powering the energy transition through joint ventures and partnerships

Duke Energy Sustainable Solutions developed the 60 MW Palmer Solar Project in partnership with Colorado Springs Utilities, which secured the generating capacity through a 25-year power purchase agreement. (Courtesy: Duke Energy Sustainable Solutions)

Contributed by Benjie Jenkins, Shishir Bhargava, Matias Litewka and Josh Kwicinski

Massive capital demands, complex regulatory requirements, and high interest rates are threatening to bring the green energy transition to its knees at a crucial time for maintaining momentum.

Leading wind turbine manufacturer Siemens Gamesa requested a 15 billion euro bailout in November of 2023, and offshore wind developers Orsted and Equinor have scrapped high-profile U.S. wind projects due to capital costs, regulatory challenges, supply chain delays, and logistical hurdles. Excitement over generous government subsidies and incentives for green hydrogen has been tempered by the announcement of strict qualification rules and the lack of a clear regulatory framework, which some companies and industry groups argue will stifle development in a sector seen as a key enabler for the energy transition. Meanwhile, oil and gas companies have been on a tear of megadeals that reflect strong optimism around the future of fossil fuels, despite efforts to rebrand themselves as greener “energy” companies while downplaying their petroleum roots.  

To be fair, recent years have shown positive trends. Global renewable capacity additions surpassed 300 GW in 2021 and could reach 500 GW this year, and annual investment in new capacity is likely to hit $500 billion. However, the International Renewable Energy Agency (IRENA) estimates that by 2030, the world will need to add 1000 GW of new capacity every year to keep global warming below the critical threshold of 1.5 degrees Celsius set in the 2015 Paris Agreement. That would mean an average annual investment of more than USD 1.3 trillion by 2030 – a number that the world is nowhere near reaching. 

Addressing the greatest collective action challenge that humanity has ever faced will require monumental efforts in both the public and private sectors. Governments must take radical action to catalyze the energy transition with a variety of carrot-and-stick approaches to incentivize clean energy investments and penalize carbon emitters. Both the US and the EU are setting aside hundreds of billions of dollars to facilitate the transition to clean energy. The Biden Administration’s Inflation Reduction Act (IRA) includes a constellation of provisions meant to catalyze supply, totaling nearly US $370 billion in clean energy incentives for producers and technology providers. The bulk of the IRA’s incentives come in the form of tax credits, but the IRA also offers “direct pay” subsidies for clean energy projects to tax-exempt entities like nonprofits or local governments, and – crucially – to taxable entities specifically for green hydrogen and carbon capture projects.  

Europe has countered Biden’s policies with incentives of its own, including a plan to mobilize over €1 trillion of funds to finance the energy transition through a flurry of climate initiatives – both on the demand and supply side. Among the most notable is the EU Hydrogen Bank, which in November 2023 provided an initial set of per-unit subsidies worth €800 million to companies producing clean hydrogen.  

However, significant hurdles remain to phasing out fossil fuels in electricity generation and deploying carbon capture and clean hydrogen broadly enough to meaningfully impact climate change. Companies need to make massive capital outlays and take disproportionate market risks in nascent sectors where the markets remain highly immature, while simultaneously proving out, scaling, and reducing the cost curve of promising technologies across multiple steps in the value chain. Companies will need to work together to overcome these barriers. Partnerships – whether joint ventures or less-formal formal alliances – are not a nice-to-have but an imperative, and should be treated as a standard modus operandi in clean energy.  

Despite headwinds in the clean energy sector, new partnership formations are a bright spot in the post-pandemic era. The Ankura JV Index, a global barometer of JV and partnership activity, shows that new green energy partnerships have been gathering steam since pandemic lockdowns receded. In 2022, new formations in 2022 were up 51% year-over-year compared to 2021, and a further increase of 32% in 2023 (see Exhibit 1). The established generation sectors of wind and solar account for a substantial portion of these deals, but the new and rapidly developing clean hydrogen sector has dominated, especially in 2022 and 2023. Carbon capture and storage, another nascent sector, has also made large contributions in recent years. 

Clean energy partnerships are accelerating

There are a variety of reasons why companies would choose partnerships as opposed to internal builds, acquisitions, or licensing arrangements – and many of these partnership motivations are magnified for companies at the vanguard of the energy transition. Clean energy companies are choosing partnerships for one or more of the following reasons:  

• Sharing risk and capital. Most clean energy projects range from a few hundred million dollars at the lower end to several billion at the higher end. Partnerships allow companies to pool resources, spread their capital across multiple investments, and share risks – all of which are essential when investing in rapidly developing technologies that are either not yet proven or remain too expensive to be deployed at scale. For example, in the United States, Air Products and AES recently announced plans to build a $4 billion green hydrogen facility in North Texas. By utilizing a joint venture structure, the partners can share the massive upfront capital cost that comes along with building 200 tons of green hydrogen production capacity per day, fed by a staggering 1.4GW of in-house wind and solar energy – enough to power more than a million homes.  

• Securing project economics. Markets for some emerging clean energy technologies such as green hydrogen, sustainable fuels, and carbon capture are immature at best and non-existent at worst. Partnerships between producers and offtakers help secure project economics and are a critical requirement to make projects bankable and secure external financing. Take, for instance, the NEOM Green Hydrogen JV in Saudi Arabia, a tri-party JV between NEOM, ACWA Power, and Air Products, which aims to produce 600 tons per day of carbon-free hydrogen using 4 GW of solar and wind energy. Air Products is the exclusive offtaker for the project entering into a fixed fee offtake agreement with the JV. The project achieved financial close last year with $6.1 billion of the total $8.4 billion investment coming from external financing.  

• Combining complementary capabilities and needs. Many clean energy projects require expertise across diverse domains, often beyond the traditional purview of individual companies. Collaborative ventures facilitate the sharing of specialized knowledge, allowing partners to access a broader skill set. Green hydrogen projects co-developed with renewable generation or manufacturing plants, or carbon capture projects co-developed with new fossil fuel projects, are just some of the complex combinations that favor partnerships.

  For instance, consider HyDeal España, which is poised to become one of the largest hydrogen joint ventures in Europe, with 3.3GW of electrolyzer capacity and 4.8GW of solar photovoltaic capacity to power the electrolysis process. It is also building a large network of hydrogen pipelines. The project features four shareholders positioned at different levels of the hydrogen value chain: DH2 Energy (electrolysis), Enagás (infrastructure and transmission), and ArcelorMittal and Grupo Fertiberia (both offtakers). ArcelorMittal and Fertiberia have already committed to purchasing millions of tons of offtake from the venture, while Enagás will assist in connecting HyDeal España to a greater hydrogen network. It is likely that, by themselves, none of the shareholders involved in HyDeal España would have either the capital or know-how to build a project on this scale and complexity.

  Through a joint venture, however, they are able to reduce their individual capital contributions while benefiting from their respective competencies. The ACORN CCS JV between Shell, Storegga, Harbour Energy, and Northstream Midstream Partners is another example of cross-value chain collaboration between energy, mid-stream pipeline and logistics, and CO2 capture and storage technology providers to help build a carbon capture, transportation, and storage project.  

• Strengthening bids and satisfying regulatory requirements. Joint ventures can allow companies to enter new markets that require a domestic partner, or to take advantage of rules and subsidies that privilege local players. For instance, Japan and South Korea both require a local partner to participate in bids for new offshore wind projects. EU regulators often prefer consortiums of large companies with varying expertise while selecting bids, whereas in some places including the U.S, one must have “local content requirements” to encourage domestic sourcing and manufacturing or have local community representations in the partnership governance structure. The Western Green Energy Hub, a green hydrogen JV between CWP Global, InterContinental Energy, and the Mirning People is a great example of this. In the JV, the Mirning People hold equity in the JV and a permanent board seat, to ensure they can participate and steer the JV.  

The reasons to partner are strong, but clean energy partnerships are inherently complicated. They often feature multiple players responsible for different pieces of the puzzle, whether its generating electricity, building and operating power-to-X assets, developing storage and distribution infrastructure, or offtaking end products for use in other operations. Those involved in negotiating these deals, and those tasked with managing them post-close, must navigate a host of challenges. 

Most obviously, there will almost certainly be financial asymmetries between the partners leading to different abilities to commit capital, different IRR requirements, or different investment horizons. There are also likely to be strategic asymmetries as partners jostle to operate or provide services to the venture, capture synergies with other operations, or shield their intellectual property from partners who have a learning agenda or are competitors in other areas. Other common partnership challenges are cultural: the partners are likely to have different capabilities, different decision-making styles, and different approaches to governance and assurance.   

A well-developed partnership toolbox is a critical differentiator for clean energy companies

There are several tools and skillsets that companies should nurture to navigate those challenges and be successful in partnerships: 

• Using a fit-for-purpose deal process. Often companies use a poorly adapted version of their M&A process for partnership transactions which becomes a source of various issues during the deal process (but also post-close). Such issues range from selecting the wrong partner, identifying deal killers late on in the process, not spending the appropriate amount of time at the front end of the deal process in aligning on the partner roles and contributions post-close, to most importantly treating JV deal negotiations as zero-sum. To enable a high volume of partnership transactions, companies need to tailor their deal process to capture the unique challenges posed by such transactions including tailoring the types of analysis required at various deal stages to cater to partnership-type transactions, engaging the right stakeholders in the company at the right time, and clearly setting and adhering to key deal milestones.  

• Emphasizing partner selection. One of the largest contributing factors to partnerships failing is partner incompatibility. Dealmakers spend most of their time coordinating internally on their function-specific positions, negotiating the specifics of legal agreements, and the least amount of time truly assessing their partners. They fail to ask fundamental questions, like: do we actually need a partner, or should we do this alone? Does our partner have the right capabilities? Do such capabilities fit with our business plan and are they complementary? Does the partner’s working style and culture fit with ours? What is our partner’s track record with partnerships? While not a silver bullet, answering these questions early in the process is imperative – and creates the right conditions for the partnership to succeed.  

• Knowing your wants and red lines. Companies are always evolving with changing financial and regulatory conditions – and their requirements from a transaction must shift accordingly. For example, to minimize reputational risks and ensure their partnerships comply with external commitments, energy companies are increasing their scrutiny of partnership agreements specifically with clauses that relate to emissions (including scope 2 and scope 3), compliance (such as anti-bribery and corruption, human rights, local community engagement, and money laundering), and procurement (such as supplier selection or related party transactions), to name a few. Companies would be wise to develop a cross-functional Pre-and-Post Close Transaction Requirements document that stipulates their baseline expectations and ideal preferences for new deals, especially those related to compliance, legal, tax, treasury, accounting, and governance. Though time-consuming on the front end, such a document will pay dividends over time, not only by helping dealmakers get to a “good yes” or a “quick no,” but also by enabling the organization to coalesce around shared positions and unearth areas of hidden misalignment between its functions and the business areas.  

• Baking-in flexibility in legal agreements. Our analysis of 109 shareholder companies across 51 JVs shows that partner alignment is highest just before the close of a deal, with only 20% of shareholders rating their alignment as “low.” However, alignment tends to decrease over the life cycle of the partnership, with 52% of shareholders rating their alignment as “low” or “very low” during operations. To prepare for inevitable misalignments in strategy, scope, budgets, and capital investments, companies need to design flexibility into their legal agreements to prevent disagreements from undermining the partnership or leading to complete deadlock. Such provisions may include mechanisms to ensure the partnership can still operate if the budget is not approved by the partners; provisions like sole-risk or non-consent in case the partners disagree on future capital investments; or pre-defined dilution, transfer of interest, or dissolution mechanisms in cases where misalignments cannot be resolved.   

• Focusing on post-close management during the deal process. Pre-close myopia is a common trap that dealmakers fall into. Under pressure to get a deal over the line, they lose sight of how the partnership will be managed and governed in practice. Often, either deliberately or unintentionally, “sticky” deal topics get pushed to post-close, such as what roles the partners will play during different phases (e.g., engineering, construction, operations); what services the partners will provide to the venture, and at what cost; or how the partnership will be staffed. Such questions may seem small in isolation during deal negotiations, but they can compound if left unresolved pre-close and can cause significant delays or disputes as the partnership ramps up. Whenever possible, they should at least be agreed upon in principle before the definitive agreements are signed. Companies should also consider defining the appropriate governance structures and management processes internally to ensure they can govern and manage the partnership in line with their strategic interests. 

• Capturing learnings and establishing a center of excellence. Practice makes perfect – but only when one is deliberate about identifying lessons learned along the way and applying them in the future. Companies that are effective in executing partnership transactions, and managing them post-close, often have formal mechanisms in place to capture lessons learned, such as conducting a 6-month or 1-year post-close deal lookback. 38% of companies in our benchmarking have also established a center of excellence for partnerships to capture and disseminate best practices across the organization, something we strongly recommend for every clean energy company with a growing portfolio of partnerships. 

It’s often said that “a partnership is a leaky ship,” and there is no question that many partnerships underperform and some fail outright. But succumbing to financial, technical, or regulatory headwinds is simply not an option for clean energy companies. The moral imperatives to reduce fossil fuel consumption, and the financial incentives attached to the energy transition, are too great. And those companies that are able to partner effectively with others have a critical differentiator. Better to focus on a different old adage: “If you want to go fast, go alone; if you want to go far, go together.” 

About the authors

Benjie Jenkins is a director in Ankura’s Joint Ventures and Partnerships Practice. He works globally with companies in the renewable energy, oil and gas, and mining sectors to structure new joint ventures and to improve management and governance practices within existing joint ventures.

Matias Litewka is a senior associate in Ankura’s Joint Venture and Partnership Practice. He has advised on joint venture transactions and governance matters across five continents and has experience in the automotive, energy, mining, and aerospace sectors.

Shishir Bhargava is a managing director in Ankura’s Joint Ventures and Partnerships Practice. He serves clients in renewables, oil and gas, and industrials sector on joint venture transactions and their post-close governance, including helping companies build JV and partnership transaction-related capabilities.

Joshua Kwicinski is a managing director in Ankura’s Joint Ventures and Partnerships Practice. He serves clients on joint venture transactions and governance matters, with a focus on mining, renewable energy, and technology sectors.