Are you considering investments in emerging energy transition sectors? Running the numbers isn’t enough – you need to test the story behind them. Here’s why commercial due diligence plays a critical role in decision making as we move to new forms of energy.
As we move to a low-cost, low-carbon and resilient energy system, there are significant investment opportunities to be found in a range of new types of energy infrastructure. These include heat networks, electric vehicle (EV) charging infrastructure and smart microgrids that connect end users to distributed forms of electricity generation and storage. For example, the heat networks sector alone has ambitions to invest £80 billion by 2050 in the development of new infrastructure, promising significant regeneration benefits, and the creation of hundreds of thousands of new jobs and skills rooted in the communities they serve.
Given the significant scale of investment required, it will be important to attract investment from a wide pool of finance including institutional investors such as pension funds and insurance companies who tend to invest in low-risk infrastructure that offers a regulated return. Increasing investment into these new sectors at the frontier of the energy transition can be challenging due to high valuation risk. This comes as a result of inherent uncertainties: markets that are evolving, technologies still scaling, and policies yet to fully crystallise.
Commercial due diligence focuses on whether future assumptions are credible, and whether the business can deliver the growth implied in valuation models
Historically, investors looking to assess the value of a company, or new infrastructure or energy generation project, have relied on financial due diligence (FDD). This involves looking at historic revenue and costs, historic Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) margin analysis, review of the terms of material current contracts, balance sheet composition and net working capital trends – these are crucial inputs.
But much of a company’s value is tied to future growth, so this approach doesn’t work for companies or projects in immature markets; historical data may not be available and even if it is, it can understate or misrepresent future risks and opportunities.
This is where commercial due diligence (CDD) comes in. It focuses on whether future assumptions are credible, and whether the business can deliver the growth implied in valuation models. It answers questions such as:
- Market size and growth trajectory: Are forecasts grounded in robust market intelligence?
- Regulatory and policy environment: Are growth projections dependent on subsidies or regulations that might change?
- Competitive landscape: What future tariffs might the company or project be able to charge its customers in future, depending on what other companies are doing?
Unlike FDD, which relies heavily on internal financial records and contracts, commercial due diligence draws from external market realities. It is very common for the immature sectors to have limited public data available, and access to tools such as market intelligence, proprietary market models and feedback obtained directly from market participants (customers, suppliers, competitors, regulators) become invaluable.
Using commercial due diligence for heat networks
The Government aims to attract £80 billion of private investment in heat networks by 2050 to support the transition to net-zero emissions, with zoning rules on the horizon to drive local connections. An FDD review might confirm stable cash flows from existing heat supply agreements. But commercial due diligence will be addressing:
- How realistic are growth opportunities around network expansion, offering cooling, flexibility services?
- Are customers willing to pay premiums for greener heat?
- What’s the risk exposure if zoning plans change or are delayed?
To answer these, CDD team will source information from DESNZ consultation rounds, speak to local authorities, property developers, and Energy Service Companies (ESCOs) to probe the reality behind development pipelines and zoning timelines. They will scrutinise emerging UK business models like ‘energy-as-a-service’ that shift from selling energy (kWh) to selling outcomes (e.g. comfort, cost savings, decarbonisation, resilience), altering both risk and cashflow profiles.
Exploring the investment opportunity of electric charging infrastructure
Similarly, the UK’s Electric Vehicle Charging Infrastructure (EVCI) sector looks set for rapid growth, driven by the 2035 ban on petrol and diesel vehicles and funds to help increase the availability of charging infrastructure such as the Rapid Charging Fund and Local Electric Vehicle Infrastructure (LEVI) Fund. But commercial realities are more complex. FDD might validate revenues from existing charge points, but CDD assesses:
- Are EV adoption forecasts realistic?
- Will grid constraints slow new charger roll-out?
- How sensitive is forecasted profitability to spikes in wholesale electricity prices?
CDD tools include interviews with investors, lenders, fleet operators and councils, analysis of Ofgem grid constraint maps, and review of new commercial models such as CPPA-like fleet agreements – these can improve utilisation and revenue certainty but often carry novel contract risks. If utilisation assumptions prove too optimistic, investors may need to lower forecasts, reduce EBITDA multiples, or build earn-outs into deal terms.
Microgrids: Fast-moving opportunity, complex commercial risks
A newer frontier in the UK is microgrids– localised energy systems combining generation, storage, and smart controls to serve a specific site or community. In the US, uptake is surging driven by increasing demand for energy resilience, integration of renewable energy and advancements in energy management technologies. Investors in the UK see similar potential, yet the commercial model carries significant risks that CDD must evaluate.
Can microgrids sustain offering lower energy tariffs over time as energy markets evolve and low-carbon alternatives like rooftop solar become more competitive?
Commercial due diligence tackles these questions with targeted analyses:
- Perform unit economics modelling to test robustness of the microgrid’s cost savings under different price scenarios for gas, electricity, and carbon.
- Benchmark tariff offers against competitors, including traditional utilities and alternative technologies such as heat pumps or rooftop solar with storage.
- Assess the low-carbon counterfactual, modelling how customers’ costs would compare if they opted for grid-supplied green tariffs or other decentralised solutions instead.
CDD helps investors judge whether the business model is robust enough to sustain revenues and deliver promised returns.
In energy transition, the future dictates value
In mature industries, valuation can largely rely on historical performance. But in emerging sectors such as heat networks or EVCI, value is predominantly future-oriented. That makes commercial due diligence essential. It tests the assumptions behind growth forecasts, reveals market-specific risks, and ensures valuations reflect the real commercial potential rather than purely optimistic projections. Approaches such as CDD are increasingly being used to ensure valuations in these new energy frontier sectors can be relied upon, helping to attract a wider set of investors.
Maria Balyasna is an Associate Director for Energy Transition with the Commercial Advisory team at Energy UK member Amberside Advisors.
