Thinking globally, investing locally

16 June 2011

M&A in the renewables sector is hotting up – but investors are cautious, crave policy certainty and, to a large degree, are staying close to home, says KPMG’s Andy Cox

Mergers and acquisitions (M&A) activity in the renewable energy sector is on the rise. After tentative signs of a rise in renewable M&A in our report a year ago, 446 transactions were completed in 2010; a 70% increase by volume on 2009, which strongly indicates a global desire to invest in the sector.

A lack of large deals, however, meant the total value actually fell 41%, to $25.6 billion in 2010 from $43.7 billion in 2009. Only biomass – a relatively small proportion of total M&A activity – bucked this trend, with total M&A values more than doubling to $2.2 billion.

Nonetheless, the global jump in activity levels looks set to continue based on the first quarter of 2011, which has begun strongly, in terms of both volume and value, with a record deal tally of 141 totalling $11.2 billion, more than double the quarterly average value of $5.5 billion in 2010, and compared with an average of 96 deals per quarter.

In 2011 our survey – of 500 senior executives in the renewable energy industry globally – indicates higher competition for acquisition targets is expected to push up global valuations, driven by better financing conditions, a post-Fukushima reinvigoration of sentiment and soaring oil prices, as well as some new acquirers, including Asian manufacturers and, potentially, pension funds.

Regulation and incentives

The availability of incentives from governments around the world is cited as a key reason for the increased appetite for renewable deals. Indeed, those planning to invest in Italy (41%), the UK (38%) and Germany (29%) cited government incentives as their primary motivation.

Now, certainty and commitment are sought by the investors we surveyed, sending a clear message that those regimes with clear and stable incentives and regulations will outperform the market in attracting new capital in the forthcoming year.

That said, investors and lenders are still cautious. The returns and risk profile must measure up against each investor’s criteria and appetite for risk in order to attract and secure investment, which is undermined by uncertainty and volatility.

For example, three quarters of respondents said they would have invested more in the UK over the last three years, if regulation and legislation had been clearer and more consistent.

M&A will continue to be impacted by the cuts to renewable feed-in tariffs that were made in some of Europe’s leading renewable energy markets during 2010. Though these decrease the attractiveness of assets to buyers, growing competition for existing projects, with attractive guaranteed feed-in tariffs at higher historic levels, is providing a temporary boost to deal activity and acquisition multiples across some Western European markets. Meanwhile in Spain, harsh incentive cuts are triggering disposals as investors re-adjust their portfolios in light of reduced returns.


A brightening outlook for renewables M&A?


This has had a negative impact on valuations; the total value of solar transactions decreased 16% year-on-year in 2010. Without further stimulus, the level of M&A activity in solar photovoltaic assets can be expected to significantly decline once operational projects with attractive feed-in tariffs have found long-term owners.

Global context

The US retained its status as the most attractive market for acquisitions, targeted by 53% of respondents, followed by China (38%), India (35%), Germany (34%) and the UK (33% – the second most attractive European country).

One of the reasons for the popularity of the US for renewable energy investment is its perceived stability and the Obama administration’s determination that renewable energy plays a vital role in accelerating the country’s economic recovery. The stated aim for 80% of US energy to be derived from clean sources by 2035 is supported by a variety of incentive schemes, including the loan guarantee programme, investment tax credits, production tax credits and state-level renewable energy targets.

China’s jump up the renewable M&A country league table, from fifth to the second most targeted country for acquisitions in 2010, comes after a year of extensive renewable project development.

And China is expected to grow in influence, with nearly four in five respondents (78%) predicting the global renewable energy market will be driven by new investors from the country (while 59% expect new acquirers from North America to develop the market).

China has ambitious plans in the solar sector and has recently announced its intention to bring an additional 5 GW of solar power capacity online by 2015 as part of its latest Five Year Plan.

The third-placed Indian market has become increasingly dynamic as a result of strong natural resources, greater accommodation to international investment compared with China and a variety of government incentives. Stimuli include renewable energy generating standards for utilities, a structure for trading renewable energy certificates and attractive tax incentives for project developers.

However, the global impact of activity in this top three may be limited as our survey found the global renewable energy market is intrinsically local.

Investors intend to focus on their own markets. North American investors, for example, expect to invest domestically by a ratio of at least 2:1. And in Asia too, a strong preference for ‘local’ investment is indicated. This would build on existing activity, which saw domestic acquisitions account for almost two thirds of total M&A values in China, for example.

This heavy bias towards local investment is a potential concern for many countries that are hoping inbound investment from China and the US will plug domestic energy funding gaps. It adds to dependence on their incumbent regional investor base and to the importance of incentivising them in what will be an increasingly competitive market.

Sector Specifics

Biomass was found to be the most popular renewable energy sector again, with 46% of respondents intending to invest (compared with 37% last year). Biomass M&A values more than doubled year-on-year in 2010 and, proportionally, the sector is now gaining ground on renewable energy bulwarks solar and wind. During the course of last year, M&A in the biomass sector accounted for 9% of all renewable energy M&A, compared with only 3% in 2009.

Despite the cuts to incentive regimes in Europe, solar remains the second most popular sector, with 39% of respondents intending to invest, up from 37% in 2010.

Wind lost some ground, with onshore dropping to 30% (2009: 35%) while appetite remained limited but broadly stable for offshore at 10% (2009: 11%)

However, wind assets remain attractive to financial investors, and banks are starting to allocate substantial capital to offshore projects. Indeed the sector has seen investment by pension funds (for example in Anholt, Denmark’s largest offshore wind farm) sparking speculation about whether this is the beginning of sustained investment activity by the pension fund industry or merely represents opportunistic investing.

Conversely, limited targets and the oligopolistic nature of the turbine supply market constrains scope for offshore acquisitions, explaining why only 13% of surveyed corporates and investors intend to acquire offshore wind equipment manufacturers and project developers during the next 18 months.

Wind is set to be the main source of renewable capacity growth in eastern and southern European markets where the conventional model of acquiring late-stage pre-construction wind farms is likely to increase in 2011 thanks to critical emissions targets, growing power demands and generous incentives compared to declining subsidies in the more saturated western European markets.

Looking ahead

It will take time to fully understand the investment implications of the nuclear accident at the Fukushima plant in Japan in March. But the impact on existing and new nuclear plants is sure to present an opportunity for the renewable sector, due to the relatively higher attractiveness of its assets in the current global marketplace.

Indeed, the re-evaluation by many nations of their position on nuclear power has already increased investors’ appetite for renewable energy assets, reflected in a dramatic rise in global renewable energy stock prices post-Fukushima. Following Germany’s decision to take seven of its oldest nuclear plants offline, China’s reduction in its 2020 nuclear capacity target (and doubling of solar) and potential delays to programmes in other countries, investors will no doubt be reassessing the additional opportunities created for the renewable sector.

More than 70% of North American, Asian and European respondents predict increased competition for acquisition targets in the next 18 months and correspondingly more than 40% of corporate and investor respondents intend to pay three to five times earnings before interest, tax and depreciation (EBITDA) for renewable energy companies over this timescale, up from at or below three times EBITDA (39%) last year.

During the next year, the sector is expected to be positively impacted by growing investment appetite and the continued drive towards low carbon in major territories. Concerns over rising oil prices and energy security will also fuel investment appetite towards low-carbon technologies.

However, attracting sufficient capital to meet renewable energy targets looks set to remain a real challenge. The stability and clarity of regulatory regimes in individual countries will undoubtedly be a significant factor in determining where investments are ultimately made. Innovative financing structures will be important to reduce some of the key risks for investors and lenders as utilities look to recycle capital. The next 12 months are shaping up to be an exciting chapter in the development of the renewables sector across the globe.



Andy Cox is KPMG’s London-based global head of energy and natural resources for transactions and restructuring