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
Tuesday, 21 June 2011
Solar industry takes tariff fight to Lords
By Sarah Arnott
Tuesday, 21 June 2011
Solar industry campaigners have their last chance to save much-needed subsidies today as MPs meet to decide if the Government's controversial cuts warrant a debate in the House of Commons.
The Merits Committee, chaired by Lord Goodlad, is to consider a letter co-signed by some 58 organisations and businesses – including the Solar Trade Association, the Co-operative, and the Town and Country Planning Association – calling for a rethink of Government plans to slash the "feed-in tariff" (FiT) scheme barely more than year after it was introduced.
The committee could trigger a parliamentary debate and vote on the Government's proposals to cut the subsidy rates available to solar power projects of more than 50 kilowatts (kW) – roughly the size of a hospital or housing association scheme – by between 38 and 70 per cent. If the changes go ahead the industry argues it is unlikely any projects of more than 50kW will be built.
Much of debate centres on the comparative cost of solar power. A report from the Climate Change Committee last month backed new nuclear as the cheapest option for the green power Britain needs to hit its carbon-reduction targets. But the solar industry disputes the point, claiming that solar costs should be compared with retail prices, because of the scale of the technology.
A report from Ernst & Young yesterday suggests that solar will compete with retail grid prices as soon as mid-2012, if current subsidy levels are maintained, rather than the mid-2016 "parity" point with wholesale costs. Plans to rejig the FiT will hike solar energy prices still further by pushing investment back down to smaller, less efficient installations, says E&Y.
Tuesday, 21 June 2011
Solar industry campaigners have their last chance to save much-needed subsidies today as MPs meet to decide if the Government's controversial cuts warrant a debate in the House of Commons.
The Merits Committee, chaired by Lord Goodlad, is to consider a letter co-signed by some 58 organisations and businesses – including the Solar Trade Association, the Co-operative, and the Town and Country Planning Association – calling for a rethink of Government plans to slash the "feed-in tariff" (FiT) scheme barely more than year after it was introduced.
The committee could trigger a parliamentary debate and vote on the Government's proposals to cut the subsidy rates available to solar power projects of more than 50 kilowatts (kW) – roughly the size of a hospital or housing association scheme – by between 38 and 70 per cent. If the changes go ahead the industry argues it is unlikely any projects of more than 50kW will be built.
Much of debate centres on the comparative cost of solar power. A report from the Climate Change Committee last month backed new nuclear as the cheapest option for the green power Britain needs to hit its carbon-reduction targets. But the solar industry disputes the point, claiming that solar costs should be compared with retail prices, because of the scale of the technology.
A report from Ernst & Young yesterday suggests that solar will compete with retail grid prices as soon as mid-2012, if current subsidy levels are maintained, rather than the mid-2016 "parity" point with wholesale costs. Plans to rejig the FiT will hike solar energy prices still further by pushing investment back down to smaller, less efficient installations, says E&Y.
Price of solar panels to drop to $1 by 2013, report forecasts
Ernst & Young analysis suggests that falling solar and rising fossil fuel prices could make large-scale installations cost-competitive without government support within a decade
Duncan Clark
guardian.co.uk, Monday 20 June 2011 12.14 BST
Prices of solar panels are falling so fast that by 2013 they will be half of what they cost in 2009, according to a report from Ernst & Young that argues solar electricity could play "an important role" in meeting the UK's renewable energy targets.
The average one-off installation cost of solar photovoltaic (PV) panels has already dropped from more than $2 (£1.23) per unit of generating capacity in 2009 to about $1.50 in 2011. Based on broker reports and industry analysis, the report forecasts that those rates of decline will continue, with prices falling close to the $1 mark in 2013.
At present, solar PV is economically viable in the UK for homeowners, businesses and investors only because of government subsidies given out via feed-in tariffs (Fits). But the new analysis suggests that falling PV panel prices and rising fossil fuel prices could together make large-scale solar installations cost-competitive without government support within a decade – sooner than is usually assumed.
The report was commissioned by the Solar Trade Association (STA) from Ernst & Young's energy and environmental infrastructure advisory unit in response to the recent shake-up of Fits, which saw government support for large solar systems significantly reduced. This was a result of the government's decision to cap the total that could be spent via Fits and weight the limited budget in favour of domestic and other small-scale installations.
The chairman of the STA, Howard Johns, said the new analysis backed up the industry line that government support for all types of solar systems in the next few years made good economic sense as it would build capacity and enable unsubsidised solar to be as widely deployed as possible as prices come down. "This reinforces the case we have laid out in our Solar Revolution strategy," he said, "and it comes from an independent consultancy."
The report coincides with new data from Bloomberg New Energy Finance that show a drastic 28% month-on-month drop in the spot price of high-grade silicon, the raw material used in most PV panels.
The conclusions of the Ernst and Young report contrast with the view of the government's advisers, the Committee on Climate Change (CCC), which recently argued that solar remained too expensive to warrant serious consideration in the short term and that Britain should instead "buy in from overseas later".
The lead author of the Ernst & Young report, Ben Warren, said the CCC's view failed to consider the wider economic benefits of solar. "Being a laggard has never been very successful in terms of capturing the greater share of the value added for the economy … if you create a sustainable market, you will achieve cost savings and drive economic benefits in terms of tax income and job creation."
To compare the relative cost of solar – usually described in terms of the dollar price of each watt of peak capacity – and other energy sources, analysts consider factors such as upfront expenditure, fuel prices, maintenance and discount rates to calculate the "levelised" cost of each unit of energy. The report predicts that, with continued support in the short term, the levellised cost of large-scale solar will be no higher than retail energy prices by 2016-19. This suggests that within 10 years companies with large electricity demands will find it cheaper to install unsubsidised solar than to buy energy via the grid in the traditional way.
In the meantime, a full assessment of the costs and benefits of supporting solar should recognise that generous subsidies help unlock new sources of capital that can speed up decarbonisation of the energy supply, according to Warren.
"The energy market is starved of capital – and it won't all come from utilities and banks," Warren said. "There's a desperate need to engage with institutional investors."
In the runup to the announcement of the Fits cuts, climate minister Greg Barker told the Guardian that Britain had underestimated the potential of solar energy and in light of falling prices he hoped to find "new pathways" for supporting large-scale solar developments.
Duncan Clark
guardian.co.uk, Monday 20 June 2011 12.14 BST
Prices of solar panels are falling so fast that by 2013 they will be half of what they cost in 2009, according to a report from Ernst & Young that argues solar electricity could play "an important role" in meeting the UK's renewable energy targets.
The average one-off installation cost of solar photovoltaic (PV) panels has already dropped from more than $2 (£1.23) per unit of generating capacity in 2009 to about $1.50 in 2011. Based on broker reports and industry analysis, the report forecasts that those rates of decline will continue, with prices falling close to the $1 mark in 2013.
At present, solar PV is economically viable in the UK for homeowners, businesses and investors only because of government subsidies given out via feed-in tariffs (Fits). But the new analysis suggests that falling PV panel prices and rising fossil fuel prices could together make large-scale solar installations cost-competitive without government support within a decade – sooner than is usually assumed.
The report was commissioned by the Solar Trade Association (STA) from Ernst & Young's energy and environmental infrastructure advisory unit in response to the recent shake-up of Fits, which saw government support for large solar systems significantly reduced. This was a result of the government's decision to cap the total that could be spent via Fits and weight the limited budget in favour of domestic and other small-scale installations.
The chairman of the STA, Howard Johns, said the new analysis backed up the industry line that government support for all types of solar systems in the next few years made good economic sense as it would build capacity and enable unsubsidised solar to be as widely deployed as possible as prices come down. "This reinforces the case we have laid out in our Solar Revolution strategy," he said, "and it comes from an independent consultancy."
The report coincides with new data from Bloomberg New Energy Finance that show a drastic 28% month-on-month drop in the spot price of high-grade silicon, the raw material used in most PV panels.
The conclusions of the Ernst and Young report contrast with the view of the government's advisers, the Committee on Climate Change (CCC), which recently argued that solar remained too expensive to warrant serious consideration in the short term and that Britain should instead "buy in from overseas later".
The lead author of the Ernst & Young report, Ben Warren, said the CCC's view failed to consider the wider economic benefits of solar. "Being a laggard has never been very successful in terms of capturing the greater share of the value added for the economy … if you create a sustainable market, you will achieve cost savings and drive economic benefits in terms of tax income and job creation."
To compare the relative cost of solar – usually described in terms of the dollar price of each watt of peak capacity – and other energy sources, analysts consider factors such as upfront expenditure, fuel prices, maintenance and discount rates to calculate the "levelised" cost of each unit of energy. The report predicts that, with continued support in the short term, the levellised cost of large-scale solar will be no higher than retail energy prices by 2016-19. This suggests that within 10 years companies with large electricity demands will find it cheaper to install unsubsidised solar than to buy energy via the grid in the traditional way.
In the meantime, a full assessment of the costs and benefits of supporting solar should recognise that generous subsidies help unlock new sources of capital that can speed up decarbonisation of the energy supply, according to Warren.
"The energy market is starved of capital – and it won't all come from utilities and banks," Warren said. "There's a desperate need to engage with institutional investors."
In the runup to the announcement of the Fits cuts, climate minister Greg Barker told the Guardian that Britain had underestimated the potential of solar energy and in light of falling prices he hoped to find "new pathways" for supporting large-scale solar developments.