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Renewables deal flow to grow

By Margaret Lee

Despite industry uncertainty and economic insecurity, the flow of deals in the renewables sector in 2011 reflected strong growth and increasing maturity as the sector moved further into the mainstream.

According to PwC’s annual global analysis of mergers and acquisition (M&A) transactions in the sector, deal value was up 40% and the consultancy expects deal flow to grow.

Overall, the 40% rise in M&A activity in 2011 resulted in deal value at a record high of US$53.5 billion, up from US$38.2 billion in 2010. For the first time, new generation technologies such as wind and solar overtook hydropower in deal volume.

Hydropower has traditionally constituted a significant section of deal flow and investment in renewables, with large-scale dam construction and a strong historical track record. With new generation technologies taking over, this reflects the shift in market perception of other renewables.

Billion-dollar deals dominated as solar, wind and energy efficiency deals surged ahead. One in every three deals last year was solar and overall deal value for the sector was up 56% from US$10.2 billion to US$15.8 billion. Solar and wind saw around US$16 billion worth of deals globally, with transactions worth US$10 billion completed in the energy efficiency sector. Overall deal value in solar and energy efficiency nearly doubled year-on-year and together, they accounted for the vast majority (79%) of the US$15.3 billion increase in the total value of all renewables deals. Paul Nillesen, a partner at PwC, said: “Deal-making in the renewables and energy-efficiency sectors is intensifying as the sector evolves. Sustained high deal numbers and record total value reflect a maturing of the sector. The trend is all the more noteworthy, given the uncertainty in the market and in government policies on renewables. We believe that deal flow will continue to be significant in the medium term.”


Challenging market

Growth in deal value was especially positive, given that it took place against a backdrop of financial and regulatory uncertainty around the world.

The European market was particularly challenging, with problems caused by sovereign debt and the Eurozone crisis likely to continue. Of course, that does make it fertile ground for takeovers – in 2011 European deal volumes dipped 6%, but overall value rose 80% from US$16.7 billion to US$30 billion.

While major deal activity in 2012 is expected to occur within the key manufacturing zones of China, the US and Europe, deal volume last year was also up in the rest of the world, which points to growing areas of interest. Whilst activity in North America fell in 2011, both in terms of deal volume and value, South American deal volumes were up 90%, with total value up from US$3.2 billion to US$6.8 billion.

Despite the difficult conditions in the market, PwC’s Nillesen expects to see deal flow increase this year. “Staying out of the markets in the hope things will improve cannot be assumed to be the right strategy. The potential for further destabilisation domestically, or at an inter-governmental level, cannot be ruled out, but if a deal is highly strategic, and mission-critical, then parties will still feel it is worth doing on the right terms,” he said.


Key drivers

There are a number of drivers behind current activity in renewables. Falling solar prices are bringing solar power closer to grid parity in some markets, and improving its economic profile in most. The entrance of pension and insurance funds, for example the US$1.3 billion investment by Danish pension insurance groups in offshore wind in Denmark, underlines a trend towards a maturing market and the creation of secondary markets, with assets sold for a second or third time. This is also supported by the trend towards larger deals, as well as growth in deal value.

While tragic, the disaster in Fukushima had a dramatic impact on the renewables sector. Many countries reappraised their energy strategy, with some, like Germany, disavowing their nuclear industry altogether.

This refocus provided a boost to the renewables industry, in terms of corporate interest and in terms of generation rollout. What is more difficult to predict is exactly which sub-sectors are likely to grow and how. Efficiency is clearly likely to continue on an upward trajectory. Corporate interest in the management of the price and emissions of power consumed, as well as concern over supply chain impact, are driving many corporations to look to increasing efficiency.

The latest report from the Carbon Disclosure Project (CDP) suggests that 43% of CDP respondents have achieved year-on-year emissions reduction, while only 28% of their suppliers have done so. With 39% of CDP respondents saying they would deselect suppliers that failed to meet formal environmental criteria within five years, there is a clear trend for emissions reduction on both an environmental and cost basis.


Consolidation

In areas of generation such as solar and wind, PwC expects to see greater consolidation and joint ventures, with a smaller number of large global players likely to emerge. Heavy competition and growing cost pressures are likely to drive consolidation in both the solar and wind sectors. Two recent profit warnings from Danish company Vestas are the most high-profile example of the challenges facing some wind power companies.

Future developments in the solar sector appear the most uncertain. Prices crashed in 2011 in large part owing to cheap Chinese manufacturing, causing problems for producers in the US and Europe.

While this led to growth in installations, a number of leading solar manufacturers were forced out of the market. Many leading Chinese manufacturers are facing heavy debt burdens, however, and there is a likelihood of overcapacity in the market.

At the same time the price of silicon appears to be on the rise – with Bloomberg New Energy Finance recently reporting the third weekly increase in the price – so developments in solar may prove difficult to predict.

Significant deal flow is expected throughout 2012 despite industry and economic uncertainty, but the report did warn that the sector was facing considerable growing pains. Continuing uncertainty in the Eurozone will still make the deal environment challenging and a deeper crisis would undoubtedly dampen deal flow further.

Yet steady interest from Asia is likely to continue to drive the market. While European bidders accounted for 48% of the total, and North America for 24%, the value of deals with Asian bidders almost doubled to US$9.4 billion or 18%, up 12% from 2011.

Despite the ramp-up in deal value in 2011, stocks in renewable energy companies suffered on the global indices as the economic situation in Europe deteriorated. Standard & Poors’ S&P Global Clean Energy Index, which tracks the performance of 30 of the most liquid and tradable global clean energy companies, fell by nearly 44.5% during 2011.

Such fluctuation in share prices not only demonstrates the current instability in the market but also reinforces the opportunities that are available to dealmakers in the cleantech field.


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