We're pleased to announce the launch of our annual report on global M&A in renewable energy. This annual report follows Powering Ahead: 2010, looking at changes and trends in the renewable energy sector to provide insight on where the market is heading.
Survey findings include:
• Globally, a total of 446 renewable energy M&A deals completed in 2010, an increase of over 70 percent on the 260 deals closed in 2009.
• A record 141 renewable M&A deals totalling US$11.2bn were announced in Q1 2011, more than double the average quarterly value of US$5.5bn in 2010, over an average of 96 announced deals.
• Government incentives remain as important as ever to the sector, particularly in Western Europe.
• 78% of respondents expected the global renewable energy market to be driven by new investors from China, while 59% expected new acquirers from North America to develop the market.
• A heavy bias towards local investment was revealed, with more than double the number of Asian respondents intending to invest in China and India than those intending to invest in European countries.
• Over 70% of North American, Asian and European respondents predict increased competition for acquisition targets
Robert Van Genderen, Director, Corporate Finance, KPMG in Russia and CIS, commented: “While Russia is one of the largest producers of non-renewable energy, the trends and developments in renewable may have significant impact on Russia, in economic and geopolitical terms, and Russian companies in the future.
With globally depleting reserves and environmental activism growing, long-term exclusive reliance on non-renewable energy may be a risky strategy for energy producers and consumers. To some extent the international oil & gas have redefined themselves as “energy” companies which encompasses both renewable and non-renewable energy. I believe all these factors are contributing to an increased activity in the non-renewables M&A market. Indeed, the home website pages of the international majors are peppered by themes of sustainability, innovation, environment, and technology. As it relates to Russian oil & gas companies, in a country with one of the largest hydrocarbon reserves, renewable would seem to be a subject of little interest. However, renewable energy is a competitive product to hydrocarbons, the push for alternative energy sources is growing, environmental concerns over hydrocarbon usage are rising, and at some point Russian companies will possibly seek to hedge themselves by developing a portfolio of renewable energy assets alongside their hydrocarbon base”.
Renewables M&A hits the acceleration pedal
Last year the number of completed M&A deals increased by over 70 percent, fuelled by a boom in sub-US$500m transactions. Despite this dramatic jump, the majority of survey respondents worldwide believe that the number of sub-US$500m deals will increase even further during the next 18 months.
These predictions are supported by a record number of announced deals in the fi rst quarter of 2011. Over 140 deals totaling US$11.2bn were announced in the fi rst quarter of 2011, compared with a quarterly average of 96 announced deals totaling US$5.5bn per quarter throughout the course of 2010. All in all, 2011 looks set to be another buoyant year for M&A.
Significantly, the survey data and M&A activity in the fi rst quarter preceded the 11 March tsunami which devastated the east coast of northern Japan and caused the nuclear accident at the Fukushima plant. It will take time for the implications of Fukushima to be understood, and for the impact on existing and new nuclear plants to become clear.
The global renewable energy market is local
Cross-border investment is not going to plug domestic renewable energy funding gaps without a step change. This will come as a disappointment to many debt-laden European countries, which were counting on a bailout from the Asia-Pacifi c region. The survey data is unequivocal in demonstrating clear regional investment biases. North American respondents show a strong local tendency with an overwhelming focus on placing capital in the USA (86 percent) ahead of China (40 percent), India (30 percent), the UK (21 percent) and Germany (17 percent). Asian and European investors are more internationally inclined but still have a clear preference for investing domestically or regionally. Simply put, the global renewable energy market is intrinsicaly local.
With countries increasingly dependent on their incumbent regional investor base, the importance of incentivizing home-grown investors is becoming increasingly paramount. Accordingly, debates concerning effective government policies and stimulus are unlikely to end soon.
Government incentives still driving European M&A
Despite cuts to renewable feed-in tariffs in some of Europe’s leading renewable energy markets over the course of 2010, government incentives remain an essential driver for M&A. Indeed survey respondents planning to invest in Italy (41 percent), the UK (38 percent) and Germany (29 percent) cited government incentives as their primary motivation above any other factor. In contrast market demand is the most prevalent M&A driver in many non-European countries such as the US (41 percent), China (46 percent) and India (46 percent).
Government incentives are currently affecting M&A on two fronts. On the one hand, cuts to feed-in tariffs are decreasing the attractiveness of renewable energy assets from the buyers’ perspective. On the other hand, in extreme cases such as Spain, where the government announced retroactive cuts to feed-in tariffs for operational projects late last year, harsh incentive cuts are actually triggering disposals with asset owners re-adjusting portfolios in light of reduced returns. This has had a negative impact on valuations, particularly in the solar sector – total solar M&A transaction values decreased 16 percent year-onyear in 2010. In contrast, given the maturity of the sector and its associated incentives, returns in the wind sector have been more impacted by low gas prices (particularly in North America) than by regulatory change.
China jumps up the renewable M&A country league table
Following a year of extensive renewable project developments, during which China surpassed the US in terms of total installed wind capacity, China jumped from the fi fth to the second most targeted country for acquisitions in 2010.
Despite China’s obvious appeal, international acquirers are struggling to fi nd a way of accessing this burgeoning market. Domestic acquisitions currently account for almost two thirds of total M&A values in China. North America and Europe only accounted for 11 percent and 3 percent respectively of Chinese M&A in 2010.
As for last year, the USA retained its status as the most attractive market for acquisitions, targeted by 53 percent of respondents, followed by China (38 percent), India (35 percent) Germany (34 percent) and the UK (33 percent). There are no signs that the USA’s position is under threat at this point.
Can pension funds release the potential of offshore wind?
The end of 2010 and start of 2011 have seen notable investments by fi nancial investors in offshore wind, including the planned US$1.1bn investment in Anholt (Denmark’s largest offshore wind farm) by two pension funds (PensionDanmark A/S and PKA A/S) and PGGM and Ampère Equity Fund investing alongside DONG on the 367 MW Walney offshore windfarm. These are notable transactions - Anholt in particular given the size of the investment and the pre-construction stage of the project.
Encouraging as it is, this type of transaction remains unusual in the current environment. Furthermore, only 20 percent of survey respondents believe that pension funds will be active renewable energy acquirers over the course of the next 18 months. The jury is out – have we now seen the beginning of sustained investment activity by the pension fund industry or isolated deal opportunities?
Biomass gaining ground on solar and wind
Last year surveyed respondents forecast that 2010 would be a strong year for biomass. These predictions were reflected in the actual results with biomass M&A values more than doubling year-on-year in 2010 to US$2.2bn.
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 percent of all renewable energy M&A, compared with only 3 percent in 2009. Biomass looks poised to maintain this momentum in 2011, with 46 percent of survey respondents this year stating that they intend to make acquisitions in the sector, compared with 37 percent in 2010.
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