- Financial investors poised to kick-start jump in global renewable energy M&A
- Deep Asian pockets: 5 out of 10 new investors likely to be from Asia
- Eurozone crisis heavily impacted debt financing
- Increase in deals up to US$500m anticipated
- US, India and China top destinations for investment, but Europe falls behind
Private equity and infrastructure funds are preparing to fly in the face of the downturn and kick-start an increase in deal activity in the renewable energy sector over the next 18 months, according to ‘Green Power: 2012’, KPMG’s annual survey of global renewable energy mergers and acquisitions (M&A).
The survey, which highlights the drivers of global deal activity, found that 92% of all respondents expected infrastructure funds and private equity investors to be the most active in buying and investing in renewables (up from 64% a year ago), followed by independent power producers themselves 87%, (up from 61% last year) and marking a distinct shift away from utilities companies which have been the most active acquirers historically.
Despite 70% of respondents indicating that it is now harder to secure debt financing to fund acquisitions of renewable projects and companies, the report, which gathered opinion from utilities, manufacturers of renewable equipment, governments and sovereign wealth funds amongst others, found that the majority of respondents (85%) expect renewable energy deal flow to remain robust in the next five years. More than 70% said they were attracted to hydro, onshore wind and solar PV investments in particular, confirming that they are seen as safe havens for long-term money.
And there was significantly greater confidence amongst respondents of an increase in deals valued below US$500m (60%) compared to those anticipating deals with a value in excess of US$500m (28%).
Andy Cox, Head of Power & Utilities at KPMG in the UK, said: “What our research has found is that green energy is becoming viewed by investors in much the same way as conventional infrastructure asset classes, like water companies and electricity grids. This is good news as it means renewables are seen as safe and stable, hence the return required by investors reduces and overall renewables becomes better value for money for energy consumers as they require less subsidy. Costs are falling rapidly to the point where renewables could soon start to challenge traditional energy sources. This in itself will stimulate renewed investment and M&A activity.”
The news will provide a welcome fillip to the industry which entered 2012 on a more subdued note in terms of deal volumes. This is in stark contrast to 2011, which was a vintage year for renewable M&A with a total of 591 deals valued at $51.2 billion announced during the year, a significant increase on the 431 transactions worth $24.2 billion recorded in 2010. Deal activity showed a particular surge in wind and solar of 132% and 37% respectively. However, both were far outstripped by the rapid increase in deal activity in the biomass sector which leapt 300%.
Yet towards the end of the year, the market was beginning to show signs of cooling with both deals and new renewables investment slowing rapidly; in the last three months of 2011 only $33.4 billion was allocated globally to renewable energy projects – a fall of 39% on the previous quarter.
And the report warned that the positive sentiment of investors today could be badly affected by regulatory uncertainty in the US and the risk of retroactive tariff cuts, particularly across Europe.
On this point, 76% of the respondents who agreed that renewable assets had become attractive on the basis of their long term low risk returns said that the risk of retroactive tariff cuts would affect confidence in the sector as a whole.
Cox continued: “The investment climate remains fragile. While it is exciting to see so many respondents expecting to invest in green energy in the near future, this could all turn on a dime if struggling governments continue to retrospectively cut tariffs and so damage confidence.”
This has already been seen in the case of Spain where in 2010 the Government announced retroactive changes to renewable projects, which principally impacted solar PV projects that had been constructed prior to September 2008. Investor appetite was damaged yet, just as it began to recover, Spain has again raised the risk of retroactivity across all renewable technologies this year. Any changes must be clear and implemented swiftly. With large asset portfolios and strong sponsor counter-parties, Spain has a particularly attractive project M&A pipeline; which is on hold until investors have full visibility over future revenues.
Yet while sudden changes to policy would negatively affect the sector, taking renewable energy as a whole, the report concluded that the next decade must be dominated by the gradual removal of subsidies so that the industry can stand on its own two feet.
Cox said: “We are expecting some of the mature technologies in certain European countries to achieve grid parity over the next few years, so governments rightly should be looking to pull back on subsidies. However, they should be careful to learn the lessons of past over-corrections which have had substantial detrimental effects. A focus on implementing flexible incentives, tapered to reflect the improving cost efficiency of the industry, would ensure that the supply chain can better plan for the future; which in turn maximises efficiencies and energy consumer value for money.”
In terms of where future investment is expected to come from, the report predicted a major ramp up in outbound investment from Asia, continuing the nascent trend seen in 2011, with over 43% of respondents ranking China top in terms of countries most likely to enter the global renewable energy market. 5 of the top 10 ten most likely countries or regions from which renewable energy investment activity will derive in the next 18 months are in Asia. Investment is stimulated by low interest rates in the case of Japan and in China by equipment manufacturers seeking to expand into new markets.
Meanwhile, the USA came out as the top destination (46%) for investment by a considerable margin despite the anticipated expiry of a number of US subsidies and the uncertainty surrounding their replacement. India, China and Germany (23%, 21% and 21% respectively) are the second and joint-third most attractive destinations.
Corporates and investors are targeting solar PV (27%), biomass (21%) and onshore wind (18%), whilst debt providers’ principal investment focus is on onshore wind (56%), solar PV (46%) and hydro (26%);
A number of utilities companies have been divesting non-core assets in the renewables sector; a trend which KPMG sees continuing in the near term, alongside a limit on their investing in new deals. Their focus is expected to remain on offshore wind investment where the scale of projects are more akin to their traditional generation assets.
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About the research
KPMG has published a report into renewable energy M&A annually for the last five years. VB/Research, a specialist renewable energy research and data provider, were commissioned to survey 500 senior executives in renewable energy between February and April 2012. Surveyed respondents were spread across Europe (30%), North America (30%) and Asia-Pacific (30%), with the Middle East, Africa, and South America accounting for the remainder. The respondents were made up of corporates; investors; debt providers; government bodies and service providers. The full research is available as a separate pdf.
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 11,000 partners and staff. The UK firm recorded a turnover of £1.7 billion in the year ended September 2011. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 152 countries and have 145,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.