North American renewable-energy M&A deals in 2010 deals amounted to $12.9 billion, which is 43% higher than the previous year. Wind took nearly one third of the total value.
PwC's assessment is backed by experts in the wind market, who predict that M&As are likely to continue to grow through 2011. But the sector should not expect a repeat of the pre financial-crisis rush of companies willing to pay hefty premiums for development companies in order to gain a foothold in the US, they believe. The scarcity of power-purchase agreements (PPAs) in many US markets, as well as low power prices driven by a glut of cheap natural gas, has meant that buyers are ascribing very little value to project development pipelines. They want assets that are already operating or fully contracted and ready to be built.
"If you've got something that is really ready to go, the market responds really strongly. People will pay up because they have difficulty producing PPAs from their own platforms at the rate they hoped to," says Martin Pasqualini, managing director of CP Energy Group. "You are either paying nothing or you are willing to pay hand-over-fist for the right opportunity."
Uncertainty over policy
Finding the right opportunity in the US market, however, is complicated by a variety of factors. The lack of policy clarity is a significant issue, says Duff Bryant, a partner in law firm Stoel Rives.
"There is a lot of uncertainty about what is going to happen with a national carbon policy and what is going to happen or not happen with a national renewable energy strategy. Anytime there is uncertainty, buyers are going to get nervous," he says. "This has also become a very politicised issue, more so than it was before. Republicans and (right-wing populist political movement) the Tea Party and their constituents are really latching on to this negative view of renewable energy and its supposed cost to the government and taxpayers. For the next year at least, investment is going to suffer because of it."
Uncertainty around subsidies has remained the backdrop to wind energy activity in Europe too, according to the PwC report. Changes to the support system made by Spanish regulators at the end of 2010 "sent shockwaves through the investor community", says the report. However, it adds that these changes were not as radical as initially feared and were essentially limited to solar photovoltaic installations rather than wind.
The US market's complex financial structures can also be off-putting to buyers. Most projects are financed with money from tax-motivated investors and get most of the project's financial returns in the first five to ten years of operation. That makes wind less attractive to buyers such as infrastructure funds and private-equity firms looking for steady cash flows. "The industry's consolidation is definitely complicated by the financial structures we've put in place," says Wood.
Other sectors, in particular solar energy, are competing with wind for investors' attention, says Bryant. "Solar is not as established, so people might see greater opportunity in something less mature."
Despite the challenges facing wind project M&As in the US, says Bryant, the technology side of the business will continue to attract investment dollars, especially companies at the early stages of development. "Venture capitalists love that stuff. And if a venture capitalist puts money into something, they are going to want it back out in four to seven years. That can drive some M&A."
Experts also predict that M&A could be driven by Chinese turbine makers looking to break into the US. Such companies will have to look at buying into projects or development firms to show that their technology works. Turbines need an operating history in the US in order for lenders to feel comfortable financing projects that use them. But after demand for equipment plummeted last year to half of what it was in 2009, there is plenty of capacity available from established players.
There is no longer a need in the market for new turbine manufacturers, says Pasqualini. "Any sponsor who has a project can call any one of the Tier 1 turbine manufacturers and they'll get great pricing, great execution and the best warranty offers and service agreements they've seen in years." New entrants will have to buy development assets and build them themselves, he predicts.
This model has been used successfully by solar photovoltaic manufacturers to buy a sales channel for their panels, says Duff Bryant, a partner in Stoel Rives. Experts predict that this will become a trend in the wind market. Goldwind's purchase last year of the 106.5MW Shady Oaks project in Illinois from Irish developer Mainstream Renewable Power is the first example. Chinese manufacturers have access to a lot of cheap capital, which enables them to do such deals, Bryant says.