TODAY’S STUDY: YOUNG LOVE AND THE STATE OF THE NEW ENERGY BUSINESS

Given how often experts are wrong, predictions that come true are worth noting.

A good friend predicted some time back that a boy she was chasing would eventually realize what a great catch she was.

“He’s just not that into you,” her friends - experts in matters of the heart one and all - kept telling her.

“Maybe,” said the surprisingly mature young woman. “But I’m going to give him some time to live and look around and give it all some thought before I write him off.”

It was an anxious time for her. She knew in her heart that there was a special connection between her and the boy and she could see that when they were together she had his full attention. But young boys being what they are, that attention kept wandering. He said he was happiest being single.

The girl went on about her life, getting better at what she did and finding out more about herself by doing so. She was always open to another boy but none came along with the depths and qualities she saw in the one she always believed was the right one. She wondered if she would always be alone but decided there were worse things than that.

The boy had some interesting experiences, some hard knocks, some successes, ran around with a few Amy Winehouse-types and had some pretty scary encounters with a couple of sociopaths.

After one very long night, he was driving home and thinking about things that had happened to him and trying to understand why what was supposed to make him so happy left him feeling so empty. He thought of something the young girl had once said to him.

“It’s easy to be alone,” she had said. “But the best things in life aren’t easy. And once you get that, there’s a next question: It’s hard to be really happy with the wrong person and it’s hard to be really happy with the right person,” she had said. “Which one would your rather do the work with?”

Like a revelation from the mystery of the night, he got it. The boy and girl are still together.

In the April 2011 survey highlighted below of 100 senior people in New Energy who do mergers and acquisitions (M&A), there are no great revelations but it is worth noting that the insiders’ predictions were as right as the young girl was.

They expected more mergers, especially in Big Solar, rising oil prices, rising electricity prices and more dominance from power companies and utilities. They were split on whether there would be increasing initial public offerings (IPOs).

Most importantly, they said there would be more New Energy.

On every point, they were right. A couple of items in the QUICK NEWS section below affirm this and trends regularly reported here further affirm the general view of what’s coming suggested in the survey.

Furthermore, a closer look shows the real revelation from the survey to be in what the young girl told the young boy.

The price of Old Energy keeps going up, even without considering its non-market price high costs to the environment and human health. It is clearly going to be hard to build modernity’s energy future with it.

New Energy’s uncertainties remain, driving consolidation and takeovers by power players and obstructing ambitious new entrants. It is clearly going to be hard to build modernity’s future with it.

But the market price of Old Energy is going to keep going up and the external costs of depending on it, from being bullied by oil potentates and dictators to being devastated by Gulf of Mexico-like and Fukushima-like catastrophes, are only going to get worse.

Technology will, meanwhile, make the benefits of drawing on the power of this good earth’s sun, wind, deep heat and flowing waters ever more affordable and accessible.

It will be hard to get it right with Old Energy and it will be hard to get it right with New Energy. Which one is worth the work?

M&A in Renewable Energy Global Outlook
May 31, 2011 (mergermarket and Rodl & Partner)

Survey Findings

One in three respondents believes the recession is now over

Asked about the state of the economic recovery respondent views are fairly mixed. Over one-third of those surveyed (34%) believe the economic recovery is secure with the recession now fully overcome. One upbeat respondent explains, “In Colombia, the market is stable, banks are providing finance and the government is doing its part to improve the economy. A lot is happening in the market with investors coming in to support existing and new projects.”

Other respondents take a less optimistic view: 24% fear the economy will slip back into recession and 42% believe it has not yet emerged from the crisis but it is on the road to recovery. A respondent from Norway comments, “We’re not out of the woods yet, but things are slowly improving,” while a UK-based respondent says, “I fear a double dip could come from sectors reliant on consumer spending such as retail, hospitality and the
housing market.”

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Respondents are split on what impact the revolutions in North Africa will have on M&A in the renewable space

Respondents are split on whether the revolutions in North Africa will have an impact on M&A in the renewable energy sector with 44% believing that it will and 41% believing that it will not. A small 15% of respondents remain uncertain.

Among respondents who believe it will affect M&A, there is also diversity of opinion with one respondent saying, “The political instability will definitely have a negative impact,” while another stresses that “The revolutions will have a huge impact on oil prices, which will make renewable energy a lot more interesting to investors.”

Another respondent who does not believe it will lead to greater deal activity, acknowledges that “It will not boost M&A, but it does reaffirm the fact that political risks exist in the oil industry and alternatives should be sought.”

More than two in three respondents expect global M&A activity in the renewable energy space to increase in the coming 12 months

In total, 72% of respondents expect global M&A in the renewable energy sector to increase (65%) or to increase greatly (7%) over the coming 12 months. “M&A activity will increase as smaller producers combine to reach that mid-cap status,” one respondent explains, while another says that “bigger players will acquire the technologies and resources of smaller companies through a process of consolidation.”

Compared to our 2010 survey, this year’s results show more measured optimism. While the broad majority of respondents hold a bullish M&A outlook, the proportion of those expecting activity to increase greatly fell to 7% from 13% last year while the share expecting a decrease edged up to 7% from 4% in 2010. More measured optimism may reflect the more general M&A trends where the bounce-back from the post-crisis period has already occurred and M&A is now increasing at a more stable pace.

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Respondents tip Europe to be the main hub of renewable energy M&A activity over the next 12 months

Almost one-third of respondents (30%) tip Europe to be the most active hub for renewable energy M&A in the coming year, while a further 37% say the region will see very significant (24%) or significant (13%) activity. One respondent notes that “Europe has a great diversity: The Nordics are great for wind power; Italy, Spain and Greece for solar; and continental Europe for geothermal and biomass,” while another simply says, “Europe is ahead of the curve in renewables.”

The majority of respondents who identify a specific European country point toward Germany where long-term feed-in tariffs help bolster renewable energy investment. One respondent also points to the consumption side, noting that “In Germany a lot of encouragement is given to people to use renewable sources of energy, especially wind and solar as it is easy to harness.”

Elsewhere, it is noteworthy that the combined figure for those respondents (23%) expecting the Asia-Pacific region to witness significant deal making over the next twelve months (62%) exceeded the total for North America (57%), marking a change from the 2010 survey.

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Looking at specific Asia-Pacific markets, respondents overwhelmingly expect China to lead the region. One survey participant believes that both China and India’s “rapid economic development” will drive M&A investment in the region, while another points toward South East Asian markets, stating, “There are a lot of prospects available in Singapore, Malaysia, Thailand, Indonesia – especially the latter where there are many new projects.”

In a view echoed by a number of respondents, one states, “The recent earthquake in Japan will make people rethink nuclear energy with many looking to the renewable sector.” Some respondents state this will be a spur to renewable energy M&A in Japan specifically, while others believe it will drive M&A investment in the sector globally.

Even as the aggregate figure of respondents identifying Asia-Pacific has surpassed North America over the two years of the survey, the view of those surveyed for prospective activity in North America remains comparatively bright with nearly one quarter (23%) believing the continent will witness the most significant renewable energy M&A globally. One such respondent states, “Wind will continue to attract investment in areas where there are few opponents, primarily in western and mid-continental agricultural areas with low population densities and in regions where purchase power agreements have higher prices, such as New England and California.”

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A large majority of respondents recognise the importance of emerging markets in the renewable energy M&A market

More than two-thirds of respondents (67%) say that emerging markets are very important in the context of M&A activity in the renewable energy space. “What happens in emerging markets is very significant. China is obviously a huge renewable energy investor and we monitor their activities closely,” states one respondent.

The proportion of respondents who do not believe that they are very important comes in at just 11%. One such respondent says, “Emerging markets are a good organic growth area, but not ready for consolidation yet,” while another says, “There is capital there, but business is troubled by structural, legal and regulatory frameworks.”

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The wind power and solar thermal niches are expected to see bustling M&A over next year, while biomass gains greater prominence

In keeping with last year’s survey results wind power is expected to be the lead sub-sector for renewable energy M&A in the coming year. Over one third of respondents (35%) identify the wind power space to see the most significant M&A, while a further 47% say the niche will see very significant (32%) or significant (15%) deal activity.

Not surprisingly, solar thermal also remains a leading space for prospective deal activity say a sizable proportion of respondents. Over one-quarter (28%) foresee the sector witnessing the most significant M&A among renewable sub-sectors over the coming year – a further 20% and 21% expect the space will see very significant and significant deal activity.

Notably, this year’s results show an increase in the prominence of the biomass space among respondents with the aggregate figure for those expecting the sub-sector to see significant M&A activity in the coming year doubling from 22% in 2010 to 44% in 2011.

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The majority of respondents believe the same subsectors will appeal to trade and private equity buyers

More than two-thirds of respondents (67%) believe the same renewable energy sub-sectors will be of interest to trade and private equity investors. Not surprisingly, a number of these respondents say both strategic and financial buyers will source transactions in the wind power and solar thermal niches.

Government support is foreseen by the majority of respondents as the principal external driver of renewable energy M&A over the coming year

Nearly three-quarters of the survey pool (72%) believe government support will be a very significant external driver of M&A activity in the renewable energy sector over the coming year. “Renewable energy is directly affected by political decisions, which create energy laws and affect prices and output of renewable energy products,” one respondent explains.

Slightly smaller proportions expect high commodity prices (68%) and cash-rich corporates (59%) will be the main external M&A drivers. While the share of respondents who point to distress and climate change as very significant M&A drivers is the same at 46%, the proportion indicating that climate change is an insignificant driver is noticeably high at nearly a quarter (23%) of the respondent pool.

Climate change concerns are fundamental to government support for renewable energy development, yet in and of itself climate change is seen as less of an important external M&A driver relative to other factors. One respondent recognises the paradox, proclaiming, “Climate change is very important, but the importance given to it not at all significant.”

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Respondents deem SPVs as an ever more attractive option for acquisitions, while interest in classical share deals wanes

Remarkably, this year’s survey results show a sizable increase in respondent expectations for the use of special purpose vehicles (SPVs) for making acquisitions: 40% of the overall survey pool believe SPVs will be the dominant deal structure over the next five years, up from just 18% in 2010. “There will be many SPVs set up to capitalise on new technologies and projects, which will become attractive to bundle together,” one respondent explains.

While SPVs are clearly becoming ever more attractive to investors, the proportion of respondents who believe classical share deals will be the dominant deal structure has fallen sharply from 2010. Indeed, last year two-thirds of respondents indicated it would be the primary structure for deal making, but the figure has fallen to just over one-third (35%) in 2011.

Overtaking competitors and gaining market share is still a key M&A driver in the renewable energy industry say respondents

Similar to our 2010 survey, overtaking competitors and gaining market share is still identified by the largest share of respondents (43%) as one of the principal internal M&A drivers in the renewable energy industry. ”It’s natural to want to grow, expand and benefit as a corporation,” comments one respondent in this regard.

Just over one-third of respondents (39%) believe that achieving economies of scale will be among the main industry drivers of M&A, while one-third say that benefiting from new and proposed legislation in specific countries and regions will be a key deal driver.

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Access to financing is now much less of a deal making obstacle according to respondents

Incredibly, just 29% of respondents identify access to financing as a significant obstacle to M&A activity in the renewable energy space in this year’s survey, marking a dramatic fall from the 70% of respondents who identified financing as an issue in 2010.

Uncertainty or lack of legislation is now considered the biggest obstacle to M&A in the space by the largest share of respondents (34%). One respondent from the US explains, “Legislation can be a bit murky. In the case of geothermal, it’s not very clear. There is obviously a drilling risk and other challenges. The incentives are good and attractive, but they are not reliable and we as sponsors of those projects are taking that risk.”

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The majority of respondents believe national governments are doing enough to stimulate renewable energy investment

Although the change from last year’s results is comparatively small (up seven percentage points), the majority of respondents (52%) now believe that national governments are doing enough to promote investment in the renewable energy sector.

There is great diversity between countries, and even states in the case of the US, which many respondents are quick to recognise. One such respondent explains, “Things are improving. For instance, the German government has been at the forefront of stimulating renewables infrastructure, whereas to date the UK government has lagged behind. Note that the majority of the UK’s renewables developments have been manufactured outside of the country.”

California stands out as a beacon of good policy among a number of those surveyed. The difference between states may explain why roughly the same proportions of respondents (around one in four) identify the US on the whole as having both good and bad renewable energy promotion policies. One respondent laments, “In California renewable energy is very well promoted, however this is not so in the rest of the country.”

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Nearly one-third of respondents believe feed-in tariffs are the most effective government policy for driving investment in the renewable energy space

Nearly one-third of respondents (31%) believe feed-in tariffs constitute the most effective government policy for driving investment in the renewable energy sector. “Feed-in tariffs are a perfect mechanism for a fair game where both small and big players benefit, but capital grants only benefit big players and isolate the small ones.”

It is noteworthy that while the overwhelming majority of respondents cite some type of government policy to help support the development of the renewable energy sector, a small minority (7%) believe governments should take a hands-off approach to the sector. One such respondent says, “I do not believe there should be any government involvement. The renewable energy sector should be a pure commercial enterprise.”

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More than two-thirds of respondents expect crude oil prices to increase over the next 12 months

A combined 67% of respondents expect crude oil prices will rise over the coming year, either by up to 25% (47%) or by more than 25% (20%). Respondents point to a host of factors that affect oil price movements. One remarks that upward price pressures will come from “instability in the Middle-East and increased demand by India and China,” while another says, “Global economic conditions are improving and this will cause the oil price to go up further.”

A number of respondents point to changes in the value of the US dollar, on which the price of crude oil is pegged, as a significant factor affecting oil prices. “Oil prices will rise in US dollars, which are becoming worthless due to ballooning debt,” says one respondent, while another says, “The US dollar has been depreciated, but in terms of the Singapore Dollars it's hardly seen a 5% increase.”

Respondents appear fairly mixed in their view of how rising oil prices affect their businesses, which could reflect the diversity of renewable energy companies and investors active in the space. For instance, one respondent believes, “High oil prices always help the renewable energy industry,” while another says, “It has a minimal impact.”

Other respondents suggest that the affects can be more heterogeneous. One such respondent elaborates, “On the one hand, increasing prices will help stimulate renewables development, therefore pushing forward project development. On the other hand, operating costs will increase, the cost of steel will increase, transport to the field will increase and therefore our prices will need to reflect this.”

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The majority of respondents believe oil prices below US$70 per barrel would cause interest in renewable energy to fall

The majority of respondents, a combined 64%, believe that oil prices below US$70 per barrel would cause interest in renewable energy to fall. Surprisingly, whereas no respondents cited oil prices of above US$80 per barrel as a break point at which interest in renewable energy investments would fall in last year’s survey, this year a combined 16% place the price at this level.

Other respondents (13%) are less certain about the influence of oil prices on renewable energy, while a small share do not believe this to be an important factor (7%). One explains, “We do not see oil and gas in this way. We see them as finite resources, which is why we are interested in renewable energy sources – they are endless. In 50 years time is oil going to be scarce? Yes. And in 50 years time are renewable resources of energy going to be around? Yes, because they are endless we are not going to run out of them, ever.”

Nearly two-thirds of respondents expect the price of electricity to rise over the next 12 months

A large majority of respondents (72%) expect the price of electricity to rise over the coming 12 months with 36% expecting it will rise by less than 5% and 36% saying it will rise by more than 5%. “It has already gone up because of Japan,” comments one respondent.

One-quarter of those surveyed believe electricity prices will remain the same over the coming year, while a miniscule 3% believe that prices will decrease (2%) or decrease greatly (1%).

Again, similar to the view taken regarding whether rising oil prices will affect businesses, respondents’ paint a mixed picture as to how it affects their own companies. One respondent states, “It is important to my expected revenue because when the construction of our power plant is finished we will be selling the energy and increased prices are going to benefit us.” Another respondent from a South African manufacturing business states, “We run only on electricity, so it affects us badly.”

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Over two-thirds of respondents expect private equity activity in the renewable energy sector to rise over the next 12 months

More than one in two (55%) believe that private equity activity in the renewable energy space will increase (45%) or increase greatly (10%) over the coming year, down from 67% of respondents in last year’s survey. One survey participant explains, “We are expecting to see greater private equity investment due to the still tight government budgets and the bank selectiveness when financing projects. As such, we expect private equity to play an important role.”

Just over one-third of the survey pool (38%) believes levels of private equity investment will remain the same over the next year. “Private equity firms are not yet comfortable or confident enough making investment in renewable energy,” one such respondent comments.

Meanwhile, a miniscule 7% of respondents expect the asset class will scale back renewable energy investments from its current levels.

Respondents see strong buy-side activity as the biggest driver of private equity activity in the renewable energy space

Not unlike last year’s survey, the wide majority of respondents (74%) expect financial investors to be most active on the buy-side. One respondent states, “There is a lot of money sitting on the sidelines and private equity funds have to put it somewhere,” while another suggests that, “Renewable energy is a maturing market, which investors are recognising and entering through acquisitions.”

The proportion of respondents who foresee sell-side activity acting as a bigger driver doubled over last year’s survey to 16% this year. “Sellers are getting a very good rate,” one respondent explains.

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Survey results show fewer respondents expect secondary buyouts this year

Secondary buyouts are identified by just over one-fifth (21%) of respondents as likely exit routes for private equity investors from renewable energy portfolio companies over 2011, down from almost one third (31%) last year.

Trade sales are identified by the largest share of respondents (41%), in keeping with last year’s survey results. “Trade exits will be very strong. There will be fewer IPOs, which are not feasible in terms of scale, size and history,” one respondent explains. Contrary to this view, the proportion of respondents identifying public listings as a viable exit route rose to 38% from 32% last year.

The vast majority of respondents believe clean technologies are very important with regard to the renewable energy sector

Overwhelmingly, respondents believe that clean technologies are
important in influencing the renewable energy sector with more than nine
in ten (94%) indicating this.

One respondent believes there will be an important influence from clean technologies, but that it could be negative. He says, “If clean coal costs could be reduced, that would curtail wind and solar development.” However, most other respondents believe the relationship between the two industriesis more symbiotic with several noting that they “go hand in hand.” One respondent comments, “Renewable energy is itself a clean technology.”

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Over one-half of respondents tip traditional energy companies to be the principal acquirers within the renewable energy sector over the next year

Over one-half of respondents (54%) tip traditional energy companies to be the principal acquirers within the renewable energy sector over the next 12 months. “Traditional energy companies understand the value of these assets. They are already existing providers and need a decent portfolio to run them effectively. And they have deep pockets,” comments one respondent.

At the same time, almost one-half (46%) tip private equity funds to be among the biggest acquirers, above the 33% who point to renewable energy companies themselves. 17% of the survey pool expect financial institutions to become active buyers in the market.

Few respondents expect renewable energy IPOs to fall, but most are split on whether it will increase or remain the same

A combined 47% of respondents expect IPO activity to increase (38%) or to increase greatly (9%) over 2011. “IPOs are growing with the long-term future of the industry,” one respondent comments. Asked which bourses will see the most share offerings, most respondents point to the New York Stock Exchange and NASDAQ in North America and the London Stock Exchange in Europe. Smaller numbers identify the Shanghai Stock Exchange and the Hong Kong Stock Exchange in the Asia-Pacific region. Elsewhere, a slightly smaller proportion (40%) of respondents is more sanguine, believing it will remain the same. And just 13% of respondents expect listing activity from renewable energy companies to decrease (10%) or decrease greatly (3%) over 2011. One such respondent states, “Until developers can demonstrate their ability to make money in operations, their risk-return issues will remain a drag on IPO feasibility.”