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42% look to invest in US renewable energy this year - report

KPMG’s annual report into mergers and acquisitions (M&A) in renewable energy, The Winds of Change, has uncovered ‘hot spots’ for future deal activity and the implications of the recession on the renewables market.

Andy Cox, energy partner at KPMG, comments: “In the face of adversity, the global energy industry is feeling positive about the future of renewables. Indeed, 78% of senior executives from across the industry believe renewable energy projects are economically viable despite collapsing fossil fuel and commodity prices and the credit crunch.”

The USA was identified as the country where they were looking to invest in renewables by 42% of respondents – enticed by generous Government subsidies. India was the second most popular destination with 24%.

The belief in investment opportunities are bright for the future as well, with 63% of respondents believing US renewable energy subsidies will increase. However, it appears the Europeans (81%) are more optimistic than Americans (51%) on President Obama’s ability to deliver on his environmental commitments.

Other highlights from the KMPG report are:

  • Over 60% believe that onshore wind and solar power will grow by more than 5% in 2009, compared to only 38% expecting similar levels of growth in offshore wind, and only 19% in marine technologies;
  • 42% of respondents intend to invest in the USA, 24% in India, 22% in China and 21% in Canada (respondents could be investing in more than one country);
  • 44% think the Copenhagen conference (COP 15) to find a successor to the Kyoto Treaty will mark a significant breakthrough and will lead to increased investment, compared to just 18% who disagree.

Economic downturn hitting renewables

The renewable energy sector has been hit hard by the economic downturn, however, with the NEX index of renewable companies recording a drop of 65% from January 2008 to March 2009; most of which was recorded in Q4 2008, according to KPMG.

Cox says: “The size of deals looks set to change and the age of the multi-billion dollar deal seems to be at an end, at least in the short term; almost four times as many respondents arguing that these are likely to decrease in number as those expecting an increase. Furthermore, less than a quarter (24%) of companies expect to invest in excess of US$100 million in renewables M&A in the next 12 months compared to 39% last year.”

It appears that larger utilities and power companies are weathering the storm, but that smaller renewable energy developers are being disadvantaged by a lack of strong balance sheets and long-term relationships with lenders.

According to Cox, 70% of those surveyed from smaller companies (with less than US$500m in revenue) are finding financing for renewable energy projects harder to come by than a year ago, compared to 57% of larger companies.

“The respondents also predicted a fall in activity originating from hedge funds, infrastructure funds and private equity houses. Our research suggests that, while third party financing is proving difficult to secure, those able to leverage off strong corporate balance sheets - such as the large power companies - are well positioned to pick up bargains,” Cox says.

Implications of economic downturn on M&A activity:

  • 58% expect to make significant reductions in planned or ongoing projects because of the economic downturn;
  • 58% said they will be spending less than US$50m on M&A this year;
  • 55% of respondents expect an increase in deals with delayed or contingent payments;
  • 57% of executives from large companies (more than $10 billion in revenue) said finance is now more difficult to obtain compared with 70% of executives from smaller companies (less than US$500m in revenue).

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