Australia urged to increase investment in renewables

According to Green Power: 2011, KPMG’s annual survey of global renewable energy mergers and acquisitions (M&A), which aims to highlight the hot spots and drivers of deal activity around the globe, 2010 was an active year for renewable energy M&A, with a total of 446 deals completed in the period, representing an increase of over 70% on the 260 deals closed in 2009.

KPMG’s annual global renewable energy mergers and acquisitions (M&A) survey, Green Power: 2011, which highlights hot spots and drivers of deal activity around the globe, showed that 2010 was an active year for renewable energy M&A, with a total of 446 deals completed in the period, representing an increase of over 70% on the 260 deals closed in 2009. It also showed that M&A activity levels are showing no signs of cooling off in 2011, as a record 141 renewable M&A deals totalling US$11.2bn were announced in the first quarter of the year, representing more than double the average quarterly value of US$5.5bn in 2010, over an average of 96 announced deals.

Commenting on the latest findings, KPMG’s National Leader of Renewables, Mathew Herring, said: “While Australia is not a top 10 player globally in the renewables sector, the high levels of activity and investment highlights the significant opportunity for us here in Australia. We have abundant renewable energy resources and need to continue to develop the industry quickly in order to become a leader throughout Asia and globally.

“The renewable M&A market has had a busy start to 2011, with a substantial jump in global activity which looks set to continue. In particular, our survey has shown that deals in the US$50m to US$0.5bn bracket are likely to see the greatest increase. Overall higher competition for targets is expected to push up global valuations driven by better financing conditions, a post-Fukushima reinvigoration of sentiment and soaring oil prices as well as some new acquirers, including Asian manufacturers and potentially pension funds. As Japan looks at alternatives to nuclear power, there could be opportunities for Australian renewable energy developers and technology providers,” said Herring.

However, government incentives remain as important as ever to the sector, particularly in Western Europe. The survey showed that more respondents planning to invest in the major Western European renewable markets cited incentives as the primary motivation over any other factor. Herring continued: “Clearly, incentives for renewable energy in Australia are as important as ever. While there have been some incentives available over the past decade, certainty over a carbon price is critical to the industry developing over the coming years.

“Our survey confirms the importance of incentive regimes to investors in Western Europe. The acceleration of cuts to feed-in tariffs for new projects across Western Europe over the last year is driving growing competition for existing projects with attractive guaranteed feed-in tariffs at higher historic levels and providing a temporary boost to deal activity and acquisition multiples in Europe. As already evident in the UK, without further stimulus the level of M&A activity, in solar photovoltaic assets in particular, can be expected to significantly decline once operational projects with attractive feed-in tariffs have long-term owners.”

Furthermore, 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.

“Chinese investors, developers and technology providers are very interested in wind, solar and other opportunities in Australia. It is important now that we continue to maximise these opportunities. Australia could take a leaf out of China’s book and better utilise and maximise its renewable energy resource wealth, as well as forging closer ties with China to co-lead the development of the industry locally, in Asia and globally,” added Herring.

Unfortunately for Europe, a heavy bias towards local investment was also 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. The survey showed a similar approach from North American investors, who prefer to invest domestically over China, India, Germany and the UK by a ratio of at least 2:1.

“At a time when debt-laden European countries are facing government stimulus being reined back or curtailed, these findings confirm that European countries will not be able to rely on transcontinental investment to plug their domestic renewable energy funding gaps without additional steps. Providing clarity, credibility and stable government policy in the near term is essential. The carbon tax debate in Australia is having an impact on projects being put on the backburner. Until we have certainty, the renewable energy industry will continue to stagnate,” said Herring.

Key findings:

• In 2010, a total of 446 renewable energy deals were completed, representing an increase of more than 70% on the 260 deals closed in 2009.
• A record 141 M&A deals were announced in the first quarter of 2011, with a total value of US$11.2bn; more than double the quarterly average value in 2010 of US$5.5bn on an average of 96 deals.
• The top five targeted countries for renewable energy investment are the USA, selected by 53% of the respondents, China (38%), India (35%), Germany (34%) and the UK (33%). China has clearly decided to maximise the commercial opportunity presented by renewable energy. Biomass was found to be the most compelling renewable energy sector again, with over 45% of respondents intending to invest (2010: 37%); closely followed by solar at 39% (2010: 37%), while onshore wind lost ground at 30% (2010: 35%) and appetite remained limited but broadly stable for offshore wind at 10% (2010: 11%).
• Over 70% of North American, Asian and European respondents predict increased competition for acquisition targets.
• Globally, over 40% of corporate and investor respondents intend to pay 3-5x EBITDA for renewable energy companies over the next 18 months, compared with last year when most respondents intended to acquire assets at or below 3x EBITDA (39%).