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Market News

 June 08, 2010
Investment in biomass "set to be next global trend"

 KMPG has published its annual survey of global renewable energy mergers and acquisitions (M&A), entitled Powering Ahead: 2010.

The report has pinpointed the "hot spots" for deal activity in 2010/11 and provides an insight into the global M&A activity in renewable energy. The findings are based on a survey of over 250 senior executives active in the renewable energy industry worldwide, which was conducted between January and March 2010.

According to KMPG, who wrote the report in collaboration with VB/Research, a specialist renewable energy research and data provider, the survey found a change in appetite from last year's findings, with biomass as popular as solar and wind.

Andy Cox, energy partner at KPMG in the UK, commented: "While wind is still seeing enormous deal activity at the moment, our research has shown that dealmakers, particularly the large companies such as the utilities, are looking for the next global trend and biomass looks set to be the 'new wind'.

"Biomass plants have the potential to yield much higher returns than other renewable sources: a well executed biomass plant can deliver substantially greater economies of scale than wind; and the heat generated from incineration can supply neighbouring buildings, creating another revenue stream."

He added that, more broadly, the potential for biomass to operate as a base load power source provided advantages in comparison to intermittent technologies such as wind and solar in large scale electricity system integration.

Challenges

However, he noted that investors in biomass had "important challenges" to address, in particular focusing around the visibility of long term fuel supply and pricing.

"These challenges are hampering the availability of funding for many projects. Furthermore, securing funding for construction is no mean feat in the current environment with lenders requiring a 'turnkey' construction contract, which effectively guarantees the construction cost and delivery program for projects, with clear contractor penalties if there are delays", he explained.

"Unfortunately, turnkey contracts in biomass do come at a price: adding up to 20% to the capital cost. Despite the fuel and construction challenges, it is interesting to see that the companies with the money to support their convictions are driving biomass forward alongside their wind and solar portfolios, which are arguably easier to deliver in the short to medium term."

Some of the survey's key findings include:

  • Biomass is the most attractive type of renewable energy source with 37% respondents intending to invest in this area; closely followed by solar at 36% and onshore wind at 35%;
  • 145% jump in renewable deal activity compared with last year despite 60% believing securing finance for acquisitions was harder in the previous 12 months;
  • UK is the third most popular country for future deal activity (US and China are first and second respectively).

Subsidies

The survey also found that government support for renewable energy is of "vital importance" for investment purposes, however, the UK was the only country where consumer demand was cited as the top attraction for investment, rather than government subsidy everywhere else.

Mr Cox said: "The 'push me, pull me' effects of government subsidies can be seen none more keenly than in the renewable energy M&A market. The research shows that the US, India and China, particularly, are hugely appealing to companies and investors by virtue of government incentives.

"Conversely, where subsidy regimes are stepping down, the negative impact on companies directly affected is creating distressed acquisition targets, such as in solar where schemes in Spain and Germany are being canned."

According to KPMG, renewable energy M&A saw an increase of 145% in deal volume in the first quarter of 2010, compared with the same period in 2009 - with 150 deals in Q1 2010 and 61 deals in Q1 2009. There was also a 63% increase in value, standing at $14.3billion (9.9 billion) in Q1 2010 and $8.8 billion (6.1 billion) in Q1 2009.

Mr Cox added: "We have seen a much busier market in Q1 2010, with a massive jump in deal volume compared with Q1 last year. It seems that price reality has finally started to dawn with company vendors and acquirers more amenable to cutting a deal than they were a year ago; but the number of buyers is still limited by access to capital.

"Indeed despite last year's respondents expecting financing to ease in the year ahead, 60% found accessing finance harder in the past year. Those companies that can access finance are typically paying three times more margin, compared with three years ago."

The full Powering ahead: 2010 report is available for download

Source: www.newenergyfocus.com