Merger and acquisition activity in the renewable energy sector surged 40% in 2011, reaching a record-high $53.5 billion, according to global consultancy PwC, which has been producing an annual review of renewable energy M&A for four years now. Large, billion-dollar deals dominated “as solar, wind and energy efficiency deals overtook hydropower as the driver for big deal values for the first time,” PwC noted.
M&A activity in the solar energy market was particularly “hot,” accounting for 1 in every 3 transactions last year, with overall M&A transaction values in the solar sector jumping 56% to $15.8 billion in 2011, from $10.2 billion in 2010. Falling solar photovoltaic (PV) panel prices have made solar power more economic, with prices in some markets having fallen to the point of grid-parity, PwC noted.
M&A activity in the energy efficiency sector was also strong. Deal values in the two sectors nearly doubled year-over-year, accounting for 79% of the $15.3 billion total, year-over-year increase.
Renewable energy matures
The increased average size of 2011’s M&A transactions is a sign of renewable energy markets and industries’ increasing maturity, according to PwC. Moreover, the spike in M&A activity comes as something of a surprise given the economic travails experienced in the Euorpean Union (EU), which led worldwide renewable energy market and industry growth and development.
Commenting on the results, PwC renewables partner Paul Nillesen said, “Dealmaking in the renewables and energy efficiency sectors is intensifying as the sector evolves. Sustained high deal numbers and record total value reflect a maturing of the sector. The trend is all the more noteworthy given the uncertainty in the market and in government policies on renewables. We believe that deal flow will continue to be significant in the medium term.”
Reappraisal and scaling back plans to develop new nuclear energy generating capacity, as in Japan, or as in the case of Germany, completely eliminating it, provided an added growth impulse to the renewable energy sector, PwC points out.
Large, long-term and relatively conservative investment organizations, such as pension funds and insurance company fund managers, are increasingly active in the renewable energy market, another indication that the sector’s maturing. Healthy activity in the secondary market, where renewable energy assets are sold for a second, or even third, time are additional evidence of this. Danish pension insurance groups invested $1.3 billion in offshore wind power projects in Denmark in 2011, PwC highlighted.
Cost pressures lead to industry shake-outs
Sharply increased supply of solar PV cells and modules lead to sharply lower prices for solar energy systems in 2011, and that has lead to an industry shake-out. While PwC expects to see a smaller number of market participants in the solar power market, similar developments have set up the wind power industry for a shake-out as well.
“US and European manufacturers are coming under cost pressures. They are not alone. Some Chinese manufacturers also face heavy debt and are coming under competitive strain. There is significant overcapacity in China. The result is likely to be a succession of tie-ups within and between the main manufacturing territories of the US, Germany and China leading to a smaller number of big global players,” Tillesen said.
Cloudy outlook for 2012
Increasing in scale, development of renewable energy projects, notably for offshore wind, is likely to spur new M&A activity in the renewable energy sector in 2012. “As offshore wind projects increase in size, the need for a strong balance sheet to support the technology becomes more important. This creates scope this year for a landmark wind power combination between players from one or more of Asia Pacific, Europe and North America,” according to PwC director for renewables and cleantech Ronan O’Regan.
The euro zone debt crisis constrained renewable energy M&A in 2011, and the persistence of this problem will make the M&A environment yet more difficult this year, PwC believes. A deepening of the crisis will only hamper the outlook further. Nonetheless, there is continued impetus for market participants to strike up deals, according to PwC.
“Staying out of the markets in the hope things will improve cannot be assumed to be the right strategy. The potential for further destabilization domestically, or at an inter-governmental level cannot be ruled out, but if a deal is highly strategic, and mission critical, then parties will still feel it is worth doing on the right terms.”