London, United Kingdom/ In the past days the Worlwide Consultant and Auditing Company, KPMG International's, launched his annual survey of global renewable energy mergers and acquisitions (M&A), entitled Powering Ahead: 2010, has pinpointed the hot spots for deal activity in 2010 and 2011.

Andy Cox, energy partner at KPMG in the UK, commented that “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.”

Considerable changes

While renewable energy M&A has seen an increase of 145% in deal volume in the first quarter of the year, compared with the same period in 2009 (150 deals in Q1 2010 and 61 deals in Q1 2009) and a 63% increase in value (US$14.3bn in Q1 2010 and US$8.8bn in Q1 2009)1, it is not immune to global credit conditions.

"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, over half have 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,” said Cox.

And continued, “Acquisitive, cash-rich companies are all too aware of the privileged position they currently hold and are driving hard bargains. Deals are currently priced at 9 x historic EBITDA -the Earnings Before Interests, Taxes, depreciation and amortization Index- (compared with 13 x in 2006/08) but companies with plans to acquire have told us that they don’t expect to pay more than a multiple of 5. With many smaller companies unable to recover from the economic crash, now is the time for the well capitalised to make hay. And so they should as two thirds of the people we spoke to expect financial investors will lead the field in the next 18 months.”

What´s the most

Looking at which types of energy are most attractive to investors, the survey has found a change in appetite from last year’s findings with biomass most appealing, followed by solar and wind.

Cox added: “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 much greater potential to yield 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 neighboring buildings, creating another revenue stream. More broadly, the potential for biomass to operate as a base load power source provides advantages in comparison to intermittent technologies such as wind and solar in large scale electricity system integration.”

“However, investors in biomass have 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. Unfortunately, turnkey contracts in biomass do come at a price: adding up to 20 percent 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.”