China and India are among the top three hotspots for mergers and acquisition (M&A) deals in the renewable energy sector in 2010, according to a survey by KPMG.
The report, released on Sunday, showed M&A activity in the sector surged 70 per cent in 2010 and is likely to remain busy for this year.
M&A deals globally rose from 260 in 2009 to 446 in 2010. The first quarter of 2011 has already produced 141 deals, said international consultancy firm KPMG in its annual survey.
China and India were the most targeted markets for M&A by renewable energy investors in 2010 after the first-placed United States (US) market.
Of the 500 senior executives surveyed, 53 per cent said they targeted the US for renewable energy investments in 2010, while 38 per cent named China and 35 per cent named India as attractive markets.
“The renewable M&A market has had a busy start to 2011, with a substantial jump in global activity which looks set to continue,” said Singapore-based KPMG partner Sharad Somani in a statement.
India’s wind sector is one of the most likely to attract investment.
The survey report quoted Cyrille Arnould, head of a global renewable energy fund at the European Investment Bank (EIB), who claimed India’s wind industry was ripe for M&A. “With wind, there has been a lot of tax-driven development which just begs to be consolidated,” he said, adding that prospective buyers will be utilities seeking to increase their generation capacity.
Similarly, the Indian government’s policies have created opportunity within its solar industry. Siobhan Smyth, head of renewables at HSBC, noted in the survey report that a number of government-driven factors made solar projects profitable, with 15 to 20 per cent returns in some states.
Those factors include the relative ease with which developers obtain power purchase agreements (PPAs), which obligate utilities to buy power at set prices, tax incentives and other incentives based on the renewable energy generated.
China’s solar industry is attracting investment because it is projected to undergo the same rapid expansion as its wind industry, which last year increased capacity by 16,500 megawatts (MW) to surpass the US in overall installed capacity.
Earlier this month, the Chinese National Energy Agency said it expected the country’s solar capacity to grow 150 to 200MW annually by 2015.
The KPMG report said that China’s wind industry growth had pushed the nation from fifth to second place as a target for M&A deals in 2010, but noted that China remained a difficult region for M&A for non-Asian investors.
Most of that investment – 63 per cent – came from within China. Only 11 per cent of buyers of Chinese firms came from the US, and three per cent from Europe.
The report’s authors point to a regional bias as one reason for this: “American respondents are twice as likely to invest domestically in preference to China, India, Germany or the UK. European respondents are no different , focusing on core European markets such as Germany and the UK.”
Asian respondents also preferred to invest within their regions, although not as strongly as their western counterparts. 40 per cent of the Asian executives polled planned on investing in the US. 58 per cent planned to invest in India and 57 per cent in China.
According to the survey report, investors favour the US renewable energy market because of its stable investment environment.
KPMG’s Mr Somani said regional biases indicated by the survey suggest that countries could find it difficult to bridge renewable energy funding gaps with foreign investment.
“Investors and lenders are still cautious…If governments are to successfully attract new capital cross-border, they must focus on incentives and regulation mechanisms that have clarity, credibility and stability,” he added.
The number of Asian investors involved in renewable energy M&A deals is increasing each year. In 2009, Asian companies made 29 acquisitions, a figure that more than doubled to 59 in 2010. Asia is expected to drive further growth in 2011 according to the survey results, with 78 per cent of respondents predicting significant new investors from China, and 42 per cent projecting new investors from India.
Manufacturers from South Korea and Japan are also expected to enter the renewable energy M&A scene, building on a trend from last year, which saw Japanese electronics manufacturer Sharp buy US solar project developer Recurrent Energy for US$305 million and Korea’s Doosan Power Systems announce its intention to invest in Scotland’s wind sector over the next 10 years.
Regardless of their country of origin, investorsare likely to face higher competition for M&A deals, said Mr Somani.
“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,” he said.
