The first quarter reports on M&A deal flow activity are out so I have been checking to see if my view on the status of these sectors is supported by the data. One useful source of data is Mercom Capital Group clean energy reports that track M&A deal flow for many industries including solar and wind energy. You can find each of Mercom’s publicly available reports on their web site for download.
For Q1:2011 the clear winner is solar energy with 25 VC funding deals totaling $658 million more than twice the $311 million for Q1:2010 and three times the Q4:2010 $238 million deal flow. The sector also continues to quickly consolidate with 18 M&A transactions totaling $1.4 billion in Q1:2011 compared to a year ago $909 million in Q1:2010. Debt financing for solar projects was also strong with 15 transactions totaling $9.7 billion. Mercom’s data confirms my own view that solar sizzles because it is the one renewable technology that offer flexibility with large, utility scale projects, advanced CIGS technologies not yet commoditized, and plenty of market potential for smaller scale solar rooftop for falling price panel installers.
Solar energy, in my view, remains the one true threat to the central station utility business model because it affords the opportunity for individual homes, commercial and industrial customers to be net generators, gain bragging rights for their sustainability, and take control of their overall energy costs in a distributed energy future. Customer aggregation, constant energy management, demand response, and better, more efficient technologies bundled and prices competitively threaten the utility control over the gateway to the customer and consign traditional utilities to a low margin, commodity energy delivery in ways never before seen.
How is the focus of the solar sector changing as a result?
- Utility scale projects got the top five deals total 70% of total $658 Million Q1:2011 VC funding.
- Thin film manufacturers were favored with $283 million in seven deals.
- CIGS technology garnered $196 million in four deals.
- Concentrated solar power (CSP) $212 million in three deals.
- 55 VC investors in 24 disclosed deals with 87% of funding going to the US.
Wind Wilts but can still Win!
Wind energy continues to be a resource with great potential but it is struggling to gain traction. Total VC investment in wind energy for Q1:2011 was only $9 million in two deals, compared to $101 million in 3 deals in Q1:2010 and $57.5 million in 4 deals in Q1: 2009.
For 2010 overall wind VC funding was up 40% over 2009 despite fewer deals. Big offshore wind projects raised $9 billion in 2010 VC funding, debt activity reached $2.6 billion as the financial markets stabilized with 29 VC rounds, 82 investors in project funding deals and 34 investors in debt and other funding deals.
Wind sector merger and acquisition (M&A) activity attracted $265 million in five deals which was up compared to $140 million in four deals in Q4 of 2010. Of the five deals in Q1 2011, only one was disclosed, the American Semiconductor’s acquisition of The Switch, according to Mercom.
Eleven (11) big project funding deals totaling $1.2 billion were announced in Q1:2011 including $553 million loan to Renova Energia, $255 million in debt to Edison Mission Energy, $120 million loan to Brookfield Renewable Power, $111 million loan to Energie Baden-Wurttemberg and $62 million loan to AES Wind Generation but that was down from $4.9 billion for 21 deals in Q4 2010.
A big problem for wind is NIMBY. Wind projects are large, noisy, not easy to site especially close to load centers, still have bird kill issues and often lack adequate transmission access from their remote locations. While most of the recently funded wind projects are onshore the best potential for wind isn’t any easier offshore—just ask the Cape Wind project.
AWEA seems to think the solution to wind energy’s problem is to add a national clean energy standard and cram wind energy down the throat of utilities. The more likely answer is in better technology and the major manufacturers seem more inclined to build bigger, taller more powerful wind turbines and have fewer of them. This is complicated by the reality that transmission access becomes a larger issue in the isolated, wind-rich locations suitable for these bigger projects.
China has commoditized wind turbine manufacturing so prices are falling on the older technologies making them unprofitable for many developers. That would be OK is wind could be sited closer to load centers but resistance is growing with Xcel Energy the latest utility to cancel a large wind project in the Midwest because of bird kill issues.
Wind is truly a mainstream resource. Perversely a scaling back of subsidies for renewable energy might actually benefit wind since it would put more pressure on solar projects and other renewable resources to bring down prices. In the early pioneering work we did at Global Energy Decisions back in 2005 in a report for our investment banking clients called Renewable Energy: The Bottom Line we forecast that wind would capture about 76% of the total renewable portfolio standard project capacity by 2025 because it was the renewable technology able to reach mainstream cost levels first. Now the challenge for wind is to keep up with technology learning curves to overcome some of its impediments in siting while retaining that cost leadership.
My view is wind is a cost competitive mainstream resource and utilities will look for opportunities to add wind to their portfolio if they can site it, have adequate transmission access, and use it to achieve their RPS targets while bringing down the overall portfolio cost. Wind’s other big advantage especially in the West—it does not need water.
Competitive Reality For Renewable Energy
We are reaching the maturity stage with solar and wind energy where the low hanging fruit has been picked and the next stage of growth requires better technology, continuing downward costs, a focus on the ‘pain points’ and buyer objections that cause the NIMBY and other problems with these any any technologies.
The cold, hard reality for renewable energy is the uncertainty it fears most is the reality is must face. Eventually our children grow up, move away from home and get day jobs. We cannot continue to forever subsidize our renewable energy children—they too must grow up and get day jobs that pay enough to sustain themselves. Our government does not have the money and our public patience with deficits and government spending is wearing thin. Wind and solar are nearing mainstream status where they must learn to be cost competitive with other resource options. The fossil generation option of choice in every market is natural gas and that is the cost benchmark both wind and solar must achieve to grow and be sustainable.
Higher natural gas prices would also help make renewables a more compelling story but there is more to be gained from creative efforts to bundle low cost gas combined cycle back-up generation with renewable projects so both technologies can compete against baseload generation and supply the load-following energy we will need for a recovering economy. For this reason, I expect to see more consolidation in the energy sector so that renewable companies are blended into portfolio plays that enable the crafting of highly competitive, advanced technology portfolio plays that appeal to the least cost, best fit regulated utility players and the merchant generators positioning to displace coal or nuclear.
Higher natural gas prices will come with more demand growth and for that we need stronger economic growth. While there is not much any of us can do to achieve that we have keep the pressure on Congress and the Administration to remove some of the economic uncertainty that is holding us back and work together on spending, deficit, entitlement and growth issues that are holding back our return to historic load growth levels across the power grids.
- Wind Stocks Sector Snapshot; America’s Wind Power Industry Grew by 15% in 2010 (your-story.org)
- First Solar & Renewables Industry Plead to Save DoE Loan Program (bloggingstocks.com)
- New California law says one-third of electricity will come from renewable sources in 2020 (venturebeat.com)
- T-box concept to capture wind energy from trains (ecomagnificent.com)
- Alternative Energy Watch: Google Invests in BrightSource Project; China Looks at More Solar Installation; Shale Gas Not So Clean (GOOG, NRG, FSLR, LDK, JASO, TSL) (247wallst.com)
- Western Wind Energy Announces $2 Million Net Income for the Year Ended Dec. 31, 2010 and Increase in Total Assets to $254 Million (prnewswire.com)