The industry stands at an inflection point regarding consolidation. But this time, it is less likely to retreat from more and larger combinations. What’s driving renewed interest in mergers and...
Renewables at a Crossroads
Investment opportunities in an evolving environment.
The global economic downturn has cast at least a measure of doubt on the business case for renewable energy technologies, leaving some industry observers to point to previous periods of renewables growth in questioning whether the market is resilient enough this time to withstand volatile energy prices and a shifting political climate.
Yet, despite this uncertainty, the market has evolved in important ways, setting the stage for it to maintain its economic viability and continue to grow. One of the hallmarks of the renewables sector today is its structural diversity in terms of the technologies, players, and geographic regions involved in its growth.
For that growth to continue, companies and investors participating in the sector will need to explicitly address uncertainty through effective risk management and contingency planning. In many cases, even those investments with promising near-term prospects will need to be evaluated on the basis of their ability to adapt to future fluctuations in demand. The relatively favorable investment climate of the past decade attracted a bevy of companies that lacked the expertise to build and sustain a competitive advantage. With industry consolidation now on the horizon, those that survive will be the ones that develop the strategic and operational capabilities required to capture value and manage regulatory and market risk.
Beginning in 2005, a number of diverse factors came together to accelerate the growth of new renewable energy generation in the United States ( see Figure 1 ). Power prices jumped as natural gas prices reached a historical high, technology advances led to significant reductions in renewable energy costs, and the investment community began to invest in the sector in earnest.
But by far the biggest driver behind the growth of renewables during this time was meaningful policy support, at both the federal and state levels. With a focus on fighting climate change and jump-starting new industries, legislators adopted a wide range of incentive mechanisms to support the development and adoption of renewable energy technologies. These mechanisms included the renewable portfolio standard (RPS), renewable energy credit (REC), feed-in tariff (FIT), investment tax credit (ITC), and production tax credit (PTC), along with various cash grants.
More than 30 U.S. states have enacted renewable portfolio standards, which mandate the use of renewable power for a certain percentage of retail electricity sales and are largely seen as the most effective policy approach to supporting the growth of renewable energy. Though each state implements its own timing, targets, and compliance, most states start with moderate targets that, in some cases, reflect existing renewable generation capacities. However, in almost all cases, the targets for 2015 and beyond are well above 2005 levels, and as a result, they have stimulated much investment and planning. Wind power, the least expensive renewable power source, has been the dominant choice of most states to date, but technology-specific set-asides have