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Renewables at a Crossroads

Investment opportunities in an evolving environment.

Fortnightly Magazine - June 2011

viable for photovoltaic applications, but all have the potential to drive disruptive change in the growth of demand for and the manufacturing supply of PV modules. One day, these new markets could dwarf the traditional rooftop market.

New Level of Scrutiny

Renewables have been a hotbed of activity in the past decade, attracting a wide variety of companies—asset developers, domestic and international utilities, technology companies, and financial companies among them. The evolving environment continues to present opportunities for investment.

However, given the uncertainty and complexity in the renewables marketplace, investment decisions are now much more difficult and require decision-making skills and tools that weren’t as essential before the economic downturn. Going forward, investment decisions will need to explicitly address uncertainty through effective risk management and contingency planning. For example, utilities that are looking to add renewable assets will need to take into consideration RPS mandate requirements, resource availability, regulatory treatment, subsidies, technology alternatives, technology costs, and rate impacts. In some cases, even those investments with promising near-term value will need to be evaluated on the basis of their ability to maintain downstream flexibility and adapt to future fluctuations in demand.

Furthermore, it will be critical for companies to develop the capabilities needed to both evaluate and add value to the assets and technologies that are likely to reenter the market in the months and years ahead. The relatively favorable investment climate of the past decade attracted a number of companies lacking the expertise to endure and win in this more difficult investment environment. For example, a number of small utilities and other companies made subscale investments in renewables where they could add little value, and they might soon be forced to divest those assets. The companies that can pick up the assets and position them to create a sustained competitive advantage will position themselves for strength in this market.

Successful renewable asset owners share a number of qualities. They typically have location and portfolio advantages, with assets in resource-abundant geographies and the ability to combine them with other existing assets in their portfolio. In addition, they have distinct capabilities, including technology knowledge, project financing expertise, project development skills, operations and maintenance ability, and trading and marketing savvy. These capabilities vary by the type of player. For example, trading and marketing savvy is more important for unregulated players that don’t have access to captive customers, particularly if they are pursuing merchant positions. Capabilities can also be complementary. Utilities and merchants with financial flexibility and operating experience, for instance, are natural partners for financially constrained developers with technology expertise.

Companies vying for ownership of renewable assets can accomplish this through either development or acquisition. Utilities, merchants, and international companies typically go down the development path, either on their own or through joint ventures with pure-play developers—though in some cases, they acquire skilled developers to add or expand their asset development capabilities. The other option is acquiring assets with PPAs from pure-play developers to mitigate development risks.

As a result, the asset development space is crowded; a wide range of companies have project pipelines in

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