[BETA] Fortnightly

The U.S. Treasury cash grants for new renewable power projects expired at the end of 2011. These incentives, which were implemented under Section 1603 of the American Recovery and Reinvestment Act of 2009, helped to support continued capacity additions throughout the recession. The impending expiration of these grants caused a wave of merger and acquisition (M&A) activity during 2011 as developers and financiers rushed to get deals done and to begin construction in order to meet the Section 1603, 5-percent safe harbor threshold by the Dec. 31, 2011 deadline.

With a history of fluctuating tax policy, the renewable power sector is accustomed to moving swiftly to take advantage of incentives. But even before this recent dash to the latest finish line, M&A activity in the renewables industry had been gaining momentum. Renewable deal activity strengthened in the five-year period from 2007 through 2011, with a notable exception. Activity dipped in the second half of 2008 because of the economic slowdown; however, it rebounded about a year later due to favorable government incentives and regulations. ¹

Over the last five years, wind has been the most popular subsector for renewable power M&A due to a more mature market and government incentives. M&A activity in wind, however, began trailing off in 2010 as low natural gas prices put increased pressure on the economics of wind. In contrast, solar deals gained momentum as falling panel prices made project economics more viable and as installed capacity increased. Utility-scale solar development also came on the scene, further encouraging deal activity. Meanwhile, M&A for biomass was limited due to feedstock supply and transportation constraints, but the subsector still managed to pique the interest of utilities seeking innovative ways to meet renewable portfolio standards. The geothermal and hydro subsectors, on the other hand, were relatively inactive, recording only a few transactions per year. This wasn’t unexpected, considering that hydro is well-established with limited new projects on the horizon, and only a handful of large companies are presently capable of and interested in pursuing geothermal initiatives since they require large capital investments and long lead times (see Figure 1).

Much of the deal activity during this five-year period has been composed of companies seeking to grow through acquisition of developers and individual projects. But lately, another kind of union has been gaining ground. Joint ventures (JV) have been on the rise as companies look to share both costs and risks and collaborate on new technologies. Since developers often have limited capital, this strategy also allows them to leverage the stronger balance sheets of JV partners to fund construction (see Figure 2). Additionally, this approach enables environmentally friendly investors to claim credit for being involved in a greater magnitude of projects and overall megawatts for relatively lower investment dollars.

Tax Policy Matters