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Green Dealing

Renewable M&A lives on despite death of Treasury cash grants.

April 2012

domestic supplies, natural gas prices likely will remain low in the near-term. The reliability, affordability and baseload capability of natural gas, along with its lower emissions profile, suggest that it likely will emerge as a strong competitor to renewables for the next tranche of generation build in the U.S.

Partly due to the shale gas boom, developers are finding that power purchase agreements (PPA) aren’t only yielding lower prices for energy, but they’re also becoming more difficult to obtain. Renewable power developers in particular are under tremendous pressure to secure long-term PPAs to obtain financing. In addition, the future need for renewable power among utilities remains uncertain, although renewable portfolio standards (RPS) are in effect in many states.

Another limiting factor is overall demand for energy, which remains relatively low in the U.S. post recession. Some of this deterioration might be due to increases in energy efficiency by consumers and businesses as well as changes in behavior. In a recent survey of consumer and business attitudes regarding energy and energy usage conducted by Deloitte and Harrison Group, 90 percent of consumers surveyed said the recession has caused them to become more resourceful, with 87 percent reporting that they’re looking at spending categories to see where they can save. 3 This frugality has naturally spilled over into electricity consumption. According to the study, 68 percent of consumers said they took extra steps to reduce their electric bills due to the recession. And even if the economy rebounds, 95 percent don’t intend to increase their electricity usage. Whether due to greater built-in efficiency or greater consumer resourcefulness—or both—the likelihood appears to be increasing that at least some of the recent demand declines could be permanent.

These adverse factors and the uncertainty around federal tax policy are certainly enough to give renewable proponents pause, but they likely aren’t sufficient to stop the advancing train of deals aimed at producing cleaner energy at palatable rates of return. Larger forces are at work. Several broad policy and market conditions, along with specific drivers within the subsectors of wind, solar and biomass, appear to have the momentum needed to overcome these drags on the M&A market. Propelled by collective strength in these areas, M&A activity is likely to increase over the next few years.

Current trends within energy markets bode well for renewable activity. Among them is pressure for power producers to move away from coal-fired generation. Recently, the Environmental Protection Agency (EPA) has been flexing its muscles under the Clean Air Act to control air quality through a series of rule makings. The Cross-State Air Pollution Rule—issued in July 2011 and recently stayed by a federal court—requires utilities to cut sulfur dioxide (SO 2) and nitrogen oxide (NOx) emissions that drift into other states. The EPA also issued mercury and air toxics standards, which seek to put national limits on mercury, acid gases, and other toxic pollution from power plants. Even while the legality of these rulemakings is being challenged by several states and power and utilities companies, numerous other proposed regulations are queuing up at