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Green Dealing

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

April 2012

the local, state and federal levels, concerning not only the environmental impacts of electricity generation but also of oil and gas production.

Whatever form and timing the final regulations take, a clean air movement is underway that likely will cause utilities and independent power producers (IPP) to retire older coal plants and defer building new ones—thus boosting the demand for replacement power capacity, some of which will be renewables. Meanwhile, as coal-fired generation comes under greater scrutiny, the remaining traditional fuel for zero-emissions power generation—uranium—has incurred a severe setback. The development of nuclear energy in the U.S. and Europe has been slowed in the aftermath of the nuclear disaster at Japan’s Fukushima plant. Additionally, Germany’s recent announcement that it plans to phase out all nuclear power by 2022 gave new impetus to the argument for alternative energy.

“But what about natural gas?” some might ask. Abundant, cheap, and emitting about half the CO 2 of coal, natural gas seems to be a no-brainer for the next round of generation construction in the U.S. However, as electric power companies consider options for their generation portfolios, the specter of gas price volatility likely will return. Current low natural gas prices are putting pressure on PPAs and discouraging renewables deals, but over the long-run—remembering that fossil power plants have life spans of 30 years or more—these prices likely will rise due to increased demand, liquefied natural gas (LNG) exports, and higher production costs, among other dynamics. While natural gas likely will be a big part of the future fuel mix, utilities are giving careful thought to balancing their generation portfolios to weather many different types of market scenarios. Through this process, some are discovering that natural gas and renewables are a good match. Natural gas and biomass, for instance, are assuming a new role as a counterbalance to the variability of renewables as power producers begin to co-locate and integrate these types of plants with solar and wind installations.

While federal tax policy is uncertain at best, and at worst seems detrimental to renewable development, other types of government policies have stepped in to fill the void. Chief among them are state RPS policies. These mandates support long-term demand for renewable energy, making investment in the sector attractive. The strength of RPS has been a key factor in regional deal activity and will continue to be going forward. 39 states plus the District of Columbia already have renewable portfolio requirements of some sort, and many are expanding their RPS provisions to include emerging forms of renewable power, such as small hydro and tidal. 4

Feed-in-tariffs (FIT) represent another policy shift that could spur renewable development. A few states, such as California, Hawaii and Vermont, along with several municipalities, have started implementing FITs, which offer developers a fixed price for the renewable power they produce. This policy, which is similar to the European model, will drive more development since it provides increased certainty of prices, without the cost or complications of negotiating a PPA. This likely will lead to more M&A, given increased development and a