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Green Dealing

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

April 2012

will further drive M&A, as will the entrance of foreign companies that are looking to purchase U.S. assets in an effort to compensate for weak demand elsewhere.

Smaller IPPs likely will seek to diversify project portfolios and grow quickly while eliminating competitors in the market. Utilities probably will eye development projects in advanced stages or newly built ones in an effort to pursue growth opportunities and to assist with RPS compliance—rather than just using PPAs. In some cases, utilities will look to acquire assets through a non-regulated business to fulfill a broader growth strategy, and they likely will seek JVs with developers to install rooftop solar panels. Financial institutions are expected to focus primarily on assets that are nearing the point where they’ll begin generating revenue due to a highly competitive and maturing market. Foreign investors most likely will continue looking to the U.S. as a means of expanding their global footprints and broadening their platforms. Finally, infrastructure investors probably will look to solar for solid and stable returns from operating projects.

Wind Options: Wind projects and deals are being driven by the federal PTC, but it’s set to expire in December 2012. Uncertainty over extensions of this incentive will affect deal activity in the near-term as will low natural gas prices. The abundance of cheap domestic natural gas already suppressed wind development in 2010, prior to its resurgence in 2011, driven by the expiration of the Treasury cash grants. U.S. Henry Hub benchmark gas prices ranged from $3 to $5 per MMBtu for most of 2010 and 2011, far below the $13 peak of 2008. 7 Wind project returns are falling as well, since utilities are now willing to pay less for PPAs in light of competitive natural gas options. This will affect the number of wind projects coming online and reduce the amount of transactions.

While this sounds like a lot of bad news for wind developers, other factors likely will offset some of these drawbacks, possibly even tipping the balance the other way. For instance, government policy in the form of RPS mandates has increased deal activity from utilities, which are becoming major buyers of wind assets. Meanwhile, a proposed ITC for offshore wind and tougher EPA-sanctioned pollution controls could spur a move toward renewables and possibly boost deals, if they come to pass. Even current low natural gas prices could be a driver for wind energy, as companies look at renewable M&A for longer-term price stability and portfolio rebalancing. Wind projects have another thing going for them: They can easily access capital since the technology is mature. Private investment has matched government support, making projects economically viable and serving as a moderate driver for M&A. In 2010, the U.S. was the global leader in wind project funding activity with 18 deals worth $3.8 billion and 10 debt funding deals worth $940 million. 8

IPPs probably will seek generation-stage wind projects or those under construction to access capital, a need that’s being exacerbated by the end of Treasury cash grants and a trend toward larger projects. Utilities likely