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Green Dealing

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

April 2012

will pursue operating projects due to the need for an increased share of green energy in the portfolio in light of stricter RPS mandates. Financial institutions are expected to focus primarily on assets that are nearing revenue generation, but outside of that, they likely will remain cautious due to the impending PTC expiration. However, if PTCs are extended beyond 2012 or the proposed investment tax credit for offshore wind is passed, these investors likely will show renewed interest in the subsector. Finally, as with solar, infrastructure investors probably will look for solid and stable returns from operating projects. On a broader level, the impending PTC expiration likely will result in development pipelines or early stage development projects getting reduced valuations for M&A or possibly requiring earn-out structures as a method to ascribe value to such assets if included in a portfolio.

Biomass Growth: In the biomass sector, the need to develop efficient technologies to achieve favorable economics will drive future M&A activity. At present, many biomass producers have technology gaps, which they will try to fill by acquiring companies or entering into JVs. The most successful in this subsector will find ways to improve capacity factors, diversify feedstocks, and co-fire with coal and natural gas to enhance reliability and reduce costs.

Additionally, improved access to funding and continued government support will attract large companies to invest in the subsector. Power producers who use biomass will continue to gain from renewable-related incentives under the American Recovery and Reinvestment Act and financial assistance for biomass feedstock production and delivery under the USDA’s Biomass Crop Assistance Program. State RPS requirements also are likely to drive demand. The volume of future deals, however, will depend largely on the EPA’s decision about whether biomass should comply with greenhouse gas permitting requirements. Currently, the EPA has deferred this decision until January 2014. 9

IPPs likely will pursue JVs with companies associated with paper and wood-based products to provide easy access to raw materials for running biomass plants. They also will target smaller IPPs that provide geographic diversification. Utilities probably will seek JVs for new project development with co-firing capabilities to reduce reliance on a single source of generation. Financial investors likely will seek projects that are in the late stages of development that have received government approval, viewing biomass as a growing industry that can offer high return on investment and substantial growth.

Green Shift

Overall, both broad market conditions and subsector drivers suggest that utilities will remain very active in renewable M&A, driven by a need to meet RPS, balance generation portfolios, and grow in the absence of organic opportunities. Much of this activity will center on acquiring generation projects and development pipelines—most likely with the exception of wind—as well as partnering with other investors to spread out exposure to individual projects and in some cases divesting renewable projects that no longer meet their criteria.

In the near-term, utilities are likely to continue investing in renewables through unregulated subsidiaries. For example, Allete recently formed an unregulated generation subsidiary to develop clean energy projects. In general, utilities likely