If any sector would seem unlikely to be singled out for its robust dealmaking outlook, renewable energy might seem to be it. After a surge in investment and in installations over the past decade, renewable energy seemed to run out of road in 2012, undermined by extreme competition, low natural gas prices and limits on government assistance in a budget-constrained environment.
But 2012 proved to be a surprise for analysts of the renewable energy sector, analyst from consulting and accountancy firm Deloitte said in their most recent overview of the sector’s merger and acquisition activity.
“After all, renewables faced an uphill battle in 2012, due to low power prices, weak electricity demand, and perhaps most notably, vacillating federal tax policy,” the report authors note. “With so much deal activity in 2011 and so little reason to be optimistic that federal tax policy would continue to stimulate wind development, some expected 2012 to be the first scene in a disappointing-and perhaps lengthy-second act for renewable M&A activity.”
“The events of 2012, however, told a different story,” the report claims. “Not only did M&A activity remain strong, but many also contend the stage has been set for continued momentum in 2013 and beyond.”
The most striking part of the report’s outlook for the sector is that it is predicated on fundamental demand growth, not further consolidation as more renewable energy firms struggle. Declining technology costs are bringing costs for some generation types – including wind power – close to grid parity with traditional forms of power generation.
The speed at which renewable generation can be added to the grid also makes a difference, the report authors say. While a new natural gas fired facility can take three to four years to permit, state renewable programs and the lack of fuel infrastructure required mean a renewable energy facility can potentially go into service in less than half that time.
The Megawatts Void
Coal retirements will play a major role even as total electricity demand struggles to grow.
Current trends within energy markets support this favorable outlook. “Among them are EPA regulations, which are forcing the retirement of older coal-fired plants,” the report said. “More than 9 GW of coal-fired generation retired in the U.S. in 2012 alone, and as much as 60 to100 GW is expected to retire over the next few years according to various industry estimates.”
“This movement is creating a ‘megawatts void,’ which emissions-free renewables can step in and fill a portion of much easier than some other forms of generation can,” even potentially new natural gas, the report authors said.
Fundamentally, the fact that the renewables sector managed to rack up advances in total market share and remain a core component of utility planning despite the headwinds of 2012 speaks to the sector’s health, Deloitte argues. With public policy permanently shifted in favor of replacing coal generation – until recently more than half the US national generation portfolio – renewable energy has a long way to grow.
For more from the report, download the full PDF here.