With billion-dollar deals becoming the norm in clean energy, investors have “confidence” in the sector. But after rebounding from the 2008 financial crisis, companies are facing a new range of diverse challenges.
If the 2008 financial crisis was a swift punch to the face for the clean energy industry — and for the whole energy sector — the global uncertainty of 2011/2012 is more like a rolling series of blows to the body. In both cases, the sector continues to stand back on its feet. But it’s still going to be a hard fight to the top.
In the aftermath of the financial implosion in 2009, mergers and acquisitions in the sector fell by one third, venture capital capital investments fell 50%, and total global investment grew by only 4%. Today, as markets have recovered and deal flow has increased, we’ve seen a massive surge increase in investment — with global investment up by two thirds since then.
However, even while leading investors continue to say that companies not investing in clean technologies “risk becoming irrelevant to the marketplace,” there are still plenty of risks involved for companies doing deals. Those risks, which range from Europe’s debt crisis to the political freeze in the U.S., are creating what experts call “rolling uncertainty.”
As the global advisory firm PricewaterhouseCoopers explains in a new report on 2011 mergers and acquisitions in clean energy, decisions are being made with a far more difficult range of options to consider:
The advice in the first half of 2009 was ‘if you don’t have to be in the market, stay out of the market. Wait a few months until things improve and confidence and a sense of calm is restored. Then go with your deal.’
But that all assumes you have a ‘rear view mirror event’. In 2012 there is no equivalent. Instead, there is great uncertainty about whether things will be better or worse in six months time. In this environment, perhaps paradoxically, a complete brake on dealmaking makes less sense. If a deal is highly strategic and mission critical, then parties may feel it is worth doing if it can get done on the right terms.
With the uncertainty over how long the constraints will persist, staying out of the markets just in the hope that things will improve cannot be assumed to be the right strategy.
Surrounded by this swirl of complicated factors, businesses are making tough decisions about how to enter or increase their participation in the fast-moving clean energy market.
For example, the overcapacity in solar has been great for driving down the price of equipment, but it’s made investing in solar manufacturing very tricky. In 2011, the French oil giant Total bought a 66% stake in the high-efficiency solar producer SunPower for $1.3 billion. While SunPower has a strong project development pipeline and the highest efficiency technology on the market, it has been hit hard by the flood of cheap modules like virtually every manufacturer. Total, the 14th largest oil and gas company in the world, says it will “turn around” SunPower. But a chronic oversupply of modules and a constantly changing policy environment make the situation very tenuous — even with SunPower’s strong technology and brand advantage.
This uncertainty hasn’t stopped clean energy deal flows. In fact, they increased by 40% in 2011 to $53 billion, according to the PwC report. And for the first time, efficiency, wind, solar and bioenergy surpassed activity in hydro — a mature sector where enormous (and often environmentally questionable) projects are more common. These “new renewables” are now reaching the scale where billion dollar mergers and acquisitions are more common.
As we predicted in last year’s report, we are seeing particularly strong momentum behind deal activity in the solar and energy efficiency sectors. Buoyed by the increase in big transactions, deal value in these two sectors has nearly doubled year on year. Together, they account for the vast majority (79%) of the US$15.3bn increase in the total value of all renewables deals.
What does all this mean? PwC expects deal flow to increase again in 2012. That means we’re likely to see more consolidation — particularly in the wind and solar sectors — as upstream companies deal with an oversupply of solar panels and wind turbines, Chinese players look to branch out into new markets, and emerging companies hook up with more mature corporate partners.
One other thing to look for in 2012: Expect critics to label some of these challenges — some of which will lead to the downfall or restructuring of companies — as a “failure” of clean energy. In fact, this is just the natural course for a fast-growing, disruptive global industry pushing forward in a tumultuous environment.