UK Renewable Treasure

UK can be top investment destination if Government gets Electricity Market Reform right.

Positioning the UK as a market of choice for financial and human capital will be key in the face of increasingly strong competition. Global investment activity is growing but must be harnessed to provide a buoyant future for the sector and to meet the low carbon agenda in the UK

Absolute clarity and consistency of the UK government's energy policy is needed urgently if future investment in the sector is to be attracted, according to Green Power: 2011, KPMG's annual survey of global renewable energy mergers and acquisitions (M&A).

The survey, which highlights the hot spots and drivers of deal activity around the globe, uncovered that 75% of respondents would have invested more in the UK over the last 3 years if regulation and legislation had been clearer and more consistent, indicating the extent to which investment is being constrained. 

Andy Cox, energy partner at KPMG in the UK, commented: “Just a third of all survey respondents indicated an intention to invest in the country this year, falling to less than a quarter of those respondents from North America. Yet the UK should be one of the leading renewable energy markets in the world, given its abundant wind, wave and tidal resources, its track record of technological innovation and its strong financial centre in the City of London”.

“Whilst the outcome of the Electricity Market Reform should ultimately be beneficial to the renewable energy sector, there is now a real risk of an investment hiatus as investors and corporates await the White Paper and its implementation which is, in turn, causing genuine concern that the UK will not meet its EU 2020 emissions targets. With three quarters of dealmakers willing to invest more capital in the UK with the right market mechanisms and structures in place, there is a clear opportunity for the coalition government to secure the UK's position as a world leader in renewable and offshore technology and, therefore, as a top destination for investment.”

Globally, 2010 was an active year for renewable energy M&A, with a total of 446 deals completed in the period, representing an increase of over 70 percent on the 260 deals closed in 2009. And M&A activity levels are showing no signs of cooling off in 2011, as a record 141 renewable M&A deals totalling US$11.2bn were announced in the first quarter of the year, representing more than double the average quarterly value of US$5.5bn in 2010, over an average of 96 announced deals.  Cox continued:

“The renewable M&A market has had a busy start to 2011, with a substantial jump in global activity which looks set to continue.  In particular, our survey has shown that deals in the US$50m - US$0.5bn bracket are likely to see the greatest increase whilst, overall, higher competition for targets is expected to push up global valuations driven by better financing conditions, a post-Fukushima reinvigoration of sentiment and soaring oil prices as well as some new acquirers, including Asian manufacturers and potentially pension funds.”

However, government incentives remain as important as ever to the sector, particularly in Western Europe. The survey showed that more respondents planning to invest in the major Western European renewable markets cited incentives as the primary motivation over any other factor. Cox continued, “Our survey confirms the importance of incentive regimes to investors in Western Europe.  The acceleration of cuts to feed-in tariffs for new projects across Western Europe over the last year is driving growing competition for existing projects with attractive guaranteed feed-in tariffs at higher historic levels and providing a temporary boost to deal activity and acquisition multiples in Europe.  As already evident in the UK, without further stimulus the level of M&A activity, in solar photovoltaic assets in particular, can be expected to significantly decline once operational projects with attractive feed-in tariffs have long term owners.”

According to the survey, 78% of respondents expected the global renewable energy market to be driven by new investors from China, while 59% expected new acquirers from North America to develop the market.  

Unfortunately for Europe, a heavy bias towards local investment was also revealed, with more than double the number of Asian respondents intending to invest in China and India than those intending to invest in European countries.  The survey showed a similar approach from North American investors, who prefer to invest domestically over China, India, Germany and the UK by a ratio of at least 2:1. Cox added:

“At a time when debt-laden European countries are facing government stimulus being reined back or curtailed, these findings confirm that European countries will not be able to rely on trans-continental investment to plug their domestic renewable energy funding gaps without additional steps such as EMR in the UK. Providing clarity, credibility and a stable Government policy in the near term will be key.” 

The survey also recognises that the impact of Fukushima on existing and new nuclear plant programs presents an opportunity for the sector as it increases the attractiveness of renewable energy assets in the global market.  

Cox added, “Having prompted many nations to begin a re-evaluation of their position on nuclear power, there has already been an increase in investors' appetite for renewable energy assets, reflected in a dramatic rise in global renewable energy stock prices post-Fukushima.  While the comparative costs of delivering clean energy mean that nuclear will underpin future generation (particularly in the UK), our survey has shown that dealmakers expected an increase in M&A activity in the sector this year even before the events in Japan.  Following Germany's decision to take seven of its oldest nuclear plants offline, China's reduction in its 2020 nuclear capacity target and potential delays to programs in other countries, investors will no doubt be reassessing the additional opportunities created for the renewable sector.”