Renewables: Big Boys Enter the Game

David R. Jones, Editor, Platts Renewable Energy Markets

The renewable energy industry, long the domain of small- to medium-sized companies peddling specialized technologies and developing small plants, has become a favorite target for acquisitions by utility giants, oil companies, and nuclear vendors. Wind energy was the first target; is solar power next?

THE TRANSFORMATION OF THE RENEWABLE energy sector from an industry characterized by independent companies to one increasingly controlled by large multinationals looks set to continue in 2008, as big companies already involved in renewables strengthen their holdings and new players seek to gain entry.

The process, under way for several years, accelerated in 2007. Mergers created new renewable energy powerhouses as Iberdrola wrapped up its purchase of Scottish Poweracquiring 2 gigawatts of renewable capacity in the processand added to its clean-energy holdings with a $4.5 million deal to pick up US utility Energy East. Acciona's acquisition of Endesa, Spain's largest power producer, created what Acciona called "a worldwide leader in renewable energies," and the merger of French companies Suez and Gaz de France brought further renewables capacity under one corporate roof.

Wind Economics Wins Buyers

Energy companies that previously had showed scant interest in renewable power looked to crack the market. French nuclear services giant Areva, for instance, in 2007 fell short in its bid to acquire German wind turbine manufacturer REpower but bought another German turbine company, Multibrid. US consulting firm Arthur D. Little notes that renewable energy has piqued the interest of petroleum majors, with BP, Shell and ConocoPhillips "investing in the most feasible and lucrative renewable energy sources in the future." Events of 2007 indicate that power providers and other energy companies are likely in 2008 to increase efforts to acquire renewable energy companies and operations.

Wind power, the most economically competitive renewables technology, has proved especially attractive for takeovers, both within the renewables industry and by outside companies anxious to diversify their energy resources, burnish their green credentials and cash in on the bountiful support policies of local, state and national governments around the world.

Several companies with new and enlarged renewables portfolios, including Iberdrola and Acciona, are planning initial public offerings for their consolidated renewable energy subsidiaries, and Energias de Portugal is considering an IPO for its worldwide wind power assets in 2008.

Why the growing interest by large energy companies in relatively small renewables operations? "We're seeing the emergence of large-scale companies wishing to build renewables businesses," Ernst & Young head of renewables Jonathan Johns told Platts. "For major companies, it's not a niche operation. It's a fundamental part of their business models."

New opportunities are opening in regional markets and emerging technologies. In Latin America, such countries as Argentina, Chile, the Dominican Republic and Mexico are welcoming and, under new laws in Argentina and the Dominican Republic, subsidizing investments in solar, wind and geothermal power. Morocco and Egypt in North Africa are stepping up their renewables promotion, with Morocco's state power utility, l'Office Nacional de l'Electricite, providing strong support for wind energy ventures.

New renewables markets also have taken hold in EU countries that have lagged behind their neighbors in developing renewable energy. Greece has targeted wind and solar power for growth and the new EU states in east Europe are looking to cash in on their abundant biomass resources.

Asian countries desperately seeking new energy sources, particularly power-hungry China and India, also are fueling demand for renewables technology. "The growth rates coming out of China are compelling," said Simon Gottelier, an analyst with London-based investment group Impax. The Chinese government's new targets should spur biomass, wind and solar energy growth of 20-24% annually through 2020, Merrill Lynch forecasts.

Previously unheard-from countries, from tiny Montenegro in the Balkans to Ecuador in South America, are springing up as renewables markets, offering developers a chance to seize new opportunities. Other nations with potentially abundant renewable resourcessuch as Russia with wind, geo-thermal and small hydropower assets and South Africa, whose enormous solar and wind energy potentials have barely been tappedawait enactment of renewables support legislation in 2008 so they can realize their potentials.

Wind energy, the renewable energy source most competitive with fossil fuels, stands poised to continue in 2008 its success of recent years (see table). With installed capacity approaching the 80 gigawatt mark worldwide, the Global Wind Energy Council predicts, despite supply chain interruptions, continued impressive growth.

"While the EU is still the leading market in wind energy with over 48 GW of installed capacity, other continents such as North America and Asia are developing at a tremendous pace," the council said. It expects the cumulative capacity of wind energy installations to reach 149.5 GW by 2010, more than double the installed capacity at the end of 2006.

1. Major Nations' Wind Capacity, 2000-2006. Source: GWEC Global Wind 2006 Report

No End in Sight

Impax's Gottelier also is bullish on the industry's prospects. "I don't see an end to growth in demand for wind power," he said, pointing to the purchase by Germany's E.ON—which he called "one of the more bearish utilities" on renewables—of Airtricity's North American wind assets for $1.4 billion. Those operations are expected to total more than 1,000 MW of capacity by the end of 2008, with 1,000 MW more in advanced development.

Gottelier agrees with the GWEC that the industry will be constrained, as it has been for several years, by shortfalls in wind turbine production. "Manufacturers can't make them fast enough," he said.

Other prospects are emerging in mature wind energy markets, including Denmark, Germany and Spain, where longstanding wind installations want to repower their facilitiesreplacing older, smaller-capacity turbines of 850 kW or less with larger 1- to 2-MW systems that occupy the same amount of space. As the US Department of Energy and other agencies work to develop turbines designed specifically to operate at low wind speeds, other opportunities could emerge in regions previously ignored because of modest wind resources.

The entry of large multinationals into the wind industry has produced more sophisticated deals. Energias de Portugal, for example, is monetizing tax equity credits that it gained in acquiring US developer Horizon Wind Energy from Goldman Sachs. As it prepared to complete its $3-billion acquisition, EDP sold the credits from 722 MW of Horizon's operational wind farms for $700 million in a deal arranged by a banking consortium lead by Citigroup. US wind facilities receive federal production tax credits of 1.9¢/kWh, for which the Portuguese company had little need.

Offshore Potential

Most of the world's current wind capacity lies onshore, and offshore wind energy could be the next great frontier, but questions persist. Though winds offshore are stronger and blow more consistently than those on land, allowing improved utilization and deployment of wind turbines up to 5 MW, and despite strong political backing from the European Union and countries like Germany and the UK, offshore wind farms have been plagued by problems.

Some are social: In the US, the UK and elsewhere, coastal residents have organized to fight what they call despoiling of their scenic views by wind turbines. Other problems are technicalseawater corrosion of turbine blades, gearboxes and other components have forced several wind farms, such as Denmark's Horns Rev and the UK's Kentish Flats, to suspend operations, and Vattenfall wind energy chief Anders Dahl has urged the industry to build more robust equipment for offshore facilities.

The result is that offshore wind energy's progress continues in fits and starts. Some projects, like the planned 1-GW London Array off the UK coast, are finally moving forward after receiving consent for an essential onshore substation to carry electricity to the grid. Germany also is forging ahead with plans for offshore wind farms. These two countries remain the best bets for offshore wind development in 2008.

But in the US, offshore wind development is stuck on the shoals. The Long Island Power Authority has torpedoed a planned 140-MW offshore wind parkdespite winning early backing from local environmental groupsbecause of rising costs. The developer of a proposed 420-MW wind facility off the coast of Cape Cod, Massachusetts faces continued battles with local opposition and members of Congress over the project in 2008. As a result, the US to date has no offshore wind operations despite strongly supportive state and federal government policies and thousands of miles of coastline.

Sunny Forecast for Solar

The outlook for solar energy is brighter. Solar photovoltaics are the world's fastest-growing energy source. Starting from a low resource base, annual global production of PV has soared six-fold since 2000, reported the Worldwatch Institute, a US think tank. New grid-connected array jumped 47% last year alone and solar PV capacity passed the 2 GW mark.

"Solar's been incredibly strong," particularly in China and the US, said Gottelier. "We've seen 40-50% annual growth rates, and growth rates will remain similar." America will provide "the key demand driver for that market," he said. Merrill Lynch forecasts that PV shipments worldwide will more than triple from 2.4 GW in 2006 to 9 GW by the decade's end.

Like wind energy, the solar PV industry has been pummeled by shortages, as PV companies compete with each other and with computer-chip makers for the high-quality polysilicon needed to make solar wafers. No solution is in sight. "The polysilicon market is in deficit, and probably will be through 2009-2010," Gottelier said.

While large companies acquire more and more wind energy companies, leaving just a handful of independent operators, the solar PV industry remains mainly in the hands of small and medium-sized companies. Gottelier doubts that they will become acquisition targets anytime soon. Solar PV is still more expensive than other power sources, unlike wind, which now can go head-to-head in many markets with natural gas.

"Solar, in broad terms, only works with subsidies," he said. "When the economics of solar projects become more compelling, they'll become more attractive."

The sleeper technology on the horizon, he said, is solar thermal power. Concentrating solar power or CSP, in which huge troughs focus sunlight on oil-filled containers to generate electricity, is seen as a means of generating utility-scale energy of 100 MW or more that can be stored for brief periods.

Projects are under way in sun-drenched parts of Israel, Spain and the US to construct CSP plants, some as large as 500 MW. America will serve as "the cradle of growth for this," Gottelier said. CSP currently generates power at about 15-20¢/kWh, he noted, but with depreciation included, the sunniest scenarios have CSP plants eventually generating at 3-5¢/kWhon par with fossil fuels.

Gifts From the Sea?

Another technology, marine energy, is still in its infancy but stands to make major leaps in 2008. Portugal, the US and the UK are vying to develop systems for harnessing power from waves and tides with the goal of building a job-creating export industry comparable to Denmark's wind industry.

The initial phase of the first commercial-scale wave farm is set to open off the northern Portuguese coast, and the UK has approved construction of the Wave Hub off southwest England to test up to 20 MW of equipment. Wave power demonstration projects are under way in the US, where the US Department of Energy and members of Congress have showed keen interest in its development.

Renewable energy's continuing growth in 2008 will hinge in part on the fortunes of fossil fuels, particularly the cost of crude oil, and in Europe, on the price of carbon emissions credits. High oil prices certainly make renewables more attractive, as does paying the price for CO₂ emissions from power plants. Oil price spikes in the 1970s sparked the first strong commercial interest in such renewables as solar and wind power, and a $70-$80 barrel of oil undoubtedly will increase interest in fossil-fuel alternatives.

But many analysts agree that renewable energy is no longer a minor or quaint component in energy companies' portfolios. Even if oil, gas and coal plants continue to dwarf wind farms and solar arrays, renewables have established their roles as a critical part of the energy mix.

Mounting public concern about climate change—and growing pressure for action—along with more government requirements for renewables generation and intense international negotiations on cutting carbon emissions have combined to solidify renewables' positions in international energy markets.

Large energy companies now acquiring their first renewable-energy assets or bolstering their existing renewables holdings have recognized the shape of things to come. Ernst & Young's Johns notes how in several recent mega-mergers, including Iberdrola's acquisition of Scottish Power and Acciona's purchase of Endesa, renewable energy assets were part of much larger dealsyet both Iberdrola and Acciona have held onto their new renewables operations. "This has not yet led to a divestment of renewable energy," he said. "They realize they need renewables for their future energy generation mix."

Key Renewable Energy Trends for 2008

*IPOs for renewable energy affiliates

*Growth in solar and wave energy

*Expansion into developing markets in Asia and Latin America

*Repowering older wind farms in Europe

*Offshore wind debates