Clean Energy Investment

Key Facts:Project financing stalls in 1Q11 while venture capital and private equity accelerate. Venture capital investment hits $2.7 billion, registering a two year quarterly high. European project finance activity impacted by reduction in feed-in tariffs.

China increases its dominance of public capital markets activity in the sector. Solar M&A drives deal numbers to three-year peak Venture capital: accelerating investment activity, particularly in green transportation Total venture capital investment soared to $2.7 billion in 1Q11, the highest quarterly investment tracked during the last two years. This represented a 59% increase on 4Q10 ($1.7 billion) and a 12% increase on 1Q10 ($2.4 billion).

Solar remains the largest sector for venture capital investment in 1Q11 ($740 million), ahead of green transportation ($429 million) and energy efficiency ($394 million). Green transportation was one of the fastest growing sub-sectors of venture capital activity with investment totalling $429 million across 25 transactions in 1Q11, a substantial increase on the $87 million invested in 15 transactions during the prior quarter. This rapid growth resulted in green transportation overtaking energy efficiency as the second largest sector for venture capital investment in 1Q11.

The surge in investment activity in the green transportation sector was driven by a small number of large financing rounds secured by US electric vehicle manufacturers preparing to scale-up manufacturing facilities and to launch their products. Fisker Automotive, a US-based manufacturer of luxury plug-in hybrid vehicles, secured $190 million in two financing rounds from undisclosed investors during the quarter. Similarly Coda Automotive, a US-based manufacturer of electric vehicles and advanced batteries, secured $76 million from a consortium of investors including Harbinger Capital Partners, Riverstone Holdings LLC, Aeris Capital and Angeleno Group.

Private equity: the mega deal returns Private equity investment also demonstrated substantial growth, with the total volume of private equity buyouts reaching $5.4 billion in 1Q11, a 58% increase on $3.4 billion in 4Q10 and double the $2.7 billion recorded in the corresponding quarter last year. The sizeable increase was accounted for by two deals $1 billion plus deals - the $1.7 billion acquisition of Ansaldo Energia Spa by First Reserve Corp and the $1.1 billion acquisition of the 400 MW Anholt offshore wind farm by PensionDanmark A/S and PKA A/S both of which were announced in March 2011. These are the first two $1 billion deals announced since September 2009.

Private equity development capital investment also expanded. Global investment reached $2.7 billion in 1Q11, an increase of 63% on 4Q10 ($1.7 billion) and over three times the volume in the corresponding quarter last year ($659 million). This increase was essentially due to Equity Partners Fund’s $1.2 billion investment in the integrated biodiesel producer BioJet International Ltd in February 2011.

A few bumps in the road for project financing Project financing volumes reached $42.1 billion in 1Q11, a 14% decrease on the $48.8 million recorded in 4Q10 but a 56% increase on the $27 billion secured during the corresponding period last year. Despite the quarter-on-quarter decline, 1Q11 still represented the second largest quarter in terms of project financing volumes since the beginning of 2009. Unexpectedly, onshore wind and solar continue to dominate the clean energy project financing landscape, accounting for 33% and 19% respectively of total project financing volumes, compared to 28% and 12% during 2010.

The higher proportion of onshore wind and solar this quarter was due to the absence of large hydro deals. In Europe, widespread changes to feed-in tariffs triggered unusual project financing patterns, particularly with respect to solar energy. Solar project financing volumes in Italy soared to $2.1 billion, up 19% on the $1.8 billion secured in 4Q10 and over six times the $329 million allocated to the sector in the corresponding quarter last year.

Developers are essentially rushing projects through the financing and connection process to ensure that they qualify for the highest possible feed-in tariff in anticipation of further cuts this year. In contrast solar project financing decreased markedly in Germany following the 13% feed-in tariff reduction that was implemented at the start of the year. Project financing totalled $58 million in 1Q11, an 84% decrease from $374 million in 4Q10 and a 90% decrease on the $606 million secured in 3Q10. “We are experiencing some abnormal project financing patterns across Europe as leading solar markets review feed-in tariff incentive mechanisms.” Douglas Lloyd, CEO of Clean Energy pipeline. “With project financing volumes so volatile, policy makers across Europe need to ensure that any changes to feed-in-tariffs are implemented incrementally to minimize market disruption,” commented Douglas Lloyd, CEO of Clean Energy pipeline.

One of the most dramatic swings in project financing in 1Q11 was in the US onshore wind industry, where securing bankable power purchase agreements is becoming increasingly difficult in light of rock-bottom natural gas prices currently at just over $4/mBTU, which is significantly below the price of $13.6 /mBTU at the start of the year. Only $2.6 billion flowed into onshore wind farms in the US in 1Q11, a 40% decrease on the quarterly average investment of $4.3 billion in the sector during 2010. China continues to dominate public market activity Clean energy companies secured $5.9 billion on public markets globally in 1Q11 (including IPOs, secondaries and convertible notes), less than half the $12.8 billion raised in 4Q10 but still a 13% increase on the $5.2 billion raised in 1Q10.

Last quarter’s exceptional performance was due to a small number of very large transactions including Enel Green Power’s $3.4 billion IPO on the Borsa Italiana. Clean energy public market activity is increasingly driven by China. Almost $3.0 billion was raised on Chinese public markets during the first quarter of the year, approximately half of the total $5.9 billion raised on public markets globally.

This represents a marked increase on 2010 when China only accounted for 20% of public markets capital raising. As a further sign of China’s dominance, the wind turbine manufacturer Sinovel’s $1.4 billion IPO on the Shanghai Stock Exchange was the largest public market transaction in 1Q11. “China is consolidating its dominance of global clean energy public market activity,” said Lloyd. “The fact that China accounted for nearly 50% of all listings this quarter is entirely unprecedented. With a series of Chinese equipment manufacturers announcing their interest in an IPO later this year, this trend looks like it has a long road to run.” Douglas Lloyd, CEO of Clean Energy pipeline In contrast public markets activity in Europe is stagnant.

There were only five European listings in 1Q11 totalling $424 million, compared with 14 listings totalling $6.3 billion in the previous quarter and nine listings totalling $4 billion million in the corresponding quarter last year. The postponement of Austrian solar backsheet manufacturer Isovoltaic’s IPO in mid-April, in what would have been Europe’s fifth largest renewable energy IPO since the beginning of 2008, underlines the lack of appetite in the current environment. Solar M&A fuels surge in deal numbers Clean Energy pipeline tracked 283 M&A transactions totalling $24.1 billion in 1Q11, an 18% decrease on $29.4 billion in 4Q10 (264 deals) but a sizeable 68% increase on $14.3 billion in 1Q10 (150 deals).

The average deal size in 1Q11 was $85 million, 23% below the average deal size in 4Q10 ($111 million) and 11% below the corresponding period last year ($96 million). The sizeable year-on-year increase in deal numbers was underpinned by a significant expansion in solar M&A activity. There were 63 solar M&A transactions in the first quarter of 2011, almost double the quarterly average of 35 during the course of 2010.

The biofuels sector was also very active in 1Q11 with 22 completed deals, twice the 2010 quarterly average of 11 deals. One development of note is the increasing appetite of large oil companies to acquire stakes in first generation Brazilian sugar cane ethanol producers. BP’s $680 million acquisition of Companhia Nacional de Açúcar e Álcool (“CNAA”), a Brazilian sugar and ethanol producer, was the fifth largest M&A transaction this quarter.

Shell’s $1.63 billion acquisition of Brazilian sugar and ethanol production firm Cosan Ltd in late 2010 was the largest clean energy M&A transaction of 2010. Source: cleanenergypipeline.com