Biomass attracts renewable energy investment

June 7, 2010 – KPMG International's annual survey of global renewable energy mergers
and acquisitions, entitled Powering Ahead: 2010, has pinpointed the hot spots
for deal activity in 2010–2001. Looking at which types of energy are most
attractive to investors, the survey found a change in appetite from last year’s
findings, with biomass most appealing, followed by solar and wind. To collect
the data, VB/Research was commissioned to survey 250 senior executives in
renewable energy between January and March 2010. The respondents were based in
Western Europe (33%), North America (29%), and Asia-Pacific (18%). The
respondents comprised corporate executives, investors, debt providers,
government bodies, and advisors.

Andy Cox, energy partner at KPMG in the UK, comments that the effect of government
subsidies is noticeable in the renewable energy mergers and acquisitions
market. “The research shows that the United States, India, and China,
particularly, are hugely appealing to companies and investors by virtue of
government incentives. Conversely, where subsidy regimes are stepping down, the
negative impact on companies directly affected is creating distressed
acquisition targets, such as in solar where schemes in Spain and Germany are
being canned.”

Renewable energy mergers and acquisitions has seen an increase of 145% in deal volume in
the first quarter of 2010 compared with the same period in 2009 (150 deals in
Q1 2010 and 61 deals in Q1 2009) and a 63% increase in value (US$ 14.3 billion
in Q1 2010 and US$ 8.8 billion in Q1 2009). However, it is not immune to global
credit conditions.

“While wind is still seeing enormous deal activity at the moment, our research has
shown that dealmakers, particularly the large companies such as the utilities,
are looking for the next global trend, and biomass looks set to be the ‘new
wind’,” says Cox. “Biomass plants have much greater potential to yield higher
returns than other renewable sources: a well executed biomass plant can deliver
substantially greater economies of scale than wind; and the heat generated from
incineration can supply neighboring buildings, creating another revenue stream.
More broadly, the potential for biomass to operate as a base-load power source
provides advantages in comparison to intermittent technologies such as wind and
solar in large-scale electricity system integration.”

However, Cox says that investors in biomass have important challenges to address such as
long-term fuel supply and pricing. “These challenges are hampering the
availability of funding for many projects. Furthermore, securing funding for
construction is no mean feat in the current environment with lenders requiring
a ‘turnkey’ construction contract, which effectively guarantees the construction
cost and delivery program for projects, with clear contractor penalties if
there are delays. Unfortunately, turnkey contracts in biomass do come at a
price: adding up to 20% to the capital cost. Despite the fuel and construction
challenges, it is interesting to see that the companies with the money to
support their convictions are driving biomass forward alongside their wind and
solar portfolios, which are arguably easier to deliver in the short to medium
term.”