Winds of Change: Investment in Alternative Energy

Winds of Change: Investment in Alternative Energy

Dolbeck, Andrew

Between the high price of oil and growing environmental concerns regarding the consequences of relying on petrochemical fuels, many companies are finding reasons to investigate alternative energy options. The quest for cleaner and more renewable energy sources is also driving energy sector mergers and acquisitions across Europe and the United States.

There are a number of reasons to invest in alternative energy. Environmental concerns, particularly regarding carbon emissions and global warming, are driving consumer demand for cleaner forms of energy production. There is also an economic incentive. oil prices have continued to rise, and oil conservation measures in the US and other countries are starting to impact demand, driving oil prices higher. Efforts to curb oil consumption include taxes on carbon emissions, mandated fuel-efficiency standards, and hybrid engine technologies. It looks like a good time to bring oil alternatives to market.

The times have been particularly hard on the US oil industry. No new US oil refineries have been built since the 1970s, and the hurricanes of recent years have taken refineries out of operation. Congress blocked a bill that would have opened up an Arctic wildlife refuge to oil drilling. Arctic drilling operations could have added an estimated one billion barrels per day to US oil production. Another motion, which would end a moratorium on offshore drilling outside the Gulf of Mexico, remains in debate.

Despite the oil industry challenges in the US, much of the alternative energy investment is happening overseas. The European Union is leading the pack on addressing climate change issues, with measures ranging from ratifying the Kyoto Protocol to passing laws to encourage and require the development of alternative energy sources.

And there has been a degree of M&A activity on the foreign alternative energy front. Norwegian wind power investor Vardar Eurus AS and Estonian investor AS Freenergy agreed in September to jointly acquire Estonian wind energy company Tooma Tuulepark OU. Germany’s E.On has announced a deal to buy the Spanish and Portuguese wind power assets of Denmark’s Dong for approximately $995 million including debt. Swedish industrial group Morphic Technologies AB agreed in August to acquire Helbio SA, a Greek company that develops technologies for the cost-effective production of hydrogen. Morphic stated that one of its benefits from the acquisition was adding Helbio’s technology to Morphic’s efforts to develop energy converters to store energy from renewable sources.

Foreign investors looking to capitalize on the demand for renewable energy sources such as wind power are turning their attention to the United States. The US market offers less competition from other alternative energy players. Wind farms, for example, only account for about one percent of US installed generating capacity. In some European countries, wind power accounts for up to ten percent. The US also has more open space. According to Antonio Mexia, the chief executive of Energias de Portugal, the US is the fastest-growing market for wind power. “In America you can put up a 200- or 300- megawatt wind park,” Mexia stated. “You can’t do that in Europe.”

Another incentive to investors is a range of US laws that encourage the development of renewable energy. At the Federal level there are laws offering tax credits to subsidize wind power producers. At the state level, 25 states have laws requiring their utilities to obtain a portion of their power from renewable resources. But US laws can also challenge potential energy investors. Energy regulation is more complex in the States than it is in many European countries. Until recently, many European utilities were state owned and they still enjoy monopoly positions and simpler regulatory environments.

Regulatory issues do not appear to have deterred energy companies from making US acquisitions. Energias de Portugal paid nearly $3 billion to acquire Horizon Wind Energy from the Goldman Sachs Group. The purchase doubled the amount of wind power operations in the Portuguese company’s portfolio. German utility E.On has agreed to acquire the North American assets of Irish wind power company Airtricity Inc. for $1.4 billion. Acciona Energia has acquired the wind farm development rights of EcoEnergy, a company based in Illinois. Spanish energy giant Iberdrola has acquired Oregon wind development company PPM Energy, as well as Community Energy of Pennsylvania, and more recently US wind farm companies Greenlight Energy and Orion Energy.

European companies are also turning their sights toward Asia for possible alternative energy investments. The environmental impacts of the current reliance on fossil fuels are global in scope, so it’s appropriate that the solutions may be as well. If the level of merger and acquisition activity is any indicator, the energy sector clearly sees alternative energy as a valuable investment. It is reasonable to expect that the renewable energy arena will continue to see significant M&A activity in North America and overseas.

Sources: New York Times, Nordic Business Report, Petroleum Intelligence Weekly, Washington Post, Waste News

By Andrew Dolbeck


Copyright NVST, Inc. Nov 12, 2007

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