Much of the talk surrounding the Smart Grid involves the construction of new infrastructure to fit the needs of an intelligent, national grid system. And along with worries about cost and implementation are concerns that distributed generation—particularly in the form of onsite renewable power—is not being taken into account as the asset that it is. But that might be about to change.
Those of us involved in energy efficiency and reliability know that the demand for renewable energy—particularly solar panels—keeps rising. But for power utilities, incorporating this energy into its existing infrastructure can be complicated and costly. On the other hand, because the investment and installation costs of onsite renewable energy are often absorbed by the user, distributed generation sites can amount to an additional set of assets for a local utility.
A quick look at investment and acquisitions data indicates that this is exactly where the market is headed. This week, PwC US released its quarterly M&A snapshot, “North American Power Deals and Trends: Q2 2011” which indicates that for the first six months of 2011, “deal activity in the US power and utilities sector nearly doubled in the first six months of 2011 over the preceding year as companies spent $52 billion to acquire new capacity rather than build their own.”
In a statement about the PwC quarterly report, US power and utilities service leader John McConomy explains the trend:
“We’re continuing to see a very competitive landscape from strategic buyers for regulated assets, which has helped propel deal activity in the first half of this year. Corporates are finding value in distressed opportunities, acquiring capacity, and buying growth versus building new capabilities from within. The various stakeholders involved in these deals are also working together to reach timely regulatory approvals, helping to minimize risk and support the rationale behind transactions in the space. We expect that ongoing pursuit for additional and diverse generation capacity will sustain a continued interest for deal activity in the sector for the remainder of 2011.”
“There is ongoing attractiveness of adding renewable energy capacity to North American power and utilities companies' portfolios,” adds Rob McCeney, US power and utilities transaction services partner, PwC. “We expect renewable energy deals to remain on the radar for both corporate and financial dealmakers as a result of a general uncertainty around ongoing legislative and regulatory changes from region to region.”
According to PwC’s report, there was a 92% increase in energy transactions with domestic buyers: from 9 deals valued at $12 billion the second quarter of 2010, to 10 deals worth $18 billion in that same period of 2011. This uptick is significant because, as Peter Gardett from AOL Energy explains, “Companies are choosing to spend money and accept the lowered regulatory risk of mergers and acquisitions rather than face the shifting policy environment and multifaceted task of building new power plants. Utilities are also responding to a mix of regulatory uncertainty and political pressure by buying rather than building renewable generation. Hesitant to begin construction of new projects using renewable fuel when federal policies are evolving and government funds are increasingly elusive, utilities have been buying renewable generation to meet their state mandates, driving deal volume higher as purchases close.”
“The fragmented, regulated utilities industry is ripe for ongoing consolidation, but deals in the space have their challenges,” underscores McConomy. “Rising commodity costs, regulatory and compliance concerns, and growing investment requirements are just a fraction of the factors that can derail a power and utilities transaction. While deals in the space provide tremendous opportunities for growth and cost savings, these transactions are under heightened scrutiny, and dealmakers should tread carefully to ensure they have uncovered every significant potential risk.”
So what do you think? Can this increase in renewable energy investment by the utility industry help spur increased integration of distributed generation? Is the demand for renewable energy strong enough to guarantee that users will continue to create—via new construction or retrofits—onsite power systems that can then be tapped by the utilities? Is this the new face of the Smart Grid, or just the same old story?
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