Countries in the GCC, a region with a high concentration of hydrocarbons, need strong policy initiatives and closer involvement of the region's governments to promote the renewable energy sector, top-placed officials in the industry said.
Renewable energy, especially solar power, could help an emirate such as Sharjah, which is experiencing power shortage, supplement its supplies, they suggested.
"Harvesting the energy of the sun is a great possibility for the [GCC] region. It could also be a good way to prevent electrical shortages, like in Sharjah. This emirate is going through drastic shortage at the moment," Hélène Pelosse, the Interim Director-General of Abu Dhabi-based International Renewable Energy Agency (Irena), told Emirates Business.
"The challenges in the region [GCC] are pretty much the same as in a lot of countries: adequate policies are lacking. Here also, fossil oils are cheap; so there needs to be incentives to develop renewable energies," Pelosse said.
In a recent report, consultant KPMG maintain that financing remains a critical problem for companies operating in the sector and that government support is essential for renewable energy to spread its wings. Mergers and acquisitions are the order of the day in the sector globally, the KPMG report highlighted.
"One of the biggest challenges for the private sector in the GCC is lack of clarity surrounding government policies on green initiatives. In the EU and the US, for example, the private sector works closely and openly with government stakeholders – this creates efficiency and stability and encourages long-term private sector investment," said Holly Wu, Director of Marketing for Asia, Africa and the Middle East, Suntech Power Holdings, a Chinese firm that meets the bulk of emerging demand for solar panels in the GCC.
Pelosse added that the implementation of an effective feed-in tariff policy in the region could show the same impact as in Europe.
"Elsewhere, feed-in tariffs have proved their impact on the development of these technologies. In Germany, for example, only last year, the government supported €400 million (Dh1.74 billion) with the feed-in tariffs and it attracted €3bn in investment."
There are also technical challenges in the region, she pointed out. "There is a lot of potential for the use of solar energy, but what of sandstorms?" she asked.
Pelosse said solar panels used in the region have to be appropriately designed to meet those challenges.
Wu has not been disappointed with the steps that have been taken in the region so far.
"Some exciting initiatives are underway in the GCC, specifically Abu Dhabi's seven per cent renewable energy target by 2020; the Dubai Municipality's proposed green building standards; sustainable building standards in Saudi Arabia and Qatar; and plans for large-scale solar power plants in Oman and Jordan.
"The next step for the GCC would be to introduce region-wide initiatives and incentives much like the EU's regional goals and targets for green energy."
Pelosse pointed out that Kuwait and Bahrain have similar plans.
"The UAE is not the only one with renewable energy targets: Bahrain and Kuwait aim at five per cent renewable energy for their electricity demand by 2020," she said.
KPMG, which recently released a detailed report on the sector, said the financial condition of the sector remained demanding.
Although banks are keen on the renewable energy sector, securing finance had become harder over the past year for over 50 per cent of the respondents KPMG surveyed for its report.
Two of the main reasons that the consultant identified for tougher financing are a substantial increase in margins (approximately three times the average margin offered three years ago) and a debt market that is growing less rapidly than the sector's ever-growing financing requirements.
"Financial investors were most seriously affected – 48 per cent faced harder financing conditions, forcing many of them to re-consider their leveraging strategy. Our 2010 survey indicates that only 36 per cent of financial investors worldwide are expecting to use leverage above 50 per cent over the next 18 months [ie, a debt-to-equity ratio greater than 1:1]," the KPMG report noted.
"The majority [64 per cent] anticipate using leverage below 50 per cent [i.e., a debt-to-equity ratio less than 1:1]. This is in stark contrast with the 2008 survey, when half of the surveyed companies were targeting leverage above 50 per cent," it added.
However, the availability of financing is forecast to improve as banks become less risk-averse than they were during the past 12 months, KPMG said. A third of the debt providers KPMG surveyed for its report indicated an intention to increase their exposure to the sector in the next 18 months.
In parallel, 46 per cent of the surveyed corporates planning acquisitions over the next 18 months are considering using bank financing to support their acquisition plans. Concrete plans that have already been announced include Rabobank's intention to raise up to $1.5bn for a fund that will provide project finance for renewable power projects across Europe.
Consistent with last year, however, there remains a significant gap between the valuation expectations of sellers and acquirers, KPMG said.
"Looking forward, many industry players and investors expect valuations and deal sizes to increase this year, although pricing is expected to remain problematic."
Transactions are currently closing at around 9x historic Ebitda (earnings before interest, taxes, depreciation and amortisation), equating to an average discount of about 30 per cent to 2006-2008 valuation multiples. However, over two-thirds of the surveyed corporates do not expect to pay more than 5x Ebitda for renewable energy companies or projects, KPMG pointed out.
Mergers and acquisitions
KPMG's surveyed respondents agreed that merger and acquisition activity (M&A) is picking up, with over 90 per cent intending to undertake a transaction in the next 18 months.
"In terms of completed M&A deals, the solar sub-sector continues to lead in 2010, with wind following closely behind. Last year, the solar and wind sub-sectors together accounted for approximately 50 per cent of the 300 completed M&A deals," KPMG said.
Equity capital market activity has also started to recover, with optimism most evident in China, since it lifted its IPO freeze in June 2009, and North America, where the surveyed respondents are showing the greatest confidence in securing public equity funding, KPMG said.
Although a global agreement on emission targets was not achieved at the Copenhagen Climate Change Conference (COP15) in December 2009, the lack of a binding agreement is unlikely to discourage corporates and investors from investing further in the renewable energy sector, KPMG said.
Among the respondents KPMG surveyed, an overwhelming 88 per cent believe that the result of the summit will not affect M&A activity worldwide.
This is despite an agreement during the summit to provide $30bn in short-term financing to support developing countries. Regional climate change concerns, energy security issues and economic rationale are all prompting developed countries to provide the renewable energy sector with a range of increasingly differentiated incentives and grants, KPMG said.
Government initiatives will also drive cross-border M&A activity, the consultant added. "Countries with attractive incentives will enhance their appeal to foreign corporates and investors, who are increasingly looking for scale and a global footprint. Surveyed respondents strongly agree – over 65 per cent of the corporates and investors based in North America or Europe intend to invest or acquire a renewable energy company or project outside their own region in the next 18 months.
The disappointing outcome of COP15 is not expected to have any impact on global M&A activity, KPMG stressed.
Many countries have now approved and are distributing significant incentives and stimuli in the form of direct grants, feed-in-tariffs and loan guarantees.
Since the summit, 43 industrialised countries as well as 41 developing nations have submitted national targets and action plans to reduce carbon emissions on a national level.
These countries represent 80 per cent of the global energy-related carbon dioxide emissions.
Other factors that continue to fuel M&A activity in the renewable sector include energy security concerns, fluctuating oil prices and the availability of renewable 'feedstock'. In the background, government-financed clusters are nurturing the development of early stage technology companies and innovators.
In the first few months of 2010, the number of completed deals in the renewable energy sector more than doubled in comparison to the corresponding period last year, KPMG said.
As 2009 wore on, activity in the M&A arena and public markets picked up pace.
On the M&A front, more and more companies with strong balance sheets tried to capitalise on attractive valuations and smaller companies' desperate need for capital. The year finished with over 300 acquisitions worldwide, totalling over $53bn in value.
M&A in the solar sector is being driven in three ways – market consolidation, to increase the dominance of existing players through M&As; technology motivated acquisitions; and downstream acquisitions, to improve access to the end-user, KPMG said.
The solar market stands out in this respect with 24 per cent of the total M&A deals in 2009 covering technology companies, manufacturers, service providers and installers. China, which supplies about half the world's solar modules, has seen a big share of the action, KPMG revealed.
This sub-sector has been impacted by weakening demand in the wind turbine market. The deep backlogs in turbine orders that were commonplace in early 2009 have been replaced by rapidly shrinking orders as developers struggled to obtain financing for their projects.
Industry players reacted swiftly to this trend. In the wind sector, large project buyers in 2009 and 2010 were from Europe, KPMG said. It included Italy's Enel, Spain's Iberdrola, UK's Renewable Energy Systems, Ireland's Bord Gais Eireann and North America's NextEra Energy Resources. Gamesa was also active, announcing its intention to acquire a minority stake of German offshore wind developer BARD in February 2010, the consultant enumerated.
On the hydro front, the action lied in North America, KPMG said. "Several large transactions were announced in Canada by companies such as BC Hydro in June 2009 (C$825m) and Transalta Corporation in July 2009 (C$754m).
In addition, the Canadian Brookﬁeld Renewable Power Fund, formerly known as Great Lakes Hydro Income Fund, acquired 15 hydroelectric plants from Brookﬁeld Renewable Power Inc. in Biomass, KPMG said.
Biomass shining through
Looking at which renewable subsectors are most attractive, KPMG's survey found a change in appetite from last year's findings with biomass (37 per cent) increasing to the same level of appeal as solar (36 per cent) and onshore wind (35 per cent) for corporates and investors.
"While wind is still recording significant deal activity, our research has shown that dealmakers, particularly large companies such as the utilities, are looking for the next global trend and biomass looks like it is positioned to be one of the most active sub-sectors for M&A in the next 18 months," KPMG said.
Biomass plants are capable of yielding higher returns than other renewable energy sources and operate more effectively as a base load power source in comparison to intermittent technologies such as wind and solar, KPMG said.
However, the biomass sub-sector still faces difficult challenges such as securing finance for construction, identifying long term sources of fuel, and the visibility of fuel prices, the consultant added.
"Yet despite these 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," KPMG said.