The skinny on renewable energy’s corporate backers

Capital starved alternative sector will turn to established firms, PwC says

March 01, 2011

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Illustration by Luc Melanson

Look for established corporate giants to snap up renewable energy companies this year, PricewaterhouseCoopers says. The budding green sector is poised for a wave of mergers and acquisitions as small project developers of hydro, wind and solar setups look to big firms – from Calgary-based TransAlta Corp. to infrastructure giant General Electric – to realize growth targets.

The current renewable energy landscape in Canada is fragmented, says a PwC report released last fall under the title M&A in the Canadian Renewable Energy Sector. As in other emerging sectors, “The majority of players are undercapitalized junior developers and there is no clear market leader.”

Small companies that have managed to carve out a niche in this emerging sector now face a predicament familiar to some of the “junior” oil firms busy plumbing wells in Western Canada’s oldest oilfields. “They get to a point in time where they’ve really proved up a good body of properties and then they can attract the interest and attention of a bigger company,” says Leanne Sereda, partner in energy tax services with PwC.

Europe led North America in renewable M&A activity through 2010, accounting for 60 per cent of deals compared to 16 per cent in Canada and the U.S. That could change, PwC says. “Many junior developers and their projects are approaching maturation and are ready for construction,” the report notes. Commercializing the ventures “will only become a reality via full or partial divestiture to larger entities with strong balance sheets and the ability to access project financing.” Even traditionally extractive companies like Teck Resources Ltd. have picked up on the trend. The mining giant recently inked a deal with Suncor Energy Inc. to develop a wind farm near Drumheller, Alberta.

But it is junior firms looking for larger project partners that will drive the M&A activity, report author Mike Bowman says. Young players need capital to develop increasingly larger projects, while larger firms and energy utilities are keen to stake out a claim in the budding sector as it becomes more established.

Winnipeg-based Sequoia Energy Inc., fresh from opening a Calgary office, recently purchased Calgary-based C-Free Power Corp. The acquisition fits the pattern described by PwC. Sequoia has spent the last five years amassing a suite of wind and hydro projects. The portfolio will benefit from “being part of a much larger Sequoia team with extensive experience in engineering, community relations and business development,” Sequoia president and chief executive Ron Diduch said in a statement announcing the deal.

Limited access to capital restricts growth in the renewable sector
Photo courtesy Enmax

Government is also emerging as a key player in driving growth in the renewable sector. Policy-makers “are starting to pay attention and are driving policies and subsidies into the sector to try and encourage development, and those subsidies are making renewable energy projects more economically viable,” says Bowman, vice-president of corporate finance with PwC.

Aggressive regulations in Ontario and British Columbia have already positioned those provinces as renewable energy leaders. Ontario’s feed-in tariff, which offers premium prices for energy generated from renewable schemes, helped drive M&A activity up by 116 per cent since the program launched in 2009. “If investors see that the governments are implementing long-term commitments to the renewable energy sector, then the capital and development will follow,” Bowman says.

Long-term yields available under the green subsidy will start to attract a greater share of institutional capital to the sector, he predicts. The regulatory and price certainty will also yield interest from a growing number of traditional oil, gas and utility players keen to diversify their asset portfolios.

The shift may seem incongruous, but renewable energy allows extractive fossil fuel companies to build capacity in another area of Canada’s increasingly diversified energy mix. Calgary-based TransAlta Corp. is certainly not coasting. The Alberta-based giant has been steadily investing in alternative power since 1997, including a blockbuster purchase of Canadian Hydro Developers Inc. in 2009. Wind and renewable power schemes now comprise more than 20 per cent of the company’s generation portfolio.

Smaller players are also juggling assets. Pipeline operator Veresen Inc., formerly Fort Chicago Energy Partners, recently bought three small hydro operations, including Calgary-based Pristine Power Inc., Vancouver-based Swift Power Corp. plus the B.C. hydro assets owned by Enmax Corporation.

Higher prices for fossil fuels will also drive growth in the renewable sphere, Sereda says. “Energy producers want to be energy producers, so they will allocate their capital, for the most part, to their best returns,” she notes. “But many of the big companies will also ensure that they have some level of involvement or some portfolio in the renewable energy sector. They want to be a part of the game, and as these things are evolving they want to make sure they understand the industry.”

Hedging against the unknowns of legislation aimed at reducing emissions of carbon dioxide blamed for global warming is also part of a growing sense of corporate social responsibility on display in Canadian boardrooms. Companies ranging from food distributor Loblaws to furniture giant Ikea Canada are participating in marginal ways. By far the largest player to directly invest in projects is Google Inc., through its green business operations division. The search-engine giant has partnered with several companies, including the Marubeni Corporation, on an offshore wind project that promises to connect 6,000 megawatts of power to the American electricity grid.

Canadians are well-positioned to partner with firms in emerging markets like Brazil, China and India, PwC says. Brookfield Renewable Power Inc. has made inroads in Brazil, where it owns and operates 34 hydro facilities.

In Alberta, renewable power is a tougher sell. The energy province uses coal to generate roughly two-thirds of its electricity. Widespread adoption of renewable systems to replace the base-load capacity generated by the dirtiest of fossil fuels won’t happen without reaching into the deep pockets of established energy titans, PwC suggests. That’s because, among other challenges, a greener future hinges on “increased access to capital.”

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