Strength in numbers: US wind and solar companies realign for growth

The last year has seen a wave of mergers and acquisitions in the renewable world, with many new players moving from the traditional energy sector into the new and emerging areas. By Elisa Wood.

Will Exxon some day control the US renewable energy sector? That question is likely to elicit a chuckle, indeed a roaring laugh, in environmental circles. The green energy holdout – criticized for funding a think tank that said global warming is as likely as an alien invasion – seems an improbable patriarch.

But industry watchers say surprise is afoot in the rapidly changing world of renewables. Maybe it won’t be Exxon, but expect unusual entries, new ownership configurations, and unlikely unions in the US market. Indeed they are already occurring.

‘Broadly speaking these are industries that are maturing. There is realization that these technologies are probably going to be here to stay. Big players are entering and the small players are scrambling to compete’, said Sean Biggs, managing consultant with Navigant Consulting, a Chicago-based firm that has authored several major renewable energy studies.

A sign of the times. The Trent Mesa wind farm in Arizona is being built and developed by the USA’s largest transmission operator american electric power

Intriguing alliances are emerging as US businesses prepare to incorporate greenhouse gas restraints into bottom line strategies. As a sign of things to come, ten energy, financial and industrial giants, some of them major polluters, formed an unlikely partnership in early 2007 with several non-governmental organizations that are devoted to environmental causes. Called the US Climate Action Partnership (US CAP), the alliance intends to promote government policy that can reduce greenhouse gases 60%-80% by 2050, in part through support of clean energy technology. Members include Alcoa, BP America, Caterpillar, Duke Energy, DuPont, FPL Group, General Electric, Lehman Brothers, PG&E, PNM Resources, Environmental Defense, Natural Resources Defense Council, Pew Center on Global Climate Change, and the World Resources Institute.

Big players align for carbon advantage

While US CAP is a policy alliance, others are pursuing more formal business pairings, through mergers, acquisitions and strategic business partnerships aimed at increasing profit pools. These changes come as Congress talks more seriously about imposing carbon restrictions, and many states require that utilities purchase an increasing percentage of clean energy. ‘You are clearly seeing a conscious move by larger generators or large utilities to diversify their play with renewable technology’, said Paul Afonso, an attorney with international law firm Brown Rudnick, and a former Massachusetts energy regulator.

For example, AES Corporation and GE Energy Financial Services in early 2007 unveiled a US partnership to develop greenhouse gas emission reduction projects.

Together, the two companies plan to create annual production volume of 10 million tonnes of greenhouse gas offsets by 2010. ‘Our capital, sales channels and risk management – along with AES’s expertise in project development – make for a powerful combination that will lead the US carbon market’, said Kevin Walsh, managing director and leader of renewable energy at GE Energy Financial Services.

The partnership intends to primarily pursue methane emission reduction, but it also will develop renewable generation and energy efficiency projects to generate the offsets. The companies will then sell offsets to large businesses that seek voluntary carbon compliance with an eye toward possible future mandatory emissions limits.

‘This initiative will help GE Energy Financial Services double its already sizeable US$1.5 billion portfolio of investments in renewable energy projects by the end of 2008, and will contribute to GE’s ecomagination programme’, said Alex Urquhart, president and CEO of GE Energy Financial Services. GE ecomagination seeks out strategies to help customers meet environmental challenges while reducing GE’s own greenhouse gas emissions.

GE’s goal is to reduce its greenhouse gas emissions 1% by 2012, reduce the intensity of its greenhouse gas emissions 30% by 2008, and improve the company’s energy efficiency 30%by the end of 2012.

To that end, GE announced plans in early 2007 to pay $270 million for a 410 MW portfolio of wind farms owned by Babcock & Brown. The deal calls for GE to invest 70% of the Class A equity, with the balance provided by a subsidiary of financial company Wachovia Corp. The six wind farms are in California, Illinois, New Mexico and Pennsylvania

Meanwhile AES, one of the largest global power companies, has formed alternative energy group that is expected to invest $10 billion in wind, liquid natural gas and climate change sectors over 5-10 years. The international company plans to produce 40 million tonnes of greenhouse gas emission offsets per year by 2012

PPM Energy, a subsidiary of Scottish Power and one of the United States’ leading wind power developer, looks set to be acquired by Spain-based Iberdrola ppm energy

In addition, late last year AES announced a move into the US transmission market that is linked to renewables growth. AES is acquiring Trans-Elect, formed in 1999 as the country’s first independent transmission developer. David Gee, President of AES North America, said AES made the move because it sees significant potential for transmission development in North America, in part because of wind power projects sited far from load centres.

In another closely watched transmission deal, American Electric Power and MidAmerican Energy Holdings, two utility powerhouses, have proposed a 50:50 joint venture company to build and own transmission in wind-rich Texas. Favourable state policy and a deregulated marketplace have made Texas the largest wind energy producer in the nation, last year toppling California from the post.

If approved by regulators, the new joint venture will bring tremendous assets and expertise to the Texas grid, which is in need of expansion to accommodate more wind growth. AEP is already the largest owner of transmission in the US, as well as a major generator. MidAmerican is the fifth largest owner of transmission.

‘As the owner of the nation’s largest transmission system, we want to leverage our 100 years of expertise in planning, siting, building and operating transmission lines into a vibrant transmission business opportunity’, said Michael Morris, AEP Chairman, President and CEO, when the two companies signed a memorandum of understanding in November. ‘The transmission investment needs in AEP’s Texas footprint alone are expected to exceed $1 billion over the next several years to address existing congestion and support development of additional generation, particularly renewables’.

Jockeying to serve new demand

In the larger context, transformation in the renewable energy sector is part of a re-invigoration of the US power industry. Demand for electricity is escalating because of a strong economy and increased use of air conditioning, computers and electronic devices. The US is bracing for a 40% increase in electricity consumption by 2030, as population grows an anticipated 23% and the nation’s Gross Domestic Product doubles, according to the Edison Electric Institute.

Specifically, the US Energy Information Administration’s most recent analysis foresees a need for 5478 TWh by 2030, up from only 3821 TWh in 2005. Renewable projects are lining up to serve a portion of the need.

In many areas of the country, construction of new power and transmission facilities has been slow to keep up with demand, as the power industry tries to right itself from its financial tumble in the early part of the decade. Cambridge Energy Research Associates (CERA) describes the industry’s current state as the fourth year of a recovery from market crises, blackouts, trading scandals and major bankruptcies. The result is pent-up demand, and a need for investment over the next 15 years equal to the entire industry’s current net plant value, according to Lawrence Makovich, CERA Managing Director. Makovich provided his analysis in February during CERAWeek 2007, a conference held in Houston. CERA is headed by Daniel Yergin, Pulitzer Prize-winning author of The Prize: The Epic Quest for Oil, Money and Power.

‘The power business environment continues to evolve and new uncertainties are coming to light. Power strategies that align well to these new challenges and risks will separate the winners from the losers for many years to come’, Makovich said.

Clipper recently signed an agreement with BP for the supply of wind turbines in North America clipper windpower

It’s not clear which technologies and fuel choices will gain an edge as the US power industry undergoes its next build cycle. Renewables, clean coal and nuclear, in particular, are jockeying to become winners in the emerging world of carbon restriction. Competitive advantage in the US market will go to those with access to capital sources, earnings stability and low capital costs, according to CERA.

In an early release of its Annual Energy Outlook 2007, the US EIA envisions coal, oil and gas maintaining their positions as dominant fuels, continuing to provide 86% of US energy supply. Renewables increase, but supply a relatively small piece of the 5478 TWh of needed electricity. Renewable generation grows from 357 TWh hours generated in 2005 to 519 TWh in 2030, under the forecast.

The accuracy of the US EIA forecast, however, has frequently come under challenge by renewable energy advocates. The federal agency, itself, points out in the report that energy forecasting can be a risky business. ‘Trends in energy supply and demand are affected by many factors that are difficult to predict, such as energy prices, US economic growth, advances in technologies, changes in weather patterns, and future public policy decisions’.

With public sentiment and policy in their favour, renewables could grab a larger piece of the pie than government analysts expect, say green energy advocates. The American Wind Energy Association (AWEA) is pushing for wind power, alone, to provide 20% of the US power portfolio. With 11,603 MW in operation, wind energy was the second fastest growing electric resource, bested only by natural gas last year. In all, wind power provided 27% of the new capacity installed in the country in 2006.

International players move into US wind market

With an eye on this growth, large international players have migrated into the US market, among them EdF (Electricité’ de France) Energies Nouvelles, Enel, Scottish Power, Iberdrola and BP.

EdF has owned California-based enXco since 2002 and helped build it into a major operation and maintenance company for wind projects. Enel North America, which already operates 70 North American plants with an installed capacity of over 400 MW, last year took a large equity stake in Kansas wind developer Tradewind Energy. Together the companies plan to develop 1000 MW of wind, including the 250 MW Smoky Hills project in Kansas. Enel also purchased Windkraft Nord’s interest in the 63 MW Snyder Wind Project in Texas, expected to begin construction this year. Shortly after, Fulvio Conti, Enel CEO, said the two deals confirm that ‘we are serious players and plan on having an impact in the US wind industry’.

Another major international player that has recently made substantial US inroads is Spain’s Iberdrola. PPM Energy, one of the largest US wind farm developers, is owned by Scottish Power, which in turn is being acquired by Spanish company Iberdrola for $22.5 billion. Iberdrola also inked a deal to buy Pennsylvania-based Community Energy Inc (CEI), which has 2000 MW of wind power under development. Brent Alderfer, CEI President, described the merger a perfect marriage because it ‘combines the innovation and US market leadership of CEI with the strength and capital of the world’s leading wind energy company’. Together, the two Iberdrola acquisitions are expected to help the company achieve its goal to build 10,000 MW of renewable energy world wide by 2011.

SunPower, a manufacturer of solar cells, recently acquired Powerlight, a leading installer sunpower

Oil and gas company BP continued to make good on its new identity ‘Beyond Petroleum’ over the last year with the acquisition of two US wind developers Greenlight Energy and Orion Energy. In addition, the company formed a strategic alliance with Clipper Windpower, which allows BP to acquire a five-year share option for a 10% equity interest in Clipper and secure up to 4250 MW of wind turbines. The three deals are expected to hasten BP’s goal of building 100 US wind projects totaling 15,000 MW. Toward that end, BP Alternative Energy North America expects to begin construction this year on five wind projects, totaling 550 MW, in California, Colorado, North Dakota and Texas. The largest of the projects, already under construction, is the 300 MW Cedar Creek in Weld County, Colorado, a joint venture between BP and Babcock & Brown.

Meanwhile, Massachusetts-based American Superconductor, which specializes in high temperature superconductor wires, made its play into wind power by looking outside the US. The company in January finalized its acquisition of Wintec, an Austrian supplier of wind turbine components and system technology. The merger builds on an already established relationship between the companies – American Superconductor had supplied electronic products for Wintec modules. The acquisition allows American Superconductor to offer customers a more diverse set of products and services, including design and licensing of entire wind energy systems, turbine electrical systems, and wind farm grid interconnection solutions.

Solar acquisitions to reduce costs

Carbon constraints and international expansion aside, the US renewables industry is seeing increased consolidating for many of the same reasons as do other industries. Companies are coming together to eliminate inefficiencies in the value chain, consolidate fragmented markets, overcome supply constraints for materials and equipment, and to increase their size to compete with big players, according to Andrew Kinross, associate director at Navigant.

Managing the value chain is especially important in the solar industry. Many different players are trying to fill various industry needs along the chain from production through distribution of solar panels. This creates a lack of standardization and efficiency. A company that could gain control from ‘sand to electricity’ would have a significant advantage, said Kinross. ‘Right now to get from sand to electricity you go through 10 different companies. If one company were able manage all those aspect of the value chain it could be done more efficiently.’

SunPower’s recent $332.5 million acquisition of PowerLight is an example of vertical integration designed to reduce consumer costs. SunPower designs, manufactures and markets high-performance solar electric technology, while PowerLight is a leading installer of solar panels, particularly for large US commercial enterprises.

Tom Werner, SunPower CEO, said that together the two California companies hope to reduce the installed cost of a solar system by half over the next five years. ‘When we achieve that goal, we believe our solar systems will produce power that can compete with retail electric rates and become a mainstream energy resource. Radically simplifying and improving the customer experience is a crucial step to reducing solar power costs. The downstream or customer delivery portion of the value chain represents up to 50% of today’s installed solar system cost. We believe that we can accelerate downstream efficiency gains by combining the technology portfolios, supply chains, product development expertise and services of our two companies’.

Transmission operators are also getting together to take advantage of the growing renewables industry american electric power

Other solar mergers are less about vertical integration and more about securing scarce supplies of silicon. Examples of these mergers include Norway-based REC Group’s purchase of Advanced Silicon Materials, a Montana company, and the acquisition by SolarWorld of Shell’s crystalline solar operations. German-based SolarWorld says that the Shell acquisition makes it the largest solar technology producer in the US. SolarWorld is taking over Shell’s operations in Canada, Washington and California that manufacture solar silicon crystals, wafers, cells and modules, a production facility in Germany, and various sales and research offices. In all, SolarWorld will acquire about 80 MW of production capacity.

Another trend to watch is a changing of the guard, says Neal Dikeman, a partner with Jane Capital Partners, a California-based merchant and investment banking company. Major players from other industries are moving into solar because they see growth opportunity. Such is the case with Applied Materials, a manufacturing giant that has 14,000 employees worldwide and net sales of $9.17 billion. The California company last year moved into production of solar arrays and photovoltaic equipment. It hopes to use its expertise and scale, garnered in manufacturing semiconductor equipment, to drive down costs of solar cell production, drive up demand, and create a new revenue stream for the company. To complement its move into solar, Applied Materials venture capital arm, Applied Ventures, has invested $3 million in California-based Solaicx, a private manufacturer of single-crystal silicon wafers.

Clout of the big utility

Carbon constraints and supply chain efficiencies will clearly play a role in determining the eventual shape of the US renewables industry. But another key determinant will be the treatment of the resource by US electric utilities.

That sector, itself, is ripe for consolidation, according to some analysts, given that the nation has more than 3000 electric utilities. However, recent major acquisition attempts have been hamstrung by conflicting interests on the state regulatory front.

One of these merger attempts, between FPL Energy and Constellation Energy, could have given the two companies serious new clout in many ways, including their renewable energy strategies. FPL Energy is the nation’s largest wind developer and owner of Florida Power & Light, a major US electric industry. Constellation is a major competitive supplier, whose retail arm makes significant power sales to both utilities and the liberalized commercial and industrial customers. In addition to offering traditional power supply contracts, Constellation has begun structuring innovative renewable energy deals that offer long-term price stability to hedge against more volatile fossil fuel costs. Alas, the $28 billion transaction failed in October because of regulatory delays and objections in Maryland, home of Constellation.

The failed merger aside, FPL Energy stands out as an example of how a utility-driven company can become a major renewable energy player. Its parent FPL Group has $12 billion in annual revenue and assets that include Florida Power & Light, a large US electric utility. The company has used that financial strength to build a major international wind portfolio. Will other utilities follow its lead? It remains to be seen, given utilities general aversion to risk and their many regulatory constraints. Navigant’s Biggs says that ‘he believes’ utilities are likely to own more wind projects, and it is possible that another utility will try to emulate an FPL play.’ ‘Utilities are less likely to aggressively pursue customer-sited solar because it can be a direct competitor, in that it allows customers to generate their own energy’, he said.

Brown and Rudnick’s Afonso sees the US renewable energy field increasingly controlled by a few large players, both utilities and independent suppliers, which have scale and money. Smaller entrepreneurial ventures, he says, are likely to position themselves for acquisition by those companies

And will Exxon join the jostle for position? The company makes its cynicism about renewables clear on its website: ‘Wind and solar are growing at phenomenal rates, but EIA agrees that these sources will only meet about 1% of global energy needs by 2030. Ethanol and other biofuels will continue to contribute to growing transportation fuel needs. These alternatives will not eliminate our dependence on global markets. Technology, cost and scale disadvantages remain a challenge to expanding use.’

Exxon, however, sounds like a lone voice in the wilderness, as other oil and gas giants, like BP and Shell, invest in renewable energy. With money to be made, the game for an increasing number of companies is to acquire or be acquired. With the US power industry readying for a new scale of growth and public policy favouring clean alternatives, wind and solar companies are reconfiguring to capture what could prove to be a surprising share of the market.

Elisa Wood is a freelance journalist based in the United States

Cara Miale assisted with the research for this article.

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