KPMG Report Shows Dealmaker Interest in Biomass

In “Powering Ahead 2010: An Outlook for Renewable Energy M&A,” KPMG recognizes that 2010 may just be the year for biomass. KPMG Partner Andy Cox summarized the results in this way: “Perhaps the most surprising finding is that survey respondents are now seeing biomass as a serious contender for investment alongside solar and wind. While biomass lags behind wind and solar in terms of maturity, there are certainly attractive factors in its favour—not least its potential to generate greater returns than wind. Although there is no doubt solar and wind will continue to drive deal activity, our research suggests that from a global perspective, biomass too, will play a significant role in investment growth.”

KPMG has been conducting a survey since 2008. This year, they surveyed more than 250 senior executives in the renewable energy industry worldwide, including corporations, financial investors, debt providers, government bodies and service providers. The surveys were followed up by in-depth interviews with seven of the respondents.

As Cox pointed out, by far the most surprising result was the increased interested in biomass projects. Thirty-seven percent of respondents report that they are targeting biomass projects for mergers and acquisitions between now and the end of 2011. By comparison, thirty-six percent are looking for solar projects and 35 percent for wind projects. This is the first year that biomass has made a showing.

Of all the dealmakers, large corporations are the entities most interested in biomass project acquisitions and mergers. The reasons for the interest, according to KPMG, are two-fold. First, biomass plants have the potential to yield higher returns than other sources of renewable energy because of their scalability and because they can generate heat in addition to electricity as an additional revenue stream. Second, respondents recognize the inherent advantage of supporting base-load power sources. Unlike solar and wind, which are intermittent technologies, the on-demand nature of biomass electricity improves its investment value.

Respondents were most concerned about long-term supply availability and price risks. They also mentioned the difficulty in finding construction financing, as lenders tend to favor construction contracts that guarantee construction costs and levy penalties for delays in completion, terms that can add up to 20 percent to a project’s capital costs.

Despite these challenges, 2010 and 2011 will present many opportunities for deal making in the renewable sector; biomass energy companies will be ripe for consolidation. According to KPMG, many smaller, start-up companies with limited financial resources have been weakened by the recession and “will be forced to consider a sale in the next 18 months.”

KPMG notes that merger and acquisition activity picked up in the first few months of 2010. In 1Q2009, there were a total of 61 deals in the renewable sector. In 1Q2010, there were 150 deals. Ninety percent of respondents reported that they intended to undertake at least one merger or acquisition in the next 18 months.

Read the full report.