The economic downturn that started at the beginning of Q2 2011 has already started to affect the energy markets, including renewables.

While the sustainable industries experienced an upswing in private equity and M&A activity, spurred by spillover from deals that didn’t close during Q4 2010, the effects of depressed economic conditions were apparent in deal activity during Q2.  North American cleantech investments totaled $1.42 billion over 113 deals during Q2 2011, a year-over-year decrease of total invested capital of 10 percent from Q2 2010, and a drop from Q1 2011 levels, which totaled $2.27 billion. 

The other reason for the downturn is that Q2 2011 saw rotation in the sector as money left the capital-intensive biomaterials/biofuels and solar sectors and moved into the more capital-efficient energy sector.  While the effects of the current economic downturn will be felt across all sustainable industries, we believe that this shift in investment activity will set the stage for growth and activity through the second half of 2011.

Energy efficient M&A will be the driving force behind what we anticipate will be a flurry of investment activity in the sustainable sector. Large managed energy service providers are facing increasing demand from their customers for real-time energy management, and they are actively looking to buy the technology and/or value-added services that they can deliver quickly to their large client base. The quickest way to satisfy the demand is through acquisition, thus mature, scalable energy efficiency technologies are set to become hot commodities. The Schneider Electric purchase of Summit Energy Services for $268 million (priced at approximately 4X revenue), is already driving competition among large managed service providers for the best energy efficiency technologies. Energy efficiency companies are likely to welcome this wave of suitors, as the barriers to entry into the market, both from a regulatory and sales perspective, are extremely high.

Solar power has also been a driving force in the sustainable sector through Q1 and Q2.  The sector has a stronghold on market share as a percentage of renewable energy generation, and we expect it to continue to outperform wind and to garner an increasingly large share of the renewable energy mosaic. Solar continues to be driven by geographic location and local- and state-level incentives, and the growth rate of new installation continues.  

Solar does not have the same environmental impact as wind farms, and is a more accessible technology. We believe that both utility-scale and distributed generation will see continued growth and investment activity through the second half of 2011.

New environmental concerns over the side effects of natural gas “fracking” will also drive investment activity toward sustainable, environmentally friendly initiatives.  Many critics of the practice are concerned that natural gas fracking has serious negative environmental implications, and large natural gas drilling companies are starting to respond by testing and working to implement new types of technology.  Investment in these technologies will be spurred by the promise of more environmentally sound technologies and practices across the industry. 

Despite strong growth potential, we expect energy prices to decline in the second half of 2011 as the economy slows. Energy prices are economically sensitive, and prices will start to decline across all sectors, from traditional sources such as oil, to sustainable sources including wind and solar, as the effects of the economic downturn are felt.  We believe that oil will come down to well under $100/barrel, and electricity usage will show a quarter-over-quarter decrease from Q2 to Q4.

The drop in energy prices is also likely to drive interest in new sustainable areas.  While the world has long been focused on the scarcity of oil, as the price of oil comes down, water will become the new resource of concern.  There are several factors contributing to this likely trend. As the world’s population approaches the seven billion mark, the potential for future water shortages looms greater. Additionally, energy resource harvesting practices, such as coal mining and natural gas fracking, have created significant water pollution in affected areas, further compounding the growing crisis of access to potable water. 

In summary, we expect the following four themes to dominate the majority of activity in sustainable industries through the remainder of 2011, including:

  • Resurgence of M&A activity driven by the energy efficiency sector
  • Continued dominance of solar in the renewable energy mosaic
  • Declining energy prices across all sectors as the economy returns to a downward cycle
  • Greater investment and innovation in environmentally friendly technologies designed for traditional energy sources, such as natural gas.

 

Global Clean Energy M&A Volume

 

 

There were 86 M&A transactions in Q2 2011, of which 31 deals were disclosed for a total of $13 billion.  This deal total was down compared to 140 transactions totaling $15.2 billion in Q1 2011. While this quarter’s figures may on the surface represent a slowing of momentum in the M&A markets, we think the downward adjustment was more a function of the robustness of the Q1 2011 activity and that the Q2 2011 numbers indicate more of a steady state environment.***

Michael Butler is the CEO and co-founder of Cascadia Capital.