Dynamic renewable energy market means a busy 2012

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Michael Butler is the CEO and chairman of Cascadia Capital.

Renewable energy will come to the forefront of many political and economic discussions in the coming year, due to the presidential election, debates about natural gas fracking, and increased activity in the sector by Corporate America.

Despite some uncertainty in the market, activity will accelerate in 2012 due to increased merger and acquisition activity and alternative sources of capital entering the market. This dynamic industry landscape will be highlighted by M&A activity in energy efficiency, and continued adoption of solar as the barriers to entry rapidly decline.

As we begin the second month of the year, I wanted to share more thoughts on these and other trends I expect we'll see play out in 2012.

1. The renewable project financing market will be in turmoil as European banks pull out.

It’s no secret that banks across Europe have been experiencing the stress of the region’s ongoing economic crisis and fluctuating capital markets.

To prepare for further market volatility, European banks are increasing their capital ratios and turning their focus back to their core business. As a result, many European banks are pulling out of the U.S. project finance market for renewable energy products. This shift will likely result in an overall downturn in financial activity across the sector.

However, I expect that the void in European investments will be filled by U.S. regional banks along with private placements and other types of financing throughout the next year. These investments will likely come from insurance companies such as John Hancock, Metlife and Prudential. Union Bank, Wells Fargo and Key Bank have also indicated that they will be expanding their project finance teams.

Furthermore, tax-exempt bonds are now being used to fund qualifying projects. This was evidenced in 2011 when UTS Biogas issued a $24 million bond to finance its two California biogas projects.

Two recent biomass transactions illustrate that private equity investors are also stepping up to provide debt. Starwood Energy joined Prudential in providing debt to its Berlin Station biomass plant, and Carlyle recently provided construction financing for the Plainfield Renewable Energy Project, developed by Enova, through the Carlyle Energy Mezzanine Opportunities Group. I expect this to continue throughout 2012.

2. Climate change will come back into public focus as XL Pipeline protests gain attention.

The attention around the XL pipeline will draw interest to the controversy that surrounds broader natural gas and fracking-related issues. In the last several months, conservationists and conservatives alike have come together to object to the XL pipeline, framing it as a much too energy intensive and pollution creating oil extraction process. Locally, publicity surrounding coal exports has put climate change back in the headlines. In 2012, this debate will challenge the U.S.’s commitment to a clean energy economy as natural gas continues to make inroads in the mainstream energy matrix.

3. Renewable energy merger and acquisition activity will accelerate, lead by energy efficiency.

Last year, we saw a shift in transactions as money left capital-intensive sectors — such as biomaterials, biofuels and wind — and was invested in asset light sectors such as energy efficiency.

As a result, I predict managed services providers, like Honeywell, Siemens, and Johnson Controls, will look to acquire energy efficiency companies to meet growing customer demand for real-time energy solutions.

Schneider Electric’s acquisition of Summit Energy Services, is the strongest signal to date that the energy efficient sector is ready to go to market, and is putting pressure on other large corporations. In addition, companies like Enernoc and Serious Energy, which have not traditionally been involved in the energy services category, will begin to move into the energy efficiency sector through acquisitions.

4. Despite speculation, solar will continue to dominate the renewable energy mosaic.

As the cost curve of panels declines, the growth of solar will continue to accelerate and reach price parity with traditional energy sources in certain geographic regions such as California and areas in the Southwestern United States.

While many are wary of the solar market due to Solyndra’s failure, it’s important to keep in mind that the company did not fall victim to a weak solar market, but failed to prepare for a decline in panel pricing. While solar projects have bright futures, investors will still look for sound business models, technological innovation, and continued cost reduction. Policymakers must also provide the kind of regulatory stability that attracts investors and encourages these projects to develop. The current situation is part of an industry maturation process, and that the category has significantly outperformed all expectations and will emerge stronger than ever.