Private equity and infrastructure funds are preparing to kick-start an increase in deal activity in the renewable energy sector over the next 18 months, according to Green Power: 2012, KPMG’s annual survey of global renewable energy M&As.

The survey, which highlights the drivers of global deal activity, found that 92% of all respondents expected infrastructure funds and private equity investors to be the most active in buying and investing in renewables – up from 64% a year ago.

Independent power producers followed this at 87%, up from 61% last year, marking a distinct shift away from utilities companies that historically have been the most active acquirers.

Despite 70% of respondents indicating that it is now harder to secure debt financing to fund acquisitions of renewable projects and companies, the report, which gathered opinion from utilities, manufacturers of renewable equipment, governments and sovereign wealth funds amongst others, found that the majority of respondents (85%) expect renewable energy deal flow to remain robust in the next five years.

More than 70% said they were attracted to hydro, onshore wind and solar photovoltaic investments in particular, confirming that they are seen as safe havens for long-term money.

And there was significantly greater confidence among respondents of an increase in deals valued below $US500 million (60%) compared to those anticipating deals with a value in excess of $500 million (28%).

Commenting on the latest findings, KPMG Australia national leader of renewables Mathew Herring said: “This survey highlights the significant opportunity for Australia and the message is clear – the industry needs to develop quickly so we can become a leader throughout Asia and globally.”

Australia prefers conventional energy, but wind and solar PV on the horizon

The KPMG study notes: “The trend is that green energy globally is becoming viewed by some investors in much the same way as conventional infrastructure asset classes, like water companies and electricity grids."

Herring added: "We are seeing costs falling and this will start to drive further viable investments. We see this growing renewables in the mix of energy alternatives for this country, although in Australia conventional sources will continue to be the mainstay of our energy usage and exports.”

“This in itself will stimulate renewed investment and M&A activity globally and here in Australia we could see further investment in wind and solar PV in particular without the need for subsidies.”

The news will provide a welcome boost to the industry, which entered 2012 on a more subdued note in terms of deal volumes. This is in stark contrast to 2011, which was a vintage year for renewable M&A with a total of 591 deals valued at $51.2 billion announced globally during the year, a significant increase on the 431 transactions worth $24.2 billion recorded in 2010.

Deal activity showed a particular surge in wind and solar sectors of 132% and 37% respectively; however, both were far outstripped by the rapid increase in deal activity in the biomass sector, which leapt 300%.

The report warns that the positive sentiment of investors today could be badly affected by regulatory uncertainty.

“While it is exciting to see so many respondents expecting to invest in green energy in the near future, this could all turn quickly if struggling governments continue to retrospectively change policy and so damage confidence. This is also true in Australia. Although Australia’s renewable energy policies have become more supportive of the industry in recent years, like the bi-partisan support of the Renewable Energy Target scheme, there is still uncertainty about state-based policies which does little to fuel investor confidence.” Herring said.

China leads M&A activity, US preferred destination

In terms of where future investment is expected to come from, the report predicted a major ramp-up in outbound investment from Asia, continuing the growing trend seen in 2011, with more than 43% of respondents ranking China top in terms of countries most likely to enter the global renewable energy market.

Five of the top 10 ten most likely countries or regions from which renewable energy investment activity will derive in the next 18 months are in Asia. Investment is stimulated by low interest rates in the case of Japan and in China by equipment manufacturers seeking to expand into new markets.

The US came out as the most attractive destination (46%) for investment followed by India (23%) and then China (21%).

"We expect the M&A activity locally to be led by suppliers trying to enter our market, like wind turbines groups and infrastructure and super funds that have been able to better evaluate the risks and participate as long term investors in the sector,” Herring concluded.

This article first appeared in BEN-Global