High demand for wind and solar coupled with higher interest rates could result in slimmed returns for projects in the US, according to FTI Consulting.
With the US wind industry is keen to implement projects before production tax credit placed-in-service deadlines, and the solar investment tax credit stepping down after 2019, developers have limited room to negotiate down on costs with key contractors, found the US Renewables M&A: 2018 Review and Outlook for 2019 report.
FTI Consulting global clean energy practice managing director Chris Post said: “Strong demand and a higher interest rate environment could lead to a compression of returns in the wind and solar sectors, with limited options for cost reduction. Construction equipment and contractors are in high demand, leaving project owners with little room for negotiation.
“Nevertheless, the high level of demand from investors, local and international, means there is good reason to be confident about the pace of M&A in 2019.”
The report suggests that approaches to preserve returns include entering into power purchase agreements with offtakers, which offer more competitive pricing.
However, these counterparties may also represent a higher level of risk, the report advised.
The study also found that in addition to projects, development platforms and teams with strong track records will continue to be sought after, while oil and gas majors will continue to diversify into renewables drawn by competitive clean energy.
It also predicts that international buyers will continue to move into the sector, attracted by the abundant supply of assets with favourable relative return profiles.