 When BP Alternative Energy North America Inc. was looking for the best turbines to power its wind projects, it turned to a 5-year-old startup with an innovative new technology. Clipper Windpower plc had developed a wind turbine that generated more power (2.5 megawatts versus 1.5 megawatts) and had a longer life (30 years versus 20 years) than turbines of similar size and weight.
"We looked at all the manufacturers, and Clipper's technology, while new, represented an important technological advance," says Bob Lukefahr, president of BP Alternative Energy North America. Launched last year as an umbrella organization for BP's interests in low- and zero-carbon power generation, the alternative energy unit has holdings in wind, solar and hydrogen power projects as well as gas-fired power generation.
BP and Clipper entered into a partnership that aligns the companies on three fronts. BP will purchase Clipper turbines to generate up to 2,250 megawatts for its own wind projects; BP and Clipper will jointly develop five wind projects in the U.S.; and BP has acquired a five-year option for a 10% equity stake in Clipper, which trades on the Alternative Investment Market of the London Stock Exchange. The deal, announced in July, has a total value of about $90 million if all terms are met.
"Lots of companies were wooing Clipper and looking at the technology. We were very compatible from a values perspective, and we were able to move more swiftly than others," Lukefahr says. "BP has a lot of JVs around the world and a lot of experience in it. You just have to assure the partners' interests are aligned. And once you have it written into the deal, you can have an ongoing process that will make both sides more successful."
BP and Clipper are just two of the dozens of companies now using joint ventures and alliances to move forward in the alternative energy sector. Other partnerships announced in just the past few months include a deal between BP and chemical giant E.I. DuPont de Nemours and Co. to develop biobutanol, an agreement between Royal Dutch Shell plc and German glassmaker Saint-Gobain Glass Deutschland GmbH on solar, a plan for Renewable Energy Group Inc. to team up with multiple producers and investors on biodiesel, and a combined effort by Marathon Oil Corp. and grain processor Andersons Inc. on ethanol. Like the BP-Clipper alliance, the relationships utilize a variety of deal structures, from clearly defined joint ventures to complex arrangements that combine equity stakes and strategic alignment (see chart).
And if anyone worries about the difficulty of getting these partnerships to perform as desired, it doesn't show. Activity across the deal spectrum has been sizzling. In the first nine months of 2006, $5.6 billion in alt energy M&A, initial public offerings and private equity deals were announced worldwide, according to the Zephyr AltEnergy Deal Tracker, a database compiled by the Bureau van Dijk Electronic Publishing. And despite a third-quarter decline in dealmaking of 46% -- due largely to a drop in oil prices and investor fears about irrational exuberance over ethanol -- Zephyr commercial director Lisa Wright still believes 2006 could meet or exceed last year's record level of $9.7 billion, based on the level of activity to date.
| Power in partnering |
| Companies are surging into alt energy, but not even the biggest care to go it alone |
|
What |
Who |
When |
Deal |
 Biofuel |
Marathon Oil,
Andersons Inc. |
Oct. '06 |
JV to build and operate ethanol plants |
 Solar power |
Royal Dutch Shell,
Saint-Gobain Glass Deutschland |
Sept. '06 |
Joint acquisition of solar cell producer Avancis GmbH |
 Wind power |
BP Alternative Energy NA,
Clipper Windpower |
July '06 |
BP will buy Clipper turbines, co-develop five wind power projects with Clipper, and may acquire a 10% stake in Clipper |
Biofuel |
BP,
DuPont |
June '06 |
Alliance to develop, produce and market biobutanol beginning in 2007; expands on a 2003 development partnership to create the next generation of biofuels |
Solar power |
Degussa,
SolarWorld AG |
June '06 |
JV to develop solar silicon wafers to be used by SolarWorld to produce solar cells and modules |
Biofuel |
Renewable Energy Group,
multiple biodiesel producers and investors |
2006 |
Resource procurement and marketing for producer partner network, constructing plants near investors' grain production facilities and tapping investor's logistics expertise |
|
Source: Corporate Dealmaker |
"Longer term, such deals can be expected to grow," she says, "as various countries continue to seek sources of energy that are environmentally friendly and which lessen their dependence on other countries for oil and natural gas."
Her logic seems sound. Oil and natural gas prices remain historically high, as does concern about future supplies. The 2005 U.S. federal energy bill mandates use of some renewable additives to make gasoline and includes tax incentives for alternative energy production. States are requiring utilities to generate more power from renewable energy sources and making it easier for consumers to buy it. Even President Bush, who signed a 2005 energy bill that included tax incentives for fossil fuel producers that were 4 times those for alternative energy production, felt compelled by world events to advocate ethanol production in his 2006 State of the Union Address.
Still, as the third-quarter drop in dealmaking illustrates, the energy business is inherently volatile. And in alternative energy, it's not clear which, if any, alternative sources will become the market leaders. In that context, companies find that sharing risk, capital, customers, resources and technology is an attractive alternative to going it alone.
BP has been a pioneer in developing solar projects, and today it is a leading designer and manufacturer of photovoltaic modules, with production facilities in the U.S., Spain, Australia and India. The company hopes to gain similar prominence in biofuels through its partnership with DuPont. The companies, which have been working together since 2003 to develop the next generation of biofuels, claim they are ready to bring biobutanol, their first jointly developed product, to market next year.
Biobutanol is an attractive alternative to traditional biofuels, the companies claim, because it has lower vapor pressure, is tolerant to water contamination in gasoline blends, provides better fuel economy and has the potential to be blended into gasoline at larger concentrations than existing biofuels without the need to retrofit vehicles. BP and DuPont are working with British Sugar plc, a unit of Associated British Foods plc, to convert England's first ethanol fermentation facility to produce biobutanol from sugar cane and/or beets. The partners may construct other, larger facilities in the U.K. as well.
Strategically, the deal makes a lot of sense. DuPont comes to the table with expertise in agriculture, biotechnology and biomanufacturing; BP brings its depth of knowledge in fuels technology and global energy markets. Together, they aim to be the world leaders in the development and production of advanced biofuels and drive the growth of the entire sector. Today, biofuels account for less than 2% of global transportation fuels, but the companies believe that number could reach 20% to 30%.
Chemicals producer Degussa AG, a DuPont competitor, is making its alternative energy play in solar. In August, the company and its JV partner, solar cell producer SolarWorld AG, broke ground on a plant in Rheinfelden, Germany, that will produce solar silicon wafers from monosilane that will be processed further into solar cells and modules. Degussa will own 51% of the JV, to be called Joint Solar Silicon GmbH & Co. KG, and SolarWorld 49%. Industrial-scale production of solar silicon should begin in 2008 with an annual capacity of 850 metric tons.
It's a big deal for SolarWorld, securing access to quantities of high-grade silicon -- in short supply these days in the solar industry. Says SolarWorld chairman Frank Asbeck: "The start of our own production of solar silicon is an important milestone on the road to further growth."
Access to resources is driving many alliances in alternative energy, especially among small and midsized companies that must contend with established multinational competitors, fickle investors and sometimes scant agricultural resources.
"We've partnered and ventured with our entire value chain," says Dan Oh, CFO of Renewable Energy Group, a biodiesel producer based in Ralston, Iowa, that posted $116 million in 2005 sales. "While it's complicated and risky, it's a much more efficient structure and less risky than going alone would be. Everyone is benefiting from economies of scale, and by sharing equity stakes, we're able to make sure our incentives are aligned. It's helped us mature in an industry that is progressing very quickly, and become an integrated company."
REG, which recently landed $100 million in investment, is representative of the smaller players that are critical to meeting demand in alternative energy and propelling the industry forward, but that rely on a sometimes complex array of alliances to survive in an unpredictable market. REG, for instance, has used alliances to create a network of six biodiesel producers to which it provides resource procurement and marketing and management support. It hopes to add six additional partners by 2010.
REG's relationships with its investors -- that include food producer Bunge Ltd., grain shipper ED&F Man Holdings Ltd., grain producer West Central Cooperative and two venture groups -- are critical, too, and for more than just capital. REG is building biodiesel plants adjacent to raw-materials processing plants owned by West Central and Bunge, and it is getting grain terminal and transportation support from ED&F.
While not joint ventures per se, these alliances are similar to JVs in that the partners share resources, technology and expertise. "They're investments with strategic relationships," says Blair White, REG's outside counsel and a partner at Pillsbury Winthrop Shaw Pittman LLP. "It's a different business model. In a joint venture, two parties contribute assets. At the other end of the spectrum, you have a party who makes a passive investment. This is something in the middle."
Whether megamultinational or tiny startup, every player in the alternative energy market has to contend with volatility. A drop in oil prices, discouraging news from the Middle East or a disappointing crop can slow investment and deal activity. The 50-50 ethanol JV between Marathon Oil and Andersons was stalled for about three months before finally closing in October, a delay that may have been the result of a hiccup in the ethanol market.
The public markets have shut down for ethanol deals, with initial public offerings like that of Iowa Falls, Iowa-based Hawkeye Holdings Inc. -- backed by Boston-based private equity firm Thomas H. Lee Partners LP -- being put on hold because of a drop in oil prices. Those that did make it out the chute -- such as VeraSun Energy Corp. -- have seen their shares drop 40% in some cases.
While public markets aren't giving money to ethanol players now, Chris Groobey, a partner at Baker & McKenzie in Washington, isn't surprised that the Andersons Marathon Ethanol LLC JV eventually came together. "Everyone has been looking at oil majors to go into the ethanol market," he says. "They get the benefit from the tax credit, which is what's driving the ethanol business, and ethanol is becoming more of a business than a private equity play, and more attractive to oil companies going in. Oil companies need someone who understands the agricultural side of the business."
That's not to say that equity investments won't be back. The potential of the alternative market is simply too attractive. Andersons already has a deal with New Hampshire private equity firm New Energy Capital Corp. in which the two have co-invested in three ethanol plants that are under construction and nearing completion.
"The benefit is putting together two different kinds of investors who couldn't accomplish a project on their own," says Groobey, who advised New Energy on the deals, "a pure financial player with no day-to-day management ability and others who have operating businesses but not a lot of free cash to tie up in a single project."
It just goes to show that in the resource-intensive, unpredictable alternative energy sector, there's power in
numbers. - Claire Poole
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