Power Engineering - Energy companies fear renewables bubble

15 May 2008 - One-half of the world's energy leaders are concerned that a bubble may be developing in the renewable technology sector, according to a survey released yeserday by KPMG International.

In 'Turning Up the Heat', a poll of Director-level executives across more than 200 global power and utilities companies, suppliers, distributors and investors, 50 per cent of respondents (and nearly two-thirds in Europe), agreed that there is a real risk of a bubble in the renewable energy sector, driving some commentators to compare it to the dotcom boom.

Andy Cox, Partner in KPMG in the UK, and Global Head of Energy and Utilities for Transaction Services, said: "Buyers are paying big multiples for assets in their efforts to be ahead of the curve as governments seek to cut emissions. Our concern is that investors may be ignoring the risks of investing in an embryonic industry that has still to undergo a huge amount of change as it matures. These are exciting times but buyers should take care to do proper analysis before they take the plunge."

The survey comes on the back of a huge surge in prices being paid for renewable energy companies. The most recent major deal in the sector was UK-based Scottish and Southern Energy's $2.2bn acquisition of Airtricity. It is estimated that the final sale price of India-based Suzlon Energy's $1.6bn acquisition of REpower in 2007 was about four times annual revenue and when Franco-Belgian group Suez bought a majority stake (50.1 per cent) in Compagnie du Vent in November 2007, the $494 million deal valued the French wind generator at more than 50 times its annual revenue.

Fifty-two per cent of those surveyed believe that high valuations are a factor restricting growth in the sector, while 56 per cent said they had considered but not completed deals in the last three years mainly due to unrealistic expectations of price on the part of sellers.

The survey also highlights another trend, which points towards the possibility of a bubble emerging; small investors are entering the market where bigger, seasoned ones are more cautious. Two-thirds (66 per cent) of the largest companies (those with annual revenue over $10bn) agree that a bubble is a possibility whereas only 44 per cent of smaller companies (with revenue under $500m) are concerned. Although the bigger firms are doing more buying, smaller ones are much more likely to incur new debt (45 per cent compared with 24 per cent). Smaller companies also take on higher gearings, with about one-half (48 per cent) accepting figures of over 50 per cent. Just one-third (32 per cent) of larger companies do the same.

Government policy has played an important part in the development of the sector. KPMG's report found that 47 per cent of respondents said that government subsidy and support was a major factor in determining the flow of deals in the sector. Conversely, however, the survey also identified state involvement as a real concern among those surveyed, with 57 per cent saying that government policy and uncertainty was a hindrance to consolidation.

Andy Cox added: "The current high valuations may partly be a reflection of investors' desire to remain one step ahead as they keep a watchful eye on government green initiatives around the globe, but much of it is jam tomorrow and what would happen if public policy did not move as expected or current technologies become out- dated?"

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