The Global View

Who’s afraid of a renewable energy bubble?

money5.jpgIf you ask Michael Jackson, he’d probably say Bubbles is a good thing. But it looks like the green energy industry isn’t prepared to trust a singer who hasn’t done anything good since Smooth Criminal and right now, says KMPG, execs are afraid there’s a green tech bubble on the way.

Over 50 percent of the 200 global power and utilities companies, suppliers, and financial investors that KPMG put the
thumbscrews on said they were actually a little bit scared a bubble “may be developing in the renewable energy sector”.

Gasp!

The report puts it like this:

One-half of the respondents polled for this report agreed that a bubble in the renewable energy sector is a “real risk”, with high valuations noted as being by far the leading cause for the failure of M&A efforts in the last three years. Valuations have continued to rise and there have been a number of deals recently completed where enterprise value per operating MW acquired has hit the US$4-5m mark, representing a willingness by many acquirers to pay significant premiums for their targets.

Mmm, bubbly.

While we wait for the bubble to pop, it seems money will flock to renewable energy like footballers flock to page 3 girls.

Still, executives expect M&A activity to accelerate. Nearly three-quarters (72 percent) of respondents believe that the size of deals will increase, while over two-thirds (68 percent) expect that competition for targets will grow – and 59 percent think that infrastructure funds and financial investors will bring more money into the sector. Rhys Stanwix, Head of Energy Strategy at Scottish and Southern Energy (SSE), a major UK-listed utility, thinks this consolidation “will likely continue for the foreseeable future”. His company recently completed a €1.45bn (US$2.2bn) acquisition of Ireland – based Airtricity, a renewable energy company. Suppliers, he explains, are required to deliver on increasing targets, but there are a large number of developers, many of which are often small. “That will drive you to do either a lot of contracting or, what has happened, consolidation where suppliers buy them up,” he argues. “There are a lot of portfolio benefits and economies of scale in owning the facility. I think it was almost inevitable that this would start.” Ed Northam, CEO of Viridis Clean Energy Group, an infrastructure fund, also cannot see consolidation slowing over the next four to five years. “You are starting to see an explosion in interest,” he says.

This interest, however, is concentrated in particular parts of the renewable energy market. Roughly 60 percent of those surveyed expect consolidation to accelerate in biofuels, solar and wind. Conversely, a minority expect the same for hydroelectric firms (27 percent) and tidal energy (14 percent), with the clear majority expecting no change.

If you’re on the hunt for the whole report, you could do worse than looking here.