Energy companies fear renewables bubble

20 May 2008

A new survey by KPMG International released today says that half of the world's energy leaders are concerned that a bubble may be developing in the renewable technology sector.

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, which was a high of 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.

"Buyers are paying big multiples for assets in their efforts to be ahead of the curve as governments seek to cut emissions," says Andy Cox, KPMG partner in the UK, and global head of energy and utilities for transaction services. "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 $2.2 billion acquisition of Airtricity.

It is estimated that the final sale price of India wind energy equipment maker Suzlon Energy's $1.6 billion acquisition of REpower in 2007 (See: How Suzlon won the bid for REpower)  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.