• KPMG launches Global Renewables Survey
   
• Fifty percent of global energy companies wary of possible renewables bubble
   
• Fears even more prominent in Europe, with two thirds of energy leaders voicing concerns
   
• Escalating valuation multiples in sector driving dotcom comparisons
   
• Energy corporates should review acquisition strategies

KPMG International, the Big 4 accounting firm, says a survey shows that one-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 percent 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 US$2.2 billion (€1.4 billion) acquisition of Irish wind energy company Airtricity. It is estimated that the final sale price of India-based Suzlon Energy’s US$1.6 billion (€1.1 billion) acquisition of REpower in 2007 was about four times annual revenue and when Franco-Belgian group Suez bought a majority stake (50.1 percent) in Compagnie du Vent in November 2007, the US$494 million (€321 million) deal valued the French wind generator at more than 50 times its annual revenue.

Fifty-two percent of those surveyed believe that high valuations are a factor restricting growth in the sector, while 56 percent 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 percent) of the largest companies (those with annual revenue over US$10bn) agree that a bubble is a possibility whereas only 44 percent of smaller companies (with revenue under US$500m) are concerned. Although the bigger firms are doing more buying, smaller ones are much more likely to incur new debt (45 percent compared with 24 percent). Smaller companies also take on higher gearings, with about one-half (48 percent) accepting figures of over 50 percent. Just one-third (32 percent) 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 percent 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 percent 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 outdated?”

The report was written in co-operation with the Economist Intelligence Unit and is based on a survey of 202 senior executives from across the global energy industry, conducted in February 2008. Respondents were senior representatives, 50 percent with executive boardroom positions, from power generators, oil & gas majors, renewable energy suppliers, energy distributors and financial investors. A range of company sizes were represented including some of the biggest, with one in five having revenue of more than US$10bn. Approximately 35 percent of respondents were based in North America, 30 percent in Europe and 22 percent from Asia-Pacific.

Supplementary to the survey results, interviews were also conducted by the Economist Intelligence Unit with the following senior executives:

• Babcock & Brown Wind Partners - Geoff Dutaillis, COO
   
• Iberdrola Renovables - Estanislao Rey-Baltar, CFO
   
• Macquarie Group - Ian Learmonth, Executive Director, heading European Renewables Business
   
• Scottish and Southern Energy - Rhys Stanwix, Head of Energy Strategy
   
• Suzlon Energy - Vivek Kher, Head of Communications
   
• Viridis Clean Energy Group - Ed Northam, CEO About KPMG