Clean energy slips but remains solid

By Steve Johnson
Published: August 31 2008 19:42

Investors have moderated their support for clean energy funds so far this year, but inflows into one of last year’s hottest sectors remain positive, despite the gloom surrounding broader equity markets.
Net inflows into European renewable energy funds totalled €379m (£305m, $559m) in the first half of 2008, according to figures from Lipper Feri, well down on the €7.1bn witnessed in calendar year 2007, but still solid during a half year when investors have withdrawn €75.6bn from equity funds in general.

Last year witnessed a swathe of launches of clean energy funds from houses such as Pictet, Schroders, F&C, Climate Change Capital, Impax, ING and RMF Investment Management. Fund buying helped push valuations of renewable energy stocks to, in some cases, eye-watering levels, with the WilderHill New Energy Index jumping 59 per cent during 2007.
Jonathan Johns, head of the UK renewable energy team at Ernst & Young, argued that the sector was now maturing with trailing price/earnings ratios for solar companies having fallen from “boom levels” over 300 in 2007 to a “more sustainable” level in the mid-70s, and ratios for biogas and biomass companies down from 33 to the low 20s.
Much of this adjustment has been driven by rising earnings, with the WilderHill index down a relatively modest 12.4 per cent in the first half of 2008.
However, Mr Johns argued the sector faced challenges. Initial public offerings have slowed this year. Dong Energy of Denmark and Russia’s Nitol Solar are among those to have pulled floats while the first quarter of 2008 saw only one IPO outside the Asia-Pacific region, according to E&Y data.
“There is a shortage of renewable energy stocks for funds to invest in. These funds are coming onto the market faster than floats are taking place,” he said.
Second, Mr Johns feared governments would start to look at reducing the subsidy over and above the price of fossil fuels that they pay for renewable energy.
“Increases in oil and gas prices have allowed governments to think about re-examining and possibly reducing various support mechanisms offered to renewables, especially where those governments are concerned with rising energy prices on fuel poor,” he argued.
Third, the credit crunch is having an impact, Mr Johns believed. Although lenders are interested in the sector, they are conducting more stringent due diligence and have pushed their margins 20-30 basis points higher.
Copyright The Financial Times Limited 2008