renewables have a fair wind behind them

Nick Hasell

The Copenhagen summit on climate change is still two months away, but renewable energy stocks have already got the wind behind them.
The WilderHill New Energy Global Innovation index, a basket of global shares spanning the wind, solar, biomass and fuel cell sectors, has risen 39 per cent so far this year — comfortably ahead of the 14 per cent returned by the S&P 500 or the 17 per cent gain in the FTSE all-share index. Credit Suisse’s alternative energy index, a rival benchmark, tells a similar tale — up 36 per cent since January.
It is not only share prices that are on the rise. About $25.9 billion (£16.2 billion) of new investments in global clean energy were made in the three months to September 30, according to figures released yesterday by New Energy Finance, the renewables consultancy. That number — which captures asset finance, stock market and private equity investment in the sector — suggests that the $28.6 billion notched up in the second quarter of 2009 was not merely a blip and represents a further significant rebound from the $13.3 billion trough in the first.
Closer to home, that pick-up has also filtered through to the Alternative Investment Market, which plays host to the majority of UK-listed clean energy stocks. This week, shares in Clipper Windpower, the wind turbine developer, rose 10 per cent as it disclosed advanced talks on a substantial cash injection — which could include a full takeover of the company. Renewable Energy Generation, one of a handful of small-scale wind farm developers, surged 33 per cent as it agreed to sell its Canadian assets to International Power, the FTSE 100 electricity generator. As the move in its stock suggests, the price it secured, £69 million in cash, was far in excess of the City’s estimate of their worth.

All of this is something of a relief to the sector’s investors, who have become more used to losing money than making it. Like other early stage corners of the stock market characterised by high cash consumption and negligible sales, it has been littered with disappointments.
After a series of setbacks, Solar Integrated Technologies, the solar panel maker that was once one of its brightest hopes, was bought by an American rival this summer for only £7 million — against a peak stock market value of £130 million three years earlier. Elsewhere, Voller Energy, the portable fuel cell developer, has fallen from 80p to less than 1p, CMR Fuel Cells has been delisted and last month PolyFuel, which developed fuel cell membranes, went into administration.
There have been operational setbacks. Revenues from Renewable Energy Holdings, the wind farm operator, have fallen short of forecasts simply because the wind failed to blow hard enough in Germany, its biggest market outside Britain. Clipper has suffered from cracked wind turbine blades, a problem that it has spent the past year putting right.
The broader problem has been that the development of large-scale renewable energy schemes is highly capital-intensive and reliant on the availability of private-sector project finance — such that it suffered disproportionately from the effective closure of the capital markets in the latter half of last year. That seizure explains why shares in the world’s biggest wind turbine makers fell 60 per cent in the last three months of 2008. Further, the banks and financial institutions that provided the bulk of the sector’s funding featured heavily among the credit crunch’s roster of casualties. In the United States, the dominant tax equity partners for wind farms — the system under which they are funded — were Lehman Brothers, AIG, GE and Citigroup: which, in the case of the surviving trio, have all since scaled back their lending in that niche as part of a wider effort to rebuild their balance sheets. The same phenomenon applies in Europe.
So what has changed? Most significantly, the substantial slug of government stimulus spending that has been earmarked for green energy schemes — not just to meet carbon reduction targets but also with the aim of creating jobs. New Energy Finance estimates that $163 million of public sector cash has been promised for such schemes worldwide. A rebound in oil prices from their $30-a-barrel low to back around $70 has also ensured that the commercial imperative behind alternative energy has not been lost.
Perhaps the most encouraging sign is that trade buyers, if not the stock market, are willing to price-in the future revenues of green schemes — as shown by this week’s REG disposal.
“At the trough of the market, investors would not pay for wind farm development pipelines,” Alastair Bishop, clean energy analyst at Piper Jaffray, says. “This deal shows that utilities are putting a value on them once again.” But Mr Bishop says that it will not be until 2011 that the full effect of the return of capital to the sector will be felt.
Neither is there much optimism that any post-Kyoto objectives set in Copenhagen will alter the sector’s near-term prospects. “It’s not the setting of targets that counts,” Michael McNamara, at Jefferies International, says. “It’s setting the incentives to get to the targets.”