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The Observer/The Guardian: Britain’s green investors have never had it so good: brought to you in association with Shell

Some of the new and established companies on the stock market are soaring, says Heather Connon

Green is becoming investors’ favourite colour. Once solely the province of funds specialising in socially responsible investment, now institutions from private equity to pension funds are putting their money into renewable energy and other green technology companies and projects. That is tempting green technology companies on to the stock market: the past 18 months has seen a surge in new issues, particularly on to the Aim market for smaller companies.

It is also sending prices of some of the companies already on the market soaring: investment bank Dresdner Kleinwort Wasserstein, which has a dedicated team for renewable energy, produces indices for solar, wind, fuel cell, renewable energy and energy technology companies. The solar index has risen dramatically while the other indices have also performed well over the past year.

Ian Simm, chief executive of Impax, which has more than £350m invested in alternative energy, waste management and renewable companies on behalf of a range of clients, says: ‘The investment climate for renewable energy has never been more favourable and large institutional investors are increasingly seeking exposure to it.’ Impax has just participated in a fundraising by Ocean Power Delivery, which is building a turbine for a wind farm off Portugal (and whose devices were discussed on page 4). ‘It is a sector which has got a strong future, and OPD is one of the best positioned within it.’

Like many other investors in this sector, he also highlights Ceres Power, the fuel cell company which has an agreement with British Gas to work on home heating systems using fuel cell technology although it is still some years away from commercial viability. He also points to companies like Germany’s Connergy, which is developing solar products that can be used in areas – such as hills and forests – where it is not economic to establish a power grid.

For many investors, companies like Impax – which manages its own investment trust, Impax Environmental Markets – are the best way into the renewables market. Mark Mansley, strategy and communications manager at Rathbones Greenbank, said that many individual companies had ‘racey valuations’, while funds like Impax or Merrill Lynch’s New Energy fund both spread the risk and look less stretched.

Other investors are concerned that the big rise in share prices has inflated a bubble in some areas of green technology. Emma Howard Boyd, head of the environmental research unit at Jupiter – which is raising money for a new investment trust that will focus on areas like green energy – is particularly concerned about solar power where, she says, oil prices would have to be more than $150 a barrel for the technology to be cost efficient. ‘What is making it work now is government subsidies. But there is the potential for a pullback in those sorts of companies so we are avoiding them.’

She prefers wind companies which, she says, are more competitive with energy prices where they are now. But she also favours companies that are using technology to improve the efficiency of existing energy sources such as Fuel Tech, an American company which can cut between 30 and 80 per cent from the emissions of combustion units, or Clean Air Power, an Aim-listed company which allows lorries to operate with natural gas, using diesel as a liquid spark plug, to reduce emissions and improve efficiency.

While there have been a lot of new companies coming to the British stock market recently, many of the leading companies in the sector are still listed elsewhere. Nick Robins, head of SRI research at Henderson Global Investors, points to companies like Solar World and Q Cells, both German companies – although he points out that, with Solar World’s shares having risen more than threefold in the past year, ‘valuations are looking a bit stretched. But we still think there is a very good story in solar.’

He adds that: ‘Wind is the most mature area, the longest established and the next to come to commercial viability. Because of the oil and gas price, it is now attractive for diversification.’ Henderson had invested in Norwegian company Renewable Energy Corp, which listed on the market last month. He likes companies like Vestas and Acciona, a Spanish infrastructure company, which has also become involved in wind, and is keen on companies that improve efficiency and conservation.

Rory Sullivan, the head of investor responsibility at Insight, says the fact that many renewables projects depend on government support means that the political risk is high. ‘Renewables projects can have a 15- to 20-year payback so the political risk for big projects is huge. Everyone does smaller projects as they are low-risk. But a huge offshore wind project, for example, is a huge investment. And if there is political uncertainty too, that makes it even more difficult.’

He is sceptical about the quality of some of the new companies being listed. ‘A number of the new companies coming to market are not very credible. That is a problem. And quite a lot of money is looking to be invested in this area. While it is different to the dotcom bubble as there are at least cash flows, there is still a risk that a bubble is being created.’ The industry is certainly vulnerable to changes in the political climate – as is evidenced by the burgeoning industry for trading carbon credits. This has been one of the most active areas for new Aim listings over the past year – the sector has grown from nothing to more than £2bn, according to Numis’ Frost. But late last year, the price of carbon emissions fell dramatically, hitting the price of companies dealing in them and, last month, it emerged that some European countries had more permits to trade than demand to buy them.

‘It is a new commodity for it is a very risky sector,’ says Tom Whitehouse, of Carbon International, and environmental investor and public relations consultancy. He points to companies such as Econergy International, a American group which listed on Aim this year, as a less risky alternative. It generates revenue from producing its own clean power as well as trading emissions credits.

While most of the British quoted companies in the renewables sector are small, many large companies are also investing heavily in the sector. The large utilities, like Scottish Power and American giant General Electric, are backing wind farms while the oil majors like BP and Shell are also spending heavily on alternative energy sources – although Shell sold its solar business to Solar World. Even Warren Buffet, the investment guru, is backing windpower through his Berkshire Hathaway subsidiary MidAmerican Energy.

The size of these businesses can make it hard for smaller operators to compete: Vestas, for example, has struggled in the US against the might of General Electric. They also represent a good source of buyers for the mergers and acquisitions, which are expected to characterise the sector as it grows and develops. There is already considerable interest from private equity – Goldman Sachs and Carlyle Group have both made investments in wind and solar power.

‘When their technology gets to a certain point, [renewables companies] could be bought out by large companies,’ says Frost. ‘You can see that as an opportunity for investors.’

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