Euphoria over shares in renewable energy companies has erupted because of greater environmental awareness, growing evidence of climate change, the scarcity of petroleum, and an increasing commitment by Western governments to support new sources of energy.


Euphoria has broken out for buying renewable energy shares, spurred by “the slowdown that the real estate sector has suffered,” says Ignasi Carreras, a professor at ESADE. Another factor behind the frenetic purchasing of renewal energy shares is the European Union’s requirement that renewable sources contribute significantly to overall energy consumption. The EU has set a goal that by 2020, 20% of its total energy consumption will be supplied by renewable sources. “The renewable sources [of energy] are arriving quite late,” Carreras notes, adding, however, that “thanks to big companies that made their investments, several companies in the energy, transportation and construction sectors have repositioned themselves to become sustainable enterprises. They have helped to propel activity in this sector.” During the 1980s, Carreras recalls, it was a question of “wanting to do this — but there were a lot of questions about its profitability.”


For Javier Carrillo, a professor at the Instituto de Empresa, two conditions have combined to make this possible. The first is the structural component. “Our regulatory environment favors creating businesses in this sector. Europe is committed to renewable energy, and companies need to make investments that lead to the goals outlined on the European agenda. It is also quite clear that we are at the stage of this emerging sector where it makes more sense to have a greater role for the public sector. That means public support is necessary.” On the other hand, it’s also about current conditions. “Because of the mortgage crisis, I have a feeling that investors – both shareholders and investment funds — are looking for ways to diversify their portfolios. The hunger for profitability can no longer be satisfied in their [traditionally] favorite [investment] destination — real estate. There is also a shortage of supply, and demand is putting a lot of pressure” on what is currently available. In his opinion, the structural component will last for a while. However, it is unclear how long the current boom will last.


The Role of Other Countries


In mid-November, when the price of petroleum was about $100 a barrel, President George W. Bush announced that the U.S. needs to reduce its dependence on foreign oil by utilizing technology for developing alternative sources of energy, such as ethanol (made from grains) and non-polluting hydrogen fuels used in motors. These declarations led to skyrocketing prices for renewable energy companies on the world’s most important stock markets and even reverberated in Spain.


“Although the United States has said no to the Kyoto Protocol, the U.S. has strengthened its willingness to deal with climate change,” says Carreras. “As for Spain, we very much agree with the cause.” In Latin America, in contrast, the future remains quite unclear. “These countries have no role in the Kyoto Protocol,” says Carreras. The European context is clearly marked by a commitment to “fight climate change and to depend less on fossil fuels. Elsewhere, there is also no question that there is public support [for these initiatives] in the United States.”   For Carrillo, it’s important to remember that events in Asia “are very much affected by China and India. China already plays a leading role because it has more and more demand for energy and higher levels of emissions.” As for Latin America, “geographical conditions put [that region] in a difficult situation [when it comes to energy], but there is not a large volume of [renewable energy] activity.”


Nevertheless, alternative energy companies — such as Abengoa, Sniace, Gamesa and Iberdrola — have almost no presence on the Spanish stock exchange. The Madrid exchange is not experiencing the euphoria that has shaken up other exchanges, especially Germany. In that country, the government has set this goal: Renewable sources of energy will supply 20% of the country’s entire energy consumption within 15 years. Despite such euphoria, experts believe there is no chance of reliving the bubble in technology shares that occurred in 2000. “This is a subject [renewable energy] that plays a role in the global agenda from here on in, and it will continue to do so for the next 15 years,” says Carreras. He adds that we could talk about a coming bubble in renewable sources only if “the investments were [excessive].”


According to Carrillo, there is always a risk of a bubble in any newly emerging sector. However, he adds, “I believe we still have to wait to find out if there will be a bubble.” It is almost certain that such a bubble will not take place either in the short or medium term, he says, noting that “It will be hard for a bubble to occur because the strong growth in this sector is supported by the public sector. Medium-term goals call for developing up to 20% of energy by 2020.” Carrillo cites bio-fuels as an example. “They have caused some uncertainty about their possible impact on the food supply or on the rising price of grains, which is already beginning to hurt [companies], including Abengoa (solar energy and bio-fuels).” Wind energy “is very far ahead of the others, and solar power shows a great deal of promise,” he adds. As a result, share prices for new energy companies have doubled in 2006. Four solar companies have led the way on the Frankfurt stock exchange: Q-Cells, Conergy, Resol Solar and SolarWorld.


An Upward Trend


Some analysts are beginning to warn that share prices in the renewable energy sector have risen too quickly. Carrillo attributes the steep rise in renewable energy shares everywhere around the world to what he referred to earlier as “a shortage of supply and great demand.” He adds that there will be lots of “rising prices and corrections, because the upward trend has been so steep.”


Take, for example, share prices for renewable energy companies on Spain’s Ibex 35 index. Over the last year, Iberdrola (wind power) has run up 38%, Acciona (the third-largest player in wind energy) 53%, and Gamesa (mostly wind power and wind turbines) 55%. Solaria (solar energy) has enjoyed even more spectacular results. Since its initial public offering in June, its shares have shot up by 130%. For its part, shares in Fersa, another renewable energy company, have risen 200% in one year. If the forecasts are not wrong, Iberdrola Renovables, the world’s largest owner of wind power parks, will debut on the market on December 13.


What does that company offer investors that qualifies it for making the largest stock market debut in [Spanish] history? According to Carrillo, this company “already has experience in the sector and a great willingness to make a lot more progress. This, added to its large scale of operations, helps Iberdrola Renovables look appealing.” When it comes to size, liquidity and the magnitude of its commitment to the market, adds Carrillo, Iberdrola Renovables is going to make it a [more] popular idea to invest in renewable energy. At the same time, however, this is a company that has influence and staying power. It has committed a very high percentage [of its resources] to wind power, and it is already in a part of the market that is very stable, both in terms of growth and the regulatory environment. Finally, it is a very large company that operates on a global scale in this area.”


Renewable energy has become this year’s most fashionable sector. The difference between this year and the commotion that led to the dot-com bubble in 2000 is that renewable energy companies have a business that is getting results, and is backed by social awareness and the support of governments. It has become one of the industrial sectors that have the greatest potential for growth, and investors are moving quickly to take positions both outside and within stock exchanges. In Spain, the Renewable Energy Plan establishes that in 2010, the country will attain the level of 12%. However, experts don’t believe that the plan will be carried out on schedule. “Renewable energy has public support. It is a question that has social and political dimensions. This technology is in the first phase of full-scale governmental support both at a national and international level, and that support is guaranteed to continue for quite some time,” says Carrillo. However, there is the paradox of [continued] risk. “You get the feeling that both European and international sources of support are not going to let up on the stricter emission standards that they establish,” he adds.


The Future Is Promising


Experts see a very promising future, and their forecasts are very positive. This sector has benefited from the mortgage crisis that has battered the United States. With the slowdown in the real estate market, shareholders have felt a need to move investments out of the [real estate] sector and into the clean energy sector. Boasting about the strong stock market performance of shares that are already publicly traded, analysts see lots of potential for future profits. They are excited about the upcoming initial public offerings of Iberdrola Renovables and Eolia (wind power), which could set off still another upward rally in the shares of companies in the sector. “This is an alternative destination that appeals to investors who are looking for new, more attractive positions because they have to reduce their risks,” says Carrillo. “This money had to go somewhere. Investors have repositioned their portfolios because they saw that they could make money in coming years if they invested in renewable energy, especially in photovoltaic and wind power,” adds Carreras.


However, experts warn that although investments in renewable energy can provide very high rates of return, prices are high. Nevertheless, this is a good time for these companies to make their initial public offerings. Shares of companies that have already issued shares have behaved well during this year’s stock market corrections. Over the short run, the consensus is that there is great potential to make money. “This is a fantastic time for investing,” Carreras says.


What happens in this sector will depend “on the way that the renewable energy companies mature,” says Carrillo. Medium and long-term, “their own progress, greater efficiencies and lower costs for generating electricity must enable them to become independent and to achieve a higher level of profitability that makes them more independent, more autonomous, more transparent, and more dependent on their own businesses, not on political or social factors.”


The longer these investments continue to be profitable, the more likely “some investors and some institutions will decide that it is time to take their profits,” says Carrillo. However, “I would recommend investors not include all of these companies in the same category because each one of them is different. They aren’t equally positioned to the same degree. You have to try now to learn how to minimize your risks and to not get confused because not all of them are going to be equally profitable.” Although it may be too early to say so, he warns investors to be cautious. “Overall, however, this sector provides a clear opportunity.”


Longer term, says Carrillo, investments in renewable energy will be sustainable only if “the argument for investing in them moves away from being based on the assistance they get from the public sector, which improves their competitiveness. Everything indicates that when they mature, [these companies] will achieve a higher level of efficiency. And once renewable energy sources have matured, we will be talking about a more sustainable situation.”