UK INVESTOR BULLISH ON NEW ENERGY

Sun & Wind: The New Black Gold
Ankit Jain, 4 November 2010 (IFA)

"With growing public awareness and improving economics likely to lead to much cheaper renewable energy, we believe its many forms, including wind power, solar photovoltaics (PV), biofuels, fuel cells and distributed hydrogen, offer significant growth potential…Clean Edge Research expects the dollar value of the global clean energy markets (consisting of biofuels, wind and solar power) would increase by 150% between 2009 and 2019.

"In our view, the renewable sector, the next-generation energy source, is becoming more attractive for investors after the global credit crunch. We expect industry growth to flow through to 2011, after a thaw in 2008 and 2009. The first half of this year has been comparatively strong and we believe the second half is likely to be even stronger, with improved order intake in the wind subsector and better pricing patterns in the solar industry…"

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"…[W]ind and solar energy are our favourites due to what we view as better accessibility and fast-improving economics…China, the US, the UK and India [will drive wind demand]…Japan, the US, Italy, France and India [will drive solar growth]… Several factors are…easing industry risks…[There are] five key drivers for the renewable energy stocks…project financing, regulatory environment, production costs, capital markets and valuation….[Asuming] a low probability of a double-dip recession…we are cautiously optimistic on the sector.

"Due to its capital-intensive nature, costs and availability are key for the economic viability of renewable projects…[F]inance for capital-intensive renewable projects dried up in the downturn…[and] the total threat to these five driving forces for the industry multiplied in magnitude with much higher production costs than grid parity, unrealistic valuation multiples on future expectations, high capital/project financing requirements, and regulatory disparities…[T]he five driving forces turned hostile for the renewable industry…But this proved a short-lived phase and the dynamics for the renewable sector are now rapidly returning to normal…"

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"…[A]s a result of a reduced overall threat for the renewable business, we see the renewable investment case as looking even more attractive in the near- to medium term than presently…[but] we believe that the regulatory environment, the most closely followed variable in these volatile times, will become stricter over the next six months…[though there will be] strong political support for the industry…[in] China, Japan, India and South Korea…

"[S]ector risks have eased significantly in the other four driving forces – production costs, capital markets, project financing and valuation…[C]apital markets are opening up to the sector…[C]ompanies are finding it easier to raise project financing…Currently, we favour wind companies over solar, purely on more attractive valuations."