Renewable Energy: Risk of Market Bubble

by: Research Recap

Could a market bubble be developing in the renewable energy sector following last year’s explosive growth in M&A activity? A new survey by KPMG indicates there is a significant risk of such an occurrence.

KPMG estimates that 2007 saw $55.7 billion in M&A transactions, up by 47 percent on the year before. Competition for deals is likely to increase, as will the pace of consolidation, the survey concludes.

Some industry players appear to be ignoring the many risks involved in investing in renewables, such as the ability of national governments to change their green energy policies.

Perhaps more interesting than the pace of the growth, though, is the varied nature of the deals. “One common factor, however, is that the big are swallowing up the small.” M&A activity has been encouraged by:

  • regulatory changes
  • traditional energy companies seeking to improve their foothold in the market
  • power generators — 89% of all power generators purchased a renewable energy firm in the past three years

Fifty percent of respondents polled in the study thought there was a “significant risk” of a market bubble developing in the renewable energy sector in the near term.

Another sign of a bubble is small investors piling in where bigger, seasoned ones are more cautious. Two-thirds (66 percent) of the largest companies (those with annual revenue over $10bn) agree that a bubble is a possibility. Far fewer (44 percent) smaller companies (with revenue under $500m) are concerned.