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Weighing up green investment options

LOCAL brokers are urging investor caution with regard to stocks available in so-called clean, green businesses.

Many brokers and analysts believe the share prices of some publicly-listed renewable energy stocks are highly inflated and do not reflect their commercial viability.

According to one Perth stockbroker, who did not want to be named because his firm was promoting some renewable energy stocks, the sector was being pushed by and large by ethical funds.

He said the sheer weight of capital coming from ethical funds managers, who had little investment choice, was forcing stock prices up beyond their net present value.

“There’s more money going into ethical funds than there are investments around,” he said.

“There are probably not enough projects around to handle the flood of funds.”

DJ Carmichael senior analyst Peter Strachan was more forward about the industry. In a recent report he described clean and green companies as being the “flavour of the month”.

“As a result, renewable energy stocks are generally trading at unrealistic premiums to fair value,” the article says.

“The market phenomenon … is reminiscent of the TMT (Technology, Media & Telecommunications) mania seen in late 1999, early 2000 and the more recent Bio-tech bull run.”

Mr Strachan said investors first should make themselves comfortable with the business model and the management of the company, which he believes is often deficient in these renewable technology companies.

“Investors need to make sure that managers don’t just have stars in their eyes. You have to be hard nosed about it,” he said. “Many operate for reasons other than commercial. They are looking to save the world. It’s all peace, loving and brown rice.”

Mr Strachan said the sector was characterised

by “a whole lot of white aprons and pointy

heads” who come up with great technology but can’t see it through to a commercially viable stage.

In his report he recommended that Pacific Hydro, trading at around $4 should only be worth about $3 a share, while Energy Developments, trading at about $8.50, is currently well overvalued.

Mr Strachan believes a renewable energy company had to maintain a first mover advantage over any new players into the market to remain attractive. Many companies lost this edge and were overtaken by more commercially viable and often simpler technology, he said.

Punters could be somewhat justified in their optimistic assessment of future earnings for renewable energy stocks, however, particularly with the introduction of legislation last year which made it mandatory for energy retailers to source 2 per cent of power from renewable sources such as biomass, wind, hydro and tidal power.

This has opened the door for renewable energy suppliers, who are beginning to line up to supply utilities including Western Power, which may be forced to buy-in renewable energy from other parties or face the prospect of fines.

According to Mr Strachan, this means the cost of renewable energy is more than double that from the traditional energy sources of gas and coal.

Renewable energy is normally worth around $90 a megawatt hour, compared with around $20 to $50 a megawatt hour for normal power.

With some industrial companies knocking the price they pay for energy down to $70 a megawatt hour, utilities like Western Power stand to make a loss of approximately $20 per megawatt hour, although the $120/megawatt hour paid by domestic customers may cover some of the shortfall.

So, in many cases, renewable energy is only a cheaper proposition when used in regional areas off the main power grid.

Windfarms, while becoming increasingly efficient, still fall well short of coal and gas-fired turbines in providing energy.

The Albany wind farm costs around $1,600 per installed kilowatt, the Collie coal generator costs $1,000 per installed kilowatt, while gas fired turbines costs about $300 per installed kilowatt.

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