High winds make some energy investors giddy

Are people starting to lose their heads over wind power? The Franco-Belgian Suez group is planning to acquire a 50 per cent stake in Compagnie du Vent, reportedly valuing the French wind generator at 65 times its 2007 revenues. The company has annual sales of €11.3m ($16.5m) and employs only 65 people. But Suez seems to think it is worth about €750m

It may well be a very promising company. After all, some 30 other groups had expressed interest. Suez in the end seems to have outbid Germany’s RWE, the other front runner, for the 50 per cent stake put up for sale by Acciona, the Spanish construction conglomerate, which invested in the French wind power venture when it was formed in 1989. But one has to ask whether Compagnie du Vent is really worth that much. The Spanish do not appear to think so. Otherwise, Acciona would not be selling its stake. Indeed, Suez might like to reflect on what seems to be a developing Spanish talent for flipping assets at a profit. Santander, the Spanish bank, made a quick €3bn gain last week by selling to Monte dei Paschi di Siena the Italian Antonveneta bank it had only just acquired through its participation in the ABN Amro takeover.

Apart from nifty Spanish financial footwork and timing, Suez might also ask itself whether it is buying at the top of the cycle – although some argue there is still a long way to go before the green bubble bursts. EDF, the French state-controlled electricity behemoth, may now be regretting having floated its renewable energy business last year. It would clearly have fetched an even more inflated price today.

Areva, the French state-owned nuclear group, locked horns with India’s Suzlon this year for control of Germany’s Repower. The Indians ultimately won the German bidding battle, but even they saw fit to pay €1.2bn, or about four times Repower’s annual revenues. Areva had been prepared to go higher but was blocked by Thierry Breton, the then French finance minister, who considered the frenzy for wind power was already pushing prices far too high.

The arguments in favour of wind power are well known. It is a clean renewable source of energy. Considerable government incentives are now being ploughed into the sector across Europe. But this is far from being a licence to print money. Like nuclear power stations, there are only a limited number of land sites that can take wind turbines and there is often considerable public opposition. Most of the best sites in Europe’s leading markets have already been identified and snapped up by operators.

Compagnie du Vent appears confident it will not be affected by such concerns and Suez’s balance sheet is clearly a huge asset to develop its capacity. However, things are not getting any cheaper. Costs are likely to keep growing with more competition for sites, for engineers and for customers. And what would happen, for example, if governments decided to scale back on their generous incentives for wind power? The big test for the sector will come next month when Iberdrola, the world’s largest wind power producer, plans to float a 20 per cent stake in its renewable energy business to raise about €5bn. Others will be keenly watching the outcome – the Portuguese, the Greeks, the Danes, the Italian, Belgians, the French, and many more, all have IPO plans of their own. They must be keeping their fingers crossed that the fair wind that has been driving the sector does not suddenly die down.

Unbundling conundrum

Wulf Bernotat, Eon’s chief executive, has branded Brussels as a bigger threat to Europe’s energy market than Gazprom, the Russian group. He believes the European Commission’s proposal to break up the continent’s electricity behemoths – separating, or unbundling to use the industry jargon, transport and distribution from power generation – is misguided and would weaken Europe’s electricity sector.

But if any country should consider unbundling it is Germany. The presence of six different electricity grids controlled by large generators makes it virtually impossible for alternative suppliers to enter the German market on a profitable basis. The problem is that if Germany’s electricity utilities are forced to break up, others in Europe would have to do the same.

The Commission has yet to make a convincing case that what would be good for German consumers would benefit others. In France, for example, few complain that the grid owned by state-controlled EDF has actively impeded alternative suppliers. In the Netherlands, it seems the authorities regret that they ever broke up the system in the first place. In the UK, a recent study shows the freeing up of the market has led to higher rather than lower electricity prices.

So while it is possibly a good idea in principle – and an excellent one when it comes to the German market – the evidence so far is that unbundling is not the magic solution to Europe’s high electricity prices.

european.view@ft.com

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