Alternative energy firms are attracting investment from big institutions, but oil hasn't gone away yet, writes Barry O'Halloran

High oil prices, a rush to back green technology and supportive governments are conspiring to make alternative energy a must-have for institutional investors.

Last year, they backed flotations from companies producing solar power cells and wind turbine components. The result was a record amount of cash flowing into the sector, boosting both developing and established businesses

According to US agency Cleantech, alternative energy accounted for more than $4.7 billion of the total $5.2 billion in venture capital invested in clean technology last year.

According to the same body, by last June it was attracting about 10 per cent of European venture capital.

By last November, the value of stock market-listed alternative energy companies had reached €168 billion. The Cleantech index, which tracks the performance of a leading set of these stocks, such as last year's Nasdaq launch, Solar First, and more familiar names such as Siemens Environmental, grew by 42.9 per cent last year.

This meant that every €100 invested in the 47 companies listed on the index on January 1st, 2007 had become €142.90 by the year's end.

The Morgan Stanley Capital International (MSCI) index stocks, the benchmark for the world's top listed companies, lost 1.18 per cent in 2007.

This week's stock market turmoil had knocked about 15 per cent off Cleantech by last Wednesday, but the original €100 was still worth almost €21.50 more than at the beginning of 2007.

According to Jean Ryan, Dublin-based manager of KBC Asset Management's (KBCAM) global alternative energy fund, these investments are attracting business from the world's big institutions.

But it is not confined to institutions and pension funds. It also has a relationship with New Ireland Assurance, through which Irish retail investors place cash with the fund. In 2007, it added 46.78 per cent. Over the three years ended December 31st, 2007, it grew by 37.05 per cent annually, compared to 10.58 per cent for the MSCI.

Thanks to this week's stock market troubles, it had lost 18.8 per cent by the middle of this week. However, the fund was still close to 20 per cent better off compared to where it stood at the beginning of 2007. In any case, Ryan says that the fund is a long-term play. It focuses on backing companies that manufacture the equipment used in generating alternative energy, rather than directly in wind farms or solar power facilities.

One of the companies in its portfolio is Danish turbine manufacturer, Vestas, which according to Davy researchers, was worth €13 billion last November.

Another is recent stock market debutante, Netherlands and Belgian-based Hansen, which makes the gearboxes used in the individual turbines.

Ryan explains that looking at the "upstream" element of the industry makes sense in light of the fact that it is developing rapidly, and thus demand for equipment is high.

In an Irish context, wind power group Airtricity recently sold its European business to utility Scottish and Southern Energy for €1.87 billion, having already sold its American arm for €1 billion to German giant Eon.

Not everybody is convinced that values in the alternative energy sector are realistic.

This month, 61 per cent of the US National Venture Capital Association's members said they felt that the rush of cash would overvalue the industry, as there were too many dollars chasing too few opportunities.

Companies backed by funds such as that of KBCAM are listed and have passed the point at which they need venture capital. But is there a possibility that their gains partly reflect the rush to invest rather than their real value?

Its head of investment, Treasa Ní Conghaile, agrees "to a certain extent" that there is a lot of money chasing this investment trend. "But I don't believe that this is the full story by any means," she says. "This is long-term in nature and there are a lot of companies that do have the opportunity to make money and to deliver strong earnings growth and high margins." For example, she adds that Hansen's order book is full for the next two years and asks, "Where else do you get that kind of earnings visibility?"

Along with the policy considerations, there is the basic demand for energy itself, which the International Energy Agency believes will grow by 50 per cent over the next 20 years or so.

This will boost the price paid for all sources of power, including the emerging alternatives, which now look a solid long-term bet.

High oil prices are helping to make these alternatives particularly attractive. Investors shouldn't forget however that oil itself will continue to provide much of the world's energy for some time to come, and that it gained 78 per cent last year.

KEY ALTERNATIVE ENERGY PLAYERS

Ireland

Airtricity:Wind energy group now owned by Scottish and Southern Energy, following a €1.87 billion deal this month. Active in Ireland, Britain and Europe.

Bioverda:NTR-owned biofuels producer with developing operations in Germany, the US and Ireland.

Finavera:Registered here but active largely in Canada, where it is quoted on the Toronto stock exchange, building wind farms and researching wave power systems.

SWS Group:Now owned by Ion Equity after a group of Cork co-ops sold it last year, it is focused on wind energy and waste-to-energy.

International

Renewable Energy:Quoted Norwegian producer of solar cell components, valued at about €18 billion.

Grupo Acciona:Listed Spanish wind farm operator and developer, valued at about €14 billion.

Vestas Wind Systems:Danish designer and builder of wind turbines, valued at about €13 billion.

First Solar:US-based solar power systems developer, valued at about €10 billion.