GREEN ECONOMY:Much has been made of the potential for a green economy, based on eco-products, clean energy, and green investments. But are we simply creating another economic bubble?

WE’VE HAD the dot.com phenomenon, the Celtic Tiger and the property boom – but are we on the precipice of another bubble? With property on the rocks and equities in the doldrums, investors are piling into everything green, but are there too many similarities between property and the green economy, and are we just setting up another bubble whose time will eventually run out?

It is no surprise that the green sector is so busy, given that it is one of the few areas that is showing any promise at the moment. Government incentives, available bank funding and environmental targets are all combining to make the green sector one of the most attractive. Of course for investors, an added extra of putting their money into the green economy is that it makes them feel like they’re doing something for the environment.

Andrew Ennis, a director with NCB Corporate Finance, which organises investments on behalf of the stockbrokers’ private clients, says demand is definitely out there for green projects. “People want to be contacted about all green opportunities,” he says, although adds, “but most investors are still a bit cautious”.

He says there is a greater appetite from clients looking to invest in projects, rather than companies at an early stage of development, as these are usually lower risk, although also lower return.

While Andrew Cullen, head of tax/project finance at Bank of Ireland business banking, notes that the market isn’t as vibrant this year as it has been in previous years, there is still activity. “We’re quite supportive of it and have a good pipeline of transactions for next year. We see some potential going forward,” he says.

Cullen puts the level of interest in the sector down to factors such as the level of awareness that exists with regards to the environmental targets that need to be met, as well as the existence of two Green ministers – Eamonn Ryan and John Gormley – in the Government. “You can see it feeding through in terms of policy and strategy,” he says.

Indeed just like Government policy played a key part in the boom by incentivising property investment, it is also a significant factor in the green boom. To date, a number of incentives have been introduced aimed at attracting investment and development in cleantech and renewables, such as Refits (renewable energy fee-in tariffs), RD tax credits, and the accelerated capital allowances scheme administered by Sustainable Energy Ireland, which allows 100 per cent capital allowances in the first year for which the expenditure is incurred.

Despite these incentives, some players suggest that more Government support is actually needed, pointing to the example of countries such as the Netherlands, which have an annual programme of government grants and incentives for the sector.

One of the areas with the most activity is renewable energy. Like other countries around the world, Ireland is working on boosting its green energy supply, with the aim of producing 40 per cent of its electricity from renewable sources by 2020. This will require construction of in excess of 6,000MW of wind capacity, with just about 1,000 MW constructed at present, and the remainder yet to be built. Already, over 120 wind farms have been built, with investment coming from large corporates and high net worth individuals.

Just like the property bubble, high net worth investors have been steadily piling into green technology for some time now. For some, it has been very lucrative. For example, between 2002-2006, NCB raised €100 million from private clients to invest in wind energy firm Airtricity. Following the firm’s sale to Scottish Southern Energy in 2008, investors tripled their money.

More recently, AIB Wealth Management launched its first renewable energy investment fund offering investors an opportunity to invest in the solar energy industry sector and specifically in operational solar farms.

And, just like the boutique property investment firms such as Quinlan Private which were set up during the boom, a similar trend is happening in the green sector.

Quintas Wealth Management, a Cork-based private client operation, has set up Quintas Energy to oversee the firm’s renewable energy investments in Spain, Germany and the emerging markets of Eastern Europe, while most stockbroking firms have dedicated units working in the sector.

“Property people understand debt funding and planning permission,” says Ennis, pointing to the similarities between building a housing development and a wind-farm.

Moreover, professional services firms, which have staff lying idle due to the collapse of the property sector, are also beginning to put together dedicated teams to focus on the area.

Investors are also ploughing into the green sector via the Business Expansion Scheme (Bes), with most companies operating in the sector eligible for funding under the scheme. Several investment firms run funds for clients, such as Capitacorp, which has a wind energy fund, and Simple.ie, which has a fund investing in companies across the green spectrum, including energy conservation, renewable energy and waste management. Investors can also invest directly in windfarms.

By investing this way, investors can can get tax relief on their investment at their marginal rate of tax, on up to €150,000, while the limit for corporates is €2 million.

Corporates are also active in the sector, with cash-rich companies availing of relief under Section 486B, as well as the accelerated capital allowances, to set up wind farms as ancillary businesses.

While the credit crunch and problems in the Irish banking sector means that financing for any project - green or otherwise -- is difficult to come by, and many banks have closed their doors to new business, lending to this sector does have a political impetus. As part of the Government's recapitalisation of Bank of Ireland for example, it launched a €100 million fund to support renewable energy projects.

According to Cullen, BoI has lent out about €35 million of this fund so far, largely to finance the construction of five wind farms, as well as to support the development of SMEs in the sector.

Moroever, while ACC Bank may be scaling down many of its activities in Ireland, it is thought to be gearing up for growth in the green sector, given that its parent Rabobank, is a world leader in renewables, particularly wind energy.Another factor which makes lending to projects such as windfarms more attractive for banks is the existence of Power Purchase Agreements (PPA), which outline who will buy the energy, for how much and for how long, while a floor to prices is set under the Renewable Energy Feed In Tariff (Refit) programme.

As Cullen outlines, a key part of why banks will finance windfarm projects, despite the fact that it is being done on a non-recourse basis, is because of the "golden covenant" structure, which means that windfarm developers have a guaranteed tariff for 15 years under the PPA. This means that they will be able to pay back senior debt over this period.

However, while there is no doubt that, given the current dire economic circumstances, growth in any sector is a positive, fears of over-investment in the sector may not be mis-placed.

At a global level, warnings have been coming for some time. Last year, KPMG warned in its Global Renewables Survey that 50 per cent of global energy companies were wary of a possible renewables bubble, and compared the escalating valuation multiples in the sector to the dotcom boom. Moreover, the survey also identified state involvement as a real concern among those surveyed.

Early evidence of a bubble is often shown by over-supply and in the Irish context this is already apparent. If you look at grid applications, for example, there is already double the required capacity seeking permits. This means that some windfarm developers may well be disappointed, with Ennis saying that the latest crop of wind farm applicants "may have missed the boat".

"With all sectors which expand as quickly as wind, there will be one or two casualties," he says.

Other signs of a bubble include buy-in from retail investors. Remember how popular investing in a property fund or buying an apartment in Turkey or Bulgaria was during the boom? While interest in the green sector is nowhere near as significant as it was in the good years of property investment, it is on the rise.

"Current levels of interest by Irish investors in sustainable funds are very strong with people recognising the long-term investment potential of trends in relation to climate change.

"Earlier this year, we hosted our first Sustainable Funds Seminar and it was the single most subscribed to event we have ever held, with a waiting list for places within 24 hours of the seminar being advertised," says Killian Nolan, investment manager with Rabodirect.

Moreover, at group level, Nolan says that the firm's sustainable funds are experiencing almost 50 per cent more inflows compared with other more mainstream funds added to the platform this year, such as emerging markets funds and balanced managed funds

And, while it may not yet be time to ring the warning bell, it may soon be if Comhar, the sustainable development council, gets it way. It recently suggested that that old bastion of the property boom and bust, Anglo Irish Bank, should be reconfigured as a "green bank", offering mortgages, bank loans and savings accounts that are environmentally friendly and sustainable. Déjà vu?