Renewables Step into the Mainstream

Investment in renewable energy and low carbon technology has more than doubled in the past two years and is set to grow another 30% to $63.3 billion this year, according to BlackRock Mlim. It says the political drivers are voter concern, the need to ensure the security of energy supplies, rising traditional energy prices, and falling alternative energy costs.

In November, stark warnings were published in the government-sponsored Stern Review on the economics of climate change. If no action is taken on

emissions, it says, there is more than a 75% chance of global temperatures rising 2-3°C over the next 50 years, and a 50% chance that temperatures could rise by five degrees, which could stifle global economic output by 3% and 10% respectively.

Taking action

All over the globe, governments are taking action. In Germany, biodiesel has been fully exempt from excise duty since the early 1990s, and now takes around 6.5% of diesel market share. France, the second biggest biodiesel market, offers changing excise duty incentives within a quota system. In Brazil, biofuel cars now outsell ordinary cars thanks to a state-run programme originally set up for patriotic, rather than environmental, reasons.

In China, concern about reliance on other nations for energy supplies is also driving government to look at ways to reduce imports by incentive schemes, and making a 10% ethanol blend mandatory in several provinces. Licenses for ethanol production for road transport fuel blends are expected to be issued shortly.

China is planning to build the world’s largest solar power plant with an output of 100 MW, at a projected cost of £397 million. “Increasing awareness of climate change, and the desire to improve energy security at a time of high fossil fuel prices, are driving governments worldwide to strengthen their policies on clean energy,” says Sophie Horsfall, fund manager of F&C Stewardship International Fund.

Solar power

Solar-panel supply is constricted because the raw material polysilicon is in short supply, and manufacturers that can maintain their supplies will lead the pack. Chinese company Suntech Power Holdings (STP), which makes photovoltaic cells used to capture energy from sunlight, has just signed a deal with Sunlight Group to buy silicon wafers over a five-year period.

Ersol Solar Energy, a solar-cell producer which has grown its revenues by 50% this year, also has a secure silicon supply until 2015.

The solar sector is particularly buoyant in Germany, where legislation is driving demand and in Japan, where the price of electricity is high. First Solar (FSLR), which listed on Nasdaq in November, uses an advanced thin film process for the photovoltaic modules it manufactures, which offers better value than many silicon-dependant traditional solar modules.

Applications where grid power is not available often make most sense. Carmanah Technologies (CMHXF) provides solar-powered LED lights for lighthouses and airport runways, and is currently involved in a project in London to light bus shelters.

Allen Family Foods in Delaware and GE Energy have teamed up to trial the world’s first solar-powered poultry house, which went operational in December. Poultry houses are highly energy dependent and grid electricity in Delaware has become more expensive over the last 12 months.

When the pilot photovoltaic system produces more power than required, excess power is directed to a back-up battery bank and to the grid via net metering, and the project is sent a credit to use on days when the sun does not shine. The system cost around $500,000, but will receive a rebate of $250,000 from the Delaware Green Energy Program, and is also eligible for state and federal tax credits.

Diesel deficit

Europe is expecting a diesel deficit in 2015, but bio-ethanol and bio-fuels stocks have been out-of-favour in recent months. Many companies have come to the market and some are now trading on single digit price earnings ratios in an industry which is expected to grow at 20% per annum.

CropEnergies, which uses grain and sugar beets as raw materials, was floated in Frankfurt in September. The bio-ethanol producer has established itself in just a few years and its German-based operation is the largest plant in Europe. It is currently in the process of building another plant with a yearly capacity of up to 300,000 cubic metres in Wanze on the river Meuse, Belgium.

Bombay-listed Praj Industries provides technology and equipment solutions for alcohol and fuel ethanol, and has teamed up with CropEnergies subsidiary Biowanze SA to provide technology for the proposed complex in Belgium.

Other well-established companies investing heavily in ethanol production are Bunge (BG), which processes soy beans and rapeseed and is planning to open a biofuel plant in Germany; and agricultural giant Archer Daniels Midland (ADM).

Energy giants with significant interests include Amelot Holdings, Aventine Renewable Energy, BP (BP-A), Cargill, Chevron, ExxonMobil, Monsanto (MON), Petrobras, Repsol YFP, and Royal Dutch Shell (RDSB).

Landfill gas

A business that captured imaginations last year was Infinis, which generates renewable power from landfill gas using organisms to accelerate decay, and is likely to be sold or floated by Guy Hands’ private equity venture, early in the New Year.

Unfortunately, there are few plausible investment opportunities in wave or tidal power; and wind energy has grabbed the headlines for all the wrong reasons.

Wind power

Loss-making AIM stock Renewable Energy Holdings (REH), has just announced that one of its investments, its CETO prototype, which is designed to convert wave energy into high pressure seawater leading to onshore generation of electricity, has in testing successfully transmitted high pressure seawater to shore at in excess of 500 psi. This pressure is within the parameters required to generate electricity onshore using conventional hydro-electric power turbines. The company is now actively looking for a first commercial development site offshore in the UK or Ireland, but it is highly speculative in nature.

Honiton Energy, China’s fastest-growing foreign wind generation company, may be floated on AIM by Melrose chairman Robert Adair and London Bridge founder Gordon Crawford. Honiton, incorporated in Britain, has secured the rights to more than 2,000 sq km of land in China’s Inner Mongolia region and hopes to produce 4,000 megawatts of power by 2015.

Fuel cells

High-temperature fuel cells are beginning to compete with traditional energy sources because, although they are expensive, the cells themselves are highly efficient. They can be used as mini-power stations to power small complexes or hotels. FuelCell (FCEL) is the leader in this market. But alternative energy stocks can be volatile, fluctuate with the oil price, and can easily become over-inflated by speculation. ITM Power (ITM), an AIM-listed company that is developing hydrogen fuel cells, nearly trebled on a single day last April following the release of fuel cell test results, but has now fallen back to near its original level.

There are two specialist investment trusts: Impax Environmental Markets (IEM) and Merrill Lynch New Energy Technology Trust (MNE), and a number of funds with a broadly ethical remit, such as Old Mutual Ethical, Jupiter Environment, Aegon Ethical and the F&C Stewardship range.

Clean energy is currently a strong theme in the Jupiter portfolio run by Charlie Thomas, while over 10% of the F&C Stewardship International fund is invested in technologies such as geothermal, fuelcell, waste to energy, and biofuels.

Mainstream issues

But environmental concerns are rapidly becoming mainstream issues.

“Legislative change can affect supplies and it can also lead to a changing market place – companies who ignore these types of issues are unlikely to succeed,” says Simon Knott, manager of Rights and Issues Investment Trust, a UK smaller companies investment trust. “Companies I invest in need to be thinking ahead. Within a decade, full-blown environmental legislation will start to prohibit companies from certain areas and will encourage them to pursue other areas. Building regulations are already changing to take into account issues like carbon footprints.”

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