Alternative Energy - should we all be there?

Everyone knows the thesis; traditional sources of energy (coal, oil, and gas) are finite in supply and their cumulative use is having noxious side effects which are playing a major part in damaging the global climate. The latter can also be said for the existing non-fossil fuel option, nuclear power. Things have to get cleaner, through use of resources which will not be expended by energy generation, i.e. alternative energy sources or renewables. For the purposes of this article, bio-renewables, i.e straw and wood are classified as fossil fuel based and not alternative energy. [ref] ‘The Energy Age’ by Robert Kyriakes published in 2006 by Genersys [/ref]

As I see it, alternative energy investing has three key elements:

1. Identify all of the physical options;
2. Decide which from (1) above has the most to offer;
3. Look for the usual investment requirements amongst the most attractive options (remembering that the usual avenues are not available in some of the alternatives listed below).  

Stripped of any technical explanations and in no particular order, renewables are:

• Solar Power/Thermal Solar/Photovoltaic (PV)  – absorption of the sun’s rays by conductive materials and conversion into electricity and the production of heat.
• Wind Turbines – an extension of using the power of the wind, which we’ve always done.
• Heat Pumps – moving heat within the ground to heat buildings or the process in reverse to cool buildings. Iceland have been using its geothermal springs for this purpose for 80 years.
• Ocean Thermal Power- utilising energy form the sun absorbed by the oceans (two thirds of earth’s surface).
• Biomass- organic matter (incl. waste) that has chemical energy content when burnt, ethanol as an alternative/additive for internal combustion engines.
• Fuel Cells and Hydrogen – the commonest element of all , 75% of the universe, can be converted to an energy source.
• Tidal and Wave Energy – the energy caused by a combination of the sun, moon and the earth’s centrifugal force - very difficult to extract.

Investments in these markets is of necessity early stage and perhaps better placed through a managed invest fund, a few of which are highlighted below. For those seeking big payoffs from individual companies in the longer term, a few have also been highlighted here.

A. Companies

Solar Power

Evolution Solar  (US OTC $EVSO) - Arizona based, this is an emerging industry leader and in prime position to take advantage of the expected 30% annual growth in the US Solar PV market ‘tornado’ over the next three/five years. One of the world’s fast growth & profitable industries. EVSO has links in China, a country which to the surprise of many has made a commitment to solar power and through companies such as Suntech Power Holdings (NYSE: STP) and Energy Conversion Devices (Nasdaq: ENER) has taken the lead developing the market. [ref]  http://evolutionsolar.com  [/ref]

Wind Turbines

Renewable Energy Generation (RWE) -  AIM listed, it has just announced the sale of its Canadian interests for £69m cash which enables the company to pay down its bank borrowings and still leave it with £50m net cash with which to further develop its UK interests at Goonhilly in Cornwall and Rotherham. UK output is expected to treble from its present 21MW p.a. which will give the company further breathing space to endure the painful UK planning processes for their wind farms. The recent transaction boosted its share price to 57p (30.09.09) which is up from 31.75p six months ago but still way below the 117.50p in July 2008. An example of market and sector volatility during the last twelve months and of the investment buying opportunity that may present itself in the coming months. [ref] http://business.timesonline.co.uk/tol/business/article6856379.ece  [/ref]

Indian Energy Limited (IEL) - This is an independent power producer (IPP) focused on becoming a long-term owner and operator of wind farms in India.In late August, this company became only the fourth IPO on LSE’s Alternative Investment Market during 2009. IEL raised £9.75m taking their capitalisation to a total value of £20.3m. The company has offices in London, Guernsey and Mumbai and is well placed to take advantage of the under supplied Indian energy market. Again clearly for the longer term but at 82.50 (30.09.09) the shares could be good value.

Biomass

Bp (BP.) - A surprise entry in this context? Maybe not. With a market capitalisation of over £100,000m this oil giant is investing heavily for a long term biofuels payback, over $500m with US based Biosciences Institute and all manner of joint venture with parties in South America, India and the US. At 553p (30.09.09), £BP shares have a rock solid dividend yield of 6.6% and ok, the shares may fluctuate a little but why would you want your money tied up in a lower returning bond or deposit account? [ref] http://www.bp.com [/ref]

Greenko Group (GKO) - AIM listed and a significant generator of green power in India. This company has attracted a £29m investment from US clean energy investor Global Environment Emerging Markets Fund which could eventually give them a 29.9% stake in the company.

Two Sleepers

 Investment drawbacks, American and unquoted at present, but worthy of attention, are the following  interesting ethanol producing companies. Firstly E-Fuel Corporation [ref] http://www.microfueler.com/t-company.aspx [/ref] of Los Gatos California, maker of the MicroFueler which becomes the home’s power source, check it out.  The company has been funded to date by Thomas Quinn, a man with very deep pockets as a result of an impeccable record in start ups Gyration (Nintendo Wii), Samsung, Novell. The investment dog and pony shows for E-Fuel are about to start in the US so stay tuned in.

The other privately owned American company is Fulcrum BioEnergy Inc [ref] http://www.fulcrum-bioenergy.com [/ref] which has one plant at the moment, Reno  Nevada, which produces 10m gallons of ethanol a year from municipal waste but has identified 26 other sites across the US for similar or larger operations. There do not appear any plans at present to take this company public but again watch this space.

B. Funds

Given the uncertainties, investors may want to spread the risk by choosing a unit trust or exchange traded fund and in this context it is difficult to better the funds highlighted by the Investors Chronicle on 1 September 2009 [ref] http://www.investorschronicle.co.uk/YourOpinion/article/20090901/80e69306-90c0-11de-b79b-0015171400aa/How-can-I-invest-my-Isa-into-new-energy.jsp [/ref] :

• Blackrock New Energy Investment – invests primarily in renewables.
• Guinness Alternative Energy – solar, wind and hydro electric power.
• £ALTP (ALTP)  – ETF focused on solar, wind, ethanol, geothermal, hybrids in addition to natural gas.
• £INRG (INRG) –  ETF focused on exposure to 30 of the world’s largest publicly traded companies involved in clean energy production.

Conclusion

International collaboration has not been easy but many governments, USA, China, UK, are at last coming round to the threats of climate change and rapacious exploitation of the earth’s resources. At this stage in the investment cycle, those seeking investment interests in the alternative energy sector may prefer to invest via funds but it seems sensible that some play on alternative energy should be part of a well-diversified portfolio.