Cashing in on renewable energy

Solar powerTo paraphrase the economist Herb Stein, anything which cannot last forever will end. One thing that will eventually run out is oil, and whilst the world's known reserves of oil are sufficient for many decades, sooner or later humanity will need to be weaned off the stuff.

If the oil runs out and we don't have a suitable alternative, that will be the end of modern civilisation. So we need to develop renewable sources of energy, such as wind and solar power, as well as increasing the investment in tidal barrages, hydroelectric power and nuclear energy.

Unless we see a radical breakthrough in physics, such as harnessing zero point energy or cheap fusion reactors like the one that Doc uses to power the DeLorean in "Back to the Future", the world will be increasingly reliant upon these sources. The problem for investors is that the renewable energy industry's economics are not particularly attractive at the moment.

Tax and give away
Most politicians love renewable energy, because it gives them a good excuse to increase the taxes on non-renewable energy, and it lets them buy votes and campaign donations by giving taxpayers' money to the renewable energy industry.

Naturally, whenever a government is giving away money, you get a big queue of people who want a piece of the action, and some renewable energy companies have been much more successful in getting subsidies than in producing commercially profitable applications.

Consequently, there have been several subsidy-related scandals, such as the one that surrounds the politically connected solar cell manufacturer Solyndra, which obtained hundreds of millions of dollars in US federal government loans and loan guarantees shortly before filing for bankruptcy. Solyndra is now being investigated by the Federal Bureau of Investigation!

Fewer subsidies
Competition from the traditional sources of energy, such as coal, gas, oil and nuclear power, has meant that most forms of renewable energy have only been profitable thanks to these subsidies and laws such as the feed-in tariff system, which Germany uses to overcharge consumers in order to support its solar industry.

The problem for the solar industry is that these subsidies encouraged producers to expand their manufacturing capacity, but once they were slashed the price of solar cells crashed. One of the more obvious effects of this has been the major job losses seen at some British companies, including the Wolverhampton-based Carillion.

There has been carnage in the stock market and the shares in many major solar panel producers, such as First Solar and Suntech Power Holdings , have fallen by over 90%, whilst many German solar cell producers have been bankrupted.

Increasing competition from China has put further pressure on the American and European solar industries, and as so often happens when technology changes, many investors piled into the sector and then lost their shirts because their forecasts were too optimistic.

Roll on peak oil
One thing that's guaranteed to improve renewable energy's economics is an oil crisis, preferably one which sends prices soaring to well above $150 a barrel for a long period of time.

Along with those of us who are overweight in the oil sector, anyone with an interest in the success of renewable energy should welcome rising oil prices, because it would dramatically improve the industry's economics by making renewables more competitive.

However, the industry could also resort to lobbying politicians for more subsidies and to pass laws that increase the costs of fossil fuel producers and users, as has already happened in the UK.

Making British business even more uncompetitive
In 2008, parliament passed the Climate Change Act to encourage the adoption of renewable energy by deliberately increasing the cost of non-renewable energy. I also see it as providing a strong incentive to invest overseas, as it will damage British industry, since our energy costs are going to increase at a much greater rate than those of our foreign competitors.

The government's own figures indicate that this act will cost industry some £400 billion and increase the average British household's energy costs by around £760 a year. That's a big burden to bear, and it looks as if green policies will continue to put pressure upon domestic and commercial budgets.

Investing in the sector
Britain has a few quoted companies that specialise in renewables, but they haven't exactly set the world alight. One such is the AIM-listed Renewable Energy Holdings whose shares were listed at 50p in 2005 and are now just 9p. But the main interest is in European companies and two names that stand out are the wind turbine producers; Spain's Gamesa Corporación Tecnológica and Denmark's Vestas Wind Systems.

I don't have the expertise to differentiate between companies which specialise in renewable energy technologies, so if I was going to invest in this sector I'd first consider at a specialist fund such as BlackRock New Energy , Impax Asian Environmental Markets , Jupiter Green Investment Trust or Ludgate Environmental.

Some other companies
Many large engineering groups, like Germany's Siemens, have substantial interests in renewable energy and it may come as a surprise to find out that the two "British" oil majors BP and Royal Dutch Shell are fairly big players in this sector.

For many years, BP has been playing up its alternative energy division by saying that BP now stands for "Beyond Petroleum", whilst Shell focuses upon biofuels and is also developing carbon capture technology, which it expects to use on the Oil Sands of Alberta.

There's a lot of money to be made (and lost) in the renewable energy sector, though it may take a long time for the technology to become truly competitive. In the meantime you can pick up some pointers on the sector from our Renewable Energy & Fuel Cells discussion board.

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