Renewable energy sector turns a corner

Jan 03, 2007 01:00 AM

The mixture of government support, high energy prices, carbon trading and concerns over the security of energy supplies have all combined in the past two years to make renewable energy an attractive sector. The result has been more than a dozen companies specialising in renewable energy or related fields, such as emissions trading, listing on London's junior Aim in the past year.
The highest performing renewable energy stock on Aim, the increasingly popular listing venue for global small-cap companies, was Clipper Wind power. Clipper, which develops wind farms in the US, more than doubled in value during the year, continuing the strong performance since the company listed in September 2005.

Wind is the most mature of all renewable energy technologies and companies with good wind sites can make substantial profits as electricity prices have remained high. Turbine design has advanced to allow much more power to be generated than was possible in the past, up to 3 MW or even 5 MW in the case of the biggest models. In addition, most developed country governments, including the UK and the US, offer a subsidy for wind power generation.
But investors should be wary of the potential problems associated with wind. The process of gaining planning permission from local authorities can be difficult. Companies must also get permission for any additional networks of large pylons that must be set up to connect remote wind farms to the electricity grid. Complicating matters further is a global shortage of wind turbines, caused by greatly increased global demand and high steel prices.

David Fitzsimmons, chief executive of Novera Energy, one of the UK's biggest pure play renewable companies, says he expects consolidation to take place this year.
“We're taking this forward from being a cottage industry,” he says. Ethanol companies such as Renova Energy and GTL Resources also fared well in 2006. They are cashing in on the ethanol boom in the US.

But there are potential dangers for these companies too. The crux of their business model is to exploit the lower price of ethanol compared with petrol, but those economics are changing as a bad grain harvest in many places has pushed up the price of their raw materials, while the oil price has come off its recent highs.
Emissions trading specialists have sprung up to take advantage of the new markets in carbon dioxide brought into being by the Kyoto protocol and the European Union's greenhouse gas emissions trading scheme. They too have had diverging fortunes: Climate Exchange was one of the best performers of “clean energy” companies on Aim, but Trading Emissions lost value over the year. Yet, the UK is likely to remain the centre for emissions trading for the foreseeable future, according to Paul Newman, managing director at Icap Energy.

One of the renewable energy technologies that has received the most hype in the past few years has been fuel cells. In April this year, the fuel cell specialist ITM Power was one of the relative heavyweights among renewable energy companies because it had discovered a way of making it cheaper to produce some of the key components in hydrogen fuel cells.
But as it became clear this technology would take years to come to market, the company's value dropped from £ 140 mm ($ 276 mm) to £ 125 mm.

Renewable energy in general is set to receive more investment in 2007, according to Shane Woodroffe, director of renewable energy at Fortis Bank.
“I'd say this will be one of the big growth markets, definitely.”
Venture capitalists are taking a keen interest. Mark Kerr, a director at 3i, says: “The economics of renewable energy are more compelling than the economics of traditional power generation opportunities from a venture capital perspective, because traditional power is a mature industry but renewable has huge opportunities for growing companies.”

Source: The Financial Times
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