The alternative energy sector takes a hit

For over a year, Garry White has been warning against investing in biofuels. Now, as Germany cuts its biofuels targets, he takes a look at the future of the sector…

With startling Teutonic efficiency, it appears that the Germans will be the first country to cut their biofuels targets. I am pleased: very pleased.

The German Government has shelved plans to increase the compulsory ratio of bioethanol in regular petrol to 10% next year from the current 5%. Unfortunately, it is not because they have got wise and realised that biofuels are inefficient and environmentally damaging, but because they do not work.

"The 2009 biofuel blending target of 10%, set by the EU, could harm engines of an estimated 3.12m, mostly older, vehicles," said Environment Minister Sigmar Gabriel.

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I have been warning the readers of my newsletter to avoid biofuels producers for more than a year. It seems perfectly clear to me that the subsector was going to burn investors significantly as the rug is pulled from under them as biofuels targets were scrapped. This is the start of a process I have been expecting and that I welcome.

More falls to come

Take D1 Oils (LSE:DOO), for example. This company was expected to be one of the country's success stories in the alternative energy sector. The shares have fallen from 284.25p on 12 July last year to just 41p now. I think you should still avoid the sector; there are more falls to come.

"This [news] is a great pity for European producers," said one German trader. "They had hoped for more demand. Now it looks like we could be in the same [blending] position in 2012 as we are today."

The German media also spoke to UK-based ethanol producers:

"It is all very unclear at the moment but it does not look good. The worst thing is that this [delay] could spread to other countries which have an equal, or even higher, number of old cars. Clearly this would be devastating for all those who had banked on the blending mandate being strictly imposed."

The industry is being squeezed between rising feedstock costs; concerns over the efficacy of the product; and the environmental damage it can cause. To me, the whole thing seems crazy.

The impact of biofuels

Of course, I am not totally anti-biofuels; that would be dumb. In some cases, they offer a practical and sustainable way of generating fuel and can even help with permaculture plans.

However, blindly switching from fossil fuels to biofuels is destroying important areas of the planet; it is causing the cost of food to soar and it is wasting the most vital resource of all: water. You can have alternative sources of energy, but we have no alternative to water and we probably never will.

The apparent stupidity of the industry leaves me breathless. As well as total emissions, there are many other issues that need to be addressed, such as water usage, aquifer disruption, population growth and food concerns.

I think this morning's events in Germany are just the start: the EU, the US and the UK will have to rethink this legislation. This will continue to put the share prices of listed biofuels groups at serious risk.

The subsidies won't last

All this uncertainty means that the major players will sit on their hands and not invest in technology that will improve emissions for fear of installing the wrong one. The sooner the government changes the current legislation the better. That's for the sake of the environment, the businesses operating in these fields and our future energy security.

Of course we can power our cars on corn, sugar cane or wheat, but this will not provide limitless cheap energy. Biofuels can be useful in some localised operations, but it is not the answer to exhausted oil wells and climate change. They will just make a bad situation worse. The industry has only managed to survive because of subsidy. This subsidy cannot last much longer.

You should stay away from the biofuels sector. It is not a good investment proposition the risks are skewed to the downside. The only green future is a nuclear future. This view will continue to become the mainstream. Don't buy biofuels, buy uranium via the Uranium Participation Company (TSE:U). It's the best biofuels play that there is.

This article is taken from Gary White's free daily email Gary Writes'.