How to cash in on the renewable energy boom

Climate change and the need for energy security mean money is pouring into alternative energy sources. Stock prices are rising fast, but this is no bubble.

According to James Lovelock, a founding father of the environmentalist movement, the world currently burns enough fossil fuels every year to generate 27,000 million tons of carbon dioxide (CO2). If you solidified that and piled it up, it would make a mountain nearly one mile high with a base 12 miles in circumference. Given that most scientists think that even a fraction of that amount of CO2 spells disaster for the world's climate, this statistic is horrifying enough, but the real problem, thanks to the pace of global growth, is that every year we create not less, but more CO2.

Consider China, which, with a fifth of the world's population, is undergoing a modern day industrial revolution and developing at a pace and on a scale never before witnessed in human history. It is likely to move 300 million of its population to new cities by 2020, for example that's equivalent to moving the entire population of the EU. All those new city dwellers are soon going to aspire to first-world standards of living they are going to want cars, for example. Right now, there is one car for every eligible driver in the US. In China, there are nine per every thousand eligible drivers. That won't last some estimates suggest that there could be anywhere from 100 to 200 million cars in China by 2020.

And, of course, cars require roads. The Chinese are planning to build 50,000 miles of motorway equivalent to the entire US interstate network over the next five years. This is serious stuff. But add it to the fast development taking place elsewhere in the emerging world and the upshot is that the IEA is forecasting global energy consumption to increase by 50% by 2030 and energy-related greenhouse-gas emissions by around 55%. If you believe that global warming is man-made as most scientists and commentators now do this is very bad news indeed.

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The main conclusion of the recent research in this area is that the build-up of greenhouse gases in the atmosphere chiefly CO2 and water vapour will lead to several degrees of warming. On current trends, by 2050, as global levels reach twice pre-industrial levels, it is argued that average temperatures could rise by as much as 5C from pre-industrial levels (assuming climate change goes unchecked). The Stern Review, commissioned by the Treasury last year, concluded that a warming of 3C or 4C could result in many millions more people being caught up in floods; by the middle of the century 200 million may be permanently displaced due to rising sea levels, heavier floods and drought; and a warming of 4C or more is likely to affect global food production.

All this said, there are still those who say global-warming science is no more than bunkum. The arguments against were aired earlier this year in The Great Global Warming Swindle on Channel 4. The makers of the show claimed that new evidence showed that radiation from the sun (as measured by sun-spot activity) causes the earth to heat up or cool down, and a detailed look at recent climate-change data apparently revealed that temperatures rose prior to 1940, but unexpectedly dropped in the post-war economic boom, when carbon-dioxide emissions rose dramatically. Conversely, sun-spot activity correlated very closely with the temperature data over the same period. The programme also claimed that there is evidence to suggest that the rise in CO2 lags behind the temperature rise by 800 years and therefore cannot be the cause of it. Meanwhile, others point out that CO2 is produced in far greater quantities by natural means, such as volcanic emissions, animals, bacteria, decaying vegetation and the ocean.

Bunkum or truth? It doesn't matter

However, irrespective of whether climate change is man-made, it is still clear even to George Bush that with so many of the world's fossil-fuel energy sources located in politically unstable parts of the globe, energy security' has become a pressing geopolitical issue. The development of alternative forms of energy is, therefore, not just about being clean and green, but also about reducing energy dependence. Whether the reason is energy security something that has also been recognised by the UK Government in last month's DTI White Paper or the impact of climate change, or both, the effect is much the same.

The developed world is seeing a huge and growing reallocation of resources to deal with the problem as politicians pick up alternative energy as the perfect campaigning platform. 2008 Democrat presidential hopeful Christopher Dodd is calling for an energy plan to reduce greenhouse-gas emissions, supported by a corporate-carbon tax' that would bring in $50bn a year, for example.

The proceeds would fund development of renewable technologies (renewables), such as wind, solar and bio-fuels, as well as encouraging the adoption of more energy-efficient technology in the marketplace. Add this kind of initiative to those already underway under the Kyoto Protocol and you can see why many see climate change as the next boom sector for the world's stockmarkets. As resources shift via government subsidy and private-sector investment into researching new technologies, in particular alternative forms of cleaner' energy to reduce carbon emissions, the right companies in the right place will do very well indeed.

Already a number of companies around the world involved in areas as diverse as solar energy (Renesola) and battery powered vehicles (Tanfield) are experiencing exponential growth and booming demand. In the 1996 investing classic Midas Investing, author Jonathan Steinberg states that one of his main selection criteria when choosing stocks is a strong theme. He notes that the "best trends to follow are the ones that have sufficient momentum to last for many years, if not decades". Both climate change and energy-security issues look set to be with us for many decades to come.

Steinberg also likes to see "something new". Here, climate change is heralding new technology: new business practices (the establishment of "green credentials" by both industry and government); a whole new business philosophy based on carbon neutrality supported by carbon-emission trading; as well as rafts of new legislation intended, for example, to drive the adoption of alternative energies. Climate change is also clearly a strong enough theme, as Steinberg puts it, "to spill over" into whole sectors.

A great but complicated investment opportunity

Still, investing in climate change isn't easy. For starters, there are many different strands to climate change, including emissions trading, the reduction of greenhouse gases (principally CO2), energy-efficiency improvements, the conversion of waste gases into energy, and alternative, cleaner forms of energy (see below for details).

Then there is the fact that much of the impetus behind renewables is being driven by the Kyoto protocol, and is hence legislation-driven. In many cases, government subsidy (eg, £1bn annually for deployment of renewable electricity in the UK to 2010, rising to around £2bn in 2020) is also in the mix it will be necessary for many years to come, since new technologies are not yet commercially viable on an unsubsidised basis.

There is also a huge market opportunity in technologies for lowering levels of emission and pollution. There is potential for the introduction of new cleaner coal technologies, for example, based around carbon capture and storage, which could reduce emissions from fossil-fuel power stations by as much as 90%. Also, there is the ongoing shift among conventional energy sources towards more gas usage. For example, by 2020 the consumption of gas is forecast to overtake that of oil. With the shortage of pipelines, this has made the development of ever-more efficient methods of storage a necessity. In terms of building and construction, there are new types of building materials, such as lime-based mortars, plasters and renders, which can even lock up CO2 to create a negative carbon footprint. It all adds up to a fantastic opportunity for those who take the time to understand it properly.

For more tips, read: Three stocks set to benefit from green cash

Seven sources of renewable energy


There are now a whole host of firms worldwide involved in producing and developing alternatives to mineral-oil-based fuels, which are largely based on extraction of oil from natural products, such as palm oil. US researcher Clean Edge predicts that the global market for bio-fuels (manufacturing and wholesale pricing of bio-diesel and ethanol) could be worth $80.9bn by 2016.

Wind power

Clean Edge predicts that the global market for wind energy could grow to $60.8bn by 2016. The UK has one of the longest and windiest coastlines in Europe so is ideal for this.

Solar power

The solar power market (solar wafers, photovoltaic modules, system components and installation) is forecast to be worth $69.3bn by 2016.

Fuel cells

A number of companies are developing larger-scale fuel cells, while others are developing micro-fuel cells with the potential for applications, such as powering laptops. Clean Edge thinks the market could be worth $15.6bn by 2016.

Wave and tidal energy

Last month the UK government expressed interest in building a giant £14bn, ten-mile tidal barrage across the Severn, which could potentially generate 5% of the UK's electricity from a reliable renewable source.

Biomass, waste gases and recycling

Biomass boilers are increasingly common and some firms are generating power from waste gases in old mine works and landfill sites. New technologies include pyrolysis and gasification processes that can turn waste into electricity.

Nuclear power

James Lovelock sees the onlyshort-term answer to global warming as nuclear power. He says it is the only carbon-free energy source we can use on a sufficient scale. It's hard to disagree, hence the rising uranium price.

Nigel Milton is editor of the Investing for Growth newsletter.