Clear up in the cleantech boom

James McKeigue on the new energy technologies that could transform the way we power our economies - and generate big profits for smart investors.

It doesn't start until next week. But most people already expect the United Nations' climate summit in Durban, South Africa to be a failure. Indeed, one of the few things environmentalists and climate-change sceptics agree on is that nothing significant will come out of the meeting.

How times have changed. Back in 1992, a host of countries signed up to the ground-breaking Kyoto Protocol, agreeing to cut greenhouse gas emissions in a bid to slow global warming. But since then, governments' enthusiasm for grand international deals has waned.

Why? It's mainly down to the financial crisis. With their economies mired in debt, leaders of the developed economies are less willing to commit to costly programmes to cut carbon. Emerging economies are also dragging their heels, unwilling to put ecological shackles on their fast-growing economies.

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Investors are still enthusiastic

Yet, even as the environment slides down the priority list of governments, investment in cleantech' technologies that produce renewable energy or increase energy efficiency is booming. Last year, investment in renewable power generation hit a record $195bn. This year, it's on track to be higher still. Indeed, consultancy Bloomberg New Energy Finance expects annual investment to double by 2020, particularly as emerging markets become increasingly important.

And it's not just power-generation. If you include energy efficiency and low-carbon transport, total global spending on cleantech is around $600bn and rising, says The Economist. "Big winners over the next 20 years will be the emerging renewable energy hubs in Latin America, Asia, the Middle East and Africa by 2020 the markets outside of the European Union, US, Canada and China will account for 50% of global annual investment in renewable energy capacity," says Bloomberg's Guy Turner.

So why is cleantech investment still so buoyant? One major reason is the high cost of traditional energy sources. Oil prices have spent most of the last decade at record highs. All but a handful of countries rely on imported oil to power their economies, so that's a major incentive to try to find an alternative, or to use oil more sparingly. For example, between 2005 and 2010 China managed to cut energy consumption per unit of GDP by 20%. Its most recent five-year plan has called for a further 16% reduction. Meanwhile, in the US, sales of fuel-efficient cars are soaring as drivers realise that record prices at the petrol pump are here to stay.

Energy security also plays a huge role in the cleantech boom. The oil crisis of the 1970s demonstrated the power wielded by oil-exporting countries. Since then, the US has gone through a lot of effort and spent plenty of money, with varying degrees of success, on trying to ensure that oil wells around the world keep pumping. America's travails have not been lost on the rising powers of India and China. They are investing heavily in cleantech to reduce their reliance on fossil fuel imports.

Pollution reduction and safety concerns are the other big drivers behind renewable investment. Climate change may remain a long-term issue for most people, but pollution is an issue that can cause political uproar in emerging economies. Take China, the world's biggest carbon emitter. According to the World Health Organisation, 16 of the world's 20 cities with the worst air pollution are in China. Only 1% of China's 560 million city dwellers breath air considered safe by European standards.

For a long time authorities turned a blind eye, but recent protests have forced them to acknowledge the problem. Last month the government shut a chemical plant after 12,000 people protested in one of the biggest civil disturbances in three years. This month internet bloggers some with millions of followers complained about air quality and government inaction. China may not be a democracy but it wants to keep its middle class happy. So just as Chinese living standards are catching up in terms of TVs, cars and holidays, air quality should follow.

So what technologies will benefit from the cleantech boom? Wind, hydro and solar power are the most popular forms, but other more obscure solutions should also benefit. Here we look at three, and how you can best invest in them.

Turning rubbish into energy

One potential source of extra energy is rubbish. The traditional method was to power steam generators by incinerating rubbish. Burning waste may not sound very environmentally friendly, but a combination of filters and scrubbers' means that new incinerators produce fewer toxins than a barbecue or a home fire. As a result, hundreds have sprung up in Europe in the last ten years.

Landfills are also a significant source of energy. As bacteria breaks down the waste methane is released to the extent that the gas sometimes causes landfills to burst into flames. In the last 20 years, firms have begun to exploit this gas by drilling' wells deep into landfills and using the methane to produce electricity.

However, penetration of such technology is still low. The problem with incinerators or landfill gas generators is that they can only produce energy on site. The Holy Grail of waste-to-energy is to produce fuel that can be as versatile as a barrel of oil. A number of firms have developed exciting new solutions. For example, Ensyn, a small US firm, has a technology that blasts agricultural waste with hot sand. This turns it into vapours that are cooled then recovered as a liquid fuel, which can then be used as an oil substitute for heating, power production or transport.

That's all very well for agricultural waste but the real challenge is to get energy from household waste an ugly mix of plastics, metals and organic material. Traditional sorting techniques, such as using people to sort through rubbish, are expensive and not always effective.

Here in Britain, Sterecycle thinks it has found a solution. The firm puts unsorted waste directly into sterilising chambers giant versions of the chambers used by hospitals to cleanse medical equipment where heat and pressure are used to separate organic and non-organic waste. Once separated, the organic material, which is rich in carbon, can be used for high-grade, clean energy and doesn't need to be processed in special incinerators. Meanwhile, much of the sterilised non-organic material can be recycled. For now, the firm's Yorkshire plant churns out briquettes that can be used for power-generation and heating.

However, it is also developing biogas and biofuel applications.

Like all small technology companies, many of the waste-to-energy firms are risky investments. The market is competitive and fragmented. There is always the risk that tomorrow a new firm enters the fray with a better solution. So one of the best ways to reduce the risk is to invest in a cleantech fund with exposure to waste to energy, rather than a specific individual stock.

Back in January, we tipped Impax Asset Management's Environmental Markets (LSE: IEM), an investment trust that buys stocks that provide efficient ways to deliver energy, water or waste management. The fund was hit hard by the August sell-off and lost 17% in a few days. With smaller, risky stocks out of fashion, the price hasn't yet recovered, but we still think it's a good, long-term way to play the sector. Waste and alternative energy account for 50% of the trust's holdings. It invests in large, listed firms but it also offers access to small start-ups, such as Sterecycle. Thanks to the recent sell-off the share price now trades at a discount of 16% to net asset value (NAV) compared to a lifetime average of 6%.

Cleaner nuclear energy

The most obvious way for a country to cut its fuel imports is to develop nuclear power. Sure, that still involves importing uranium for most nations, but unlike oil or gas power stations, fuel forms a tiny part around 10% of the total cost of nuclear energy. That means countries using nuclear energy are less vulnerable to volatile fuel prices.

Nuclear is also clean, in that it produces barely any carbon dioxide emissions. If its waste is well managed, it shouldn't affect the air quality. In short, it ticks most of the boxes, so why doesn't the whole world use nuclear?

In a word, fear. Accidents in the 1970s and 1980s slowed nuclear construction in the developed world. Just as nuclear power was beginning to enjoy a renaissance, the Fukushima disaster struck in Japan. Almost immediately, Germany closed its oldest nuclear plants and promised to shut the rest down by 2022.

Yet that could be good for a little-known fuel that promises the benefits of nuclear with much less risk. Thorium is a radioactive metal that is being touted as the alternative to uranium in the nuclear fuel cycle. The idea of thorium-based nuclear power is nothing new. Scientists tinkered with it in the 1940s. However, in the end governments went with uranium. This was partly because the technology was easier to develop and also because uranium-based nuclear-produced plutonium useful for nuclear weapons was a side product.

So what's changed? Well, for starters the idea of producing lots of plutonium is less palatable now than it was during the Cold War, especially as nuclear power spreads to more countries. The fear these days is not of being beaten in an arms race, but of individual terrorists getting the material to make a dirty bomb'. So the fact that thorium reactors can also use plutonium as a co-fuel, providing a useful way to dispose of plutonium from old weapons, is now a positive benefit.

That isn't thorium's only safety feature. It produces less waste than uranium and this remains radioactive for less time hundreds of years rather than thousands. That's still a long time, but it does reduce one of the main concerns about nuclear energy what to do with the waste. Thorium also makes economic sense. It is three times as abundant as uranium, and a kilo of thorium produces 250 times more energy than a kilo of uranium. What's more, existing reactors can be adapted to run on thorium, although many believe that the fuel's potential would best be exploited through purpose-made reactors.

Unsurprisingly, international interest is growing. France, which generates 75% of its power from nuclear energy, is building models of experimental thorium reactors. India, which has the world's largest thorium deposits, has already begun work on building a modified conventional reactor that can use thorium. Meanwhile, China has started work on a rival reactor design and instructed mineral refiners to store thorium that is dug up with other minerals.

The only listed firm dedicated to thorium technology is Lightbridge (Nasdaq: LTBR). The firm has designed three fuel systems that combine thorium and uranium and can fit into existing nuclear reactors. One of the systems is designed to increase the efficiency of plants, so that they can run for a longer time before having to replace the fuel, and to reduce the amount of plutonium they produce. The second system is designed to dispose of nuclear warheads, and the third to dispose of nuclear waste. The advantage of the last two systems is that, unlike the existing technologies, they don't just get rid of a nasty problem, they also produce energy.

There's no doubt that this is a risky investment. Lightbridge's products have yet to be approved. But if you believe that the benefits of thorium will eventually outweigh vested interests and political intrigue, this is the best way to play it.

Green computing

In many ways energy is the sector that information technology forgot, says TomKonrad in Forbes. IT "revolutionised the way we buy things (Amazon, eBay), how we get information (Google, Wikipedia, the decline of newspapers), and how we interact with our peers (Facebook, Twitter, LinkedIn). Yet so far, it has had little, if any, transformative impact on energy".

But Green IT' could change all that. There are two types of Green IT, says Jrgen Habichler, founder and managing partner of Mountain Cleantech. One involves cutting the energy impact of IT itself. IT accounts for 2% of global energy demand, so savings there are not to be sniffed at. But the most exciting opportunity involves using "intelligent IT systems and innovative resource-saving processes" to cut energy costs across the economy.

Green IT was born in America and is now starting to expand in Europe and Asia. "The growing amount of venture capital in Green IT reflects a change in investment philosophy that has been echoed by many venture capitalists recently: putting money in energy software and IT could generate more predictable returns in a shorter time frame, compared to some of thecapital-intensive investments in solar and biofuels," says Habichler.

One of the most promising green IT applications is in electricity demand response. In most electricity markets, power prices depend on demand. At peak time, power costs more than when demand is lowest. That's because utilities have to meet this extra demand by turning on more expensive, flexible power plants.

This is where green IT comes in. Software makes it possible for willing customers to cut their consumption during expensive periods and reduce their bills. It does this by selectively controlling machinery, lighting and ventilation, and so reducing demand without affecting important operations. The impact of one ventilation system may seem slight, but in the US more than 30,000MW of demand is now controlled by demand response companies. That's around half of the UK's totalled installed power capacity.

By grouping their clients together into one network, these demand-response firms can make a serious impact on the grid. And it isn't just used to cut power use. The increasing use of renewable technologies means electricity supply is now more variable. Wind farms, for example, are an intermittent source of power that can rise or fall with the wind. Demand response helps the grid absorb sudden leaps in power-generation, by channelling it through to its customers. Some on-site appliances, such as freezer units or ventilation systems, can act as a type of storage. By using extra energy in the present, they need less in the future, meaning that future demand can be freed up and given to another user.

A leading firm in the sector is US firm EnerNOC (Nasdaq: ENOC), which controls 7,000MW of demand. It is mainly focused on America but has won clients in Canada, Australia, New Zealand and the UK. While demand response is its main business, it has also used its IT nous to offer extra services to customers. It crunches data to help customers lower carbon emissions, improve efficiency and negotiate the best energy deals. Its efficiency consulting arm, EfficiencySmart, doubled sales in the past year. Overall, sales in the third quarter rose 4% year-on-year to $169m, while gross profit was up 9% to $84.8m. On a forward p/e ratio of 55, the shares aren't cheap. But energy consultancy firm KEMA estimates that the nascent demand response market could eventually be worth $80bn.

James McKeigue

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.