The energy story will always be a money-spinner for small cap investors. But it's not just about racy little oil stocks; here's a major energy story we'll be able to tap into for the next decade or more...
Next year, the Government will introduce 'feed-in tariffs'. That's the price that independent generators will be paid for electricity fed into the national grid. This is important. It willstimulate the UK's efforts to produce energy from alternative sources. But even more importantly for you, it's a sign of a growing investment opportunity in clean energy. And I expect penny shares to be among the best ways to make serious profits from it.
One man who thinks he's spotted a way of making money out of clean energy is Dr Stephen Mahon. He is part of a team that runs the Low Carbon Accelerator fund (LSE: LCA), a quoted vehicle that invests in the green energy sector. He's an expert and so I asked him where the best opportunities lie in this burgeoning but complicated field.
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Not, apparently, in the so-called 'hydrogen economy.' Dr Mahon cannot see fuel cells playing a major part in renewable energy generation for at least a decade. That's not to say there won't be interest in them, in my view. Ceres Power (LSE: CWR) and Ceramic Fuel Cells (LSE: CFU) are both in this space and both attract a lot of attention. And they're up 155% and 248% respectively since March.
But Mahon is much keener on several other technologies. One is wind power. In the United States, where President Obama's stimulus package included a $100bn boost for green measures, Dr Mahon predicts massive growth for small-scale wind turbines. These are a cut down version of the large windmills that are now a familiar sight on the landscape. This is where feed-in tariffs make a difference.
Once it is known exactly how much will be paid for any energy generated in this way, the financial case for small-scale wind turbines, or for that matter solar panels, will become much clearer. About 450,000 UK homes are thought to be in sufficiently windy locations for wind-powered generation to make sense. And Dr Mahon expects that many landowners, especially farmers, will either run their own wind turbine or - more likely - be approached by specialist operators who will want to lease the land.
Another area of real promise is the smart grid. The present electricity grid is not good at adjusting the supply of power to match demand. Given that wind power, especially, can only be produced when the wind blows, there is an urgent need for more efficient distribution of electricity. In the absence of effective large scale methods of storing electric power, the grid pays power producers large sums to adjust supply.
But an alternative is to pay users to adjust demand, and the Low Carbon Accelerator fund has an investment in Rltec. This is a software provider that enables big electricity users such as supermarkets to make minor adjustments to the operation of their refrigeration or air conditioning in order to regulate demand.
These are some of the opportunities identified by Dr Mahon, and the Low Carbon Accelerator fund is invested in them. If you are prepared to excuse its 70% share price decline since launch in 2006 and the steep 2.5% management fee, the shares at 29p offer one way of investing in the green revolution.
Like the oil sector, alternative, renewable sources of energy are going to be a huge story for years. Ultimately, I believe that returns for investors in the right companies could dwarf those we've been seeing recently in the oil sector.
For me, penny shares will be the best way to play it. I'd be honoured to help seek out the right companies for you.
This article was written by Tom Bulford, author of the Red Hot Penny Shares newsletter, and is taken from his free daily email the Penny Sleuth .
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