Green Money
Excerpts from Investing in climate change
The preconditions exist for another alternative-energy boom. Climate change is rarely out of the headlines. Even sceptical governments are interested in the field, if only for the sake of energy security. High oil and gas prices have made alternatives look more economically viable. And the sector is so diverse that even if one technology disappoints, others can take over.
The sector can be divided into six parts : wind power, solar, biofuels, carbon trading, “blue sky” (developing technologies such as fuel cells) and energy efficiency. This latter category can include well-established companies, such as those providing insulation to new buildings.
These various sub-sectors go in and out of fashion. Wind-turbine companies had mini-busts in 2000 and 2004, for example. The Impax index of environmental stocks reached its peak in 2000, and is now trading at around only half that level. Another mini-boom appeared to peter out last May. In 2006 biofuels were briefly hot, thanks to high oil prices, which started to make ethanol look an attractive alternative to petrol. That caused a flurry of investment in ethanol plants and the price of sugar (the basis for Brazil’s ethanol production) soared.
But the ethanol bubble was quickly popped when oil prices came down and investors realised the barriers to entry in the industry were fairly low. Investor interest has been switching to the companies that develop the enzymes which break down plant matter and turn it into fuel. “Novozymes, a Danish company, was considered a boring old speciality chemicals company until the enzymes operation was recognised,” says Ronnie Lim, head of sustainable-investments research at Morley, a fund-management group.
The wind market is probably the most developed. Three of the four largest environmental companies by market value (Suzlon from India, Gamesa from Spain and Vestas from Denmark) are wind groups, according to Impax. Turbine manufacturers should prosper in 2007, says Bruce Jenkyn-Jones, Impax’s director of investments: 28 different countries are growing wind capacity, which means that turbines are sold out to 2008. So manufacturers can push through price increases.
In the solar sector, one problem has been a shortage of silicon, which has made panel production very expensive. Eventually, thin-film technology may prove a cheaper replacement, but that is years away from mass production. However, there may be other solar opportunities. Stephen Mahon of the Low Carbon Initiative, which recently launched a £44.5m ($82.5m) environmental fund, says it is investing in Heliodynamics, a company which uses mirrors to focus the sun’s rays and thus increase the power generated.
Investors’ enthusiasm for “blue sky” projects like fuel cells tends to be limited because products will neither have an immediate environmental impact nor produce instant profits. Although the holy grail of fuel cells for cars may be some way from mass production, they are being used in laptops and fork-lift trucks.
The most controversial area is that of carbon credits, which requires energy producers to buy permits to emit greenhouse gases. In 2006 the European Union’s emissions-trading scheme was crippled by the over-allocation of permits by member countries, prompting the price to plunge by two-thirds. But James Cameron, a founder of Climate Change Capital, is optimistic. He has just raised an $830m fund to invest in carbon trading
The preconditions exist for another alternative-energy boom. Climate change is rarely out of the headlines. Even sceptical governments are interested in the field, if only for the sake of energy security. High oil and gas prices have made alternatives look more economically viable. And the sector is so diverse that even if one technology disappoints, others can take over.
The sector can be divided into six parts : wind power, solar, biofuels, carbon trading, “blue sky” (developing technologies such as fuel cells) and energy efficiency. This latter category can include well-established companies, such as those providing insulation to new buildings.
These various sub-sectors go in and out of fashion. Wind-turbine companies had mini-busts in 2000 and 2004, for example. The Impax index of environmental stocks reached its peak in 2000, and is now trading at around only half that level. Another mini-boom appeared to peter out last May. In 2006 biofuels were briefly hot, thanks to high oil prices, which started to make ethanol look an attractive alternative to petrol. That caused a flurry of investment in ethanol plants and the price of sugar (the basis for Brazil’s ethanol production) soared.
But the ethanol bubble was quickly popped when oil prices came down and investors realised the barriers to entry in the industry were fairly low. Investor interest has been switching to the companies that develop the enzymes which break down plant matter and turn it into fuel. “Novozymes, a Danish company, was considered a boring old speciality chemicals company until the enzymes operation was recognised,” says Ronnie Lim, head of sustainable-investments research at Morley, a fund-management group.
The wind market is probably the most developed. Three of the four largest environmental companies by market value (Suzlon from India, Gamesa from Spain and Vestas from Denmark) are wind groups, according to Impax. Turbine manufacturers should prosper in 2007, says Bruce Jenkyn-Jones, Impax’s director of investments: 28 different countries are growing wind capacity, which means that turbines are sold out to 2008. So manufacturers can push through price increases.
In the solar sector, one problem has been a shortage of silicon, which has made panel production very expensive. Eventually, thin-film technology may prove a cheaper replacement, but that is years away from mass production. However, there may be other solar opportunities. Stephen Mahon of the Low Carbon Initiative, which recently launched a £44.5m ($82.5m) environmental fund, says it is investing in Heliodynamics, a company which uses mirrors to focus the sun’s rays and thus increase the power generated.
Investors’ enthusiasm for “blue sky” projects like fuel cells tends to be limited because products will neither have an immediate environmental impact nor produce instant profits. Although the holy grail of fuel cells for cars may be some way from mass production, they are being used in laptops and fork-lift trucks.
The most controversial area is that of carbon credits, which requires energy producers to buy permits to emit greenhouse gases. In 2006 the European Union’s emissions-trading scheme was crippled by the over-allocation of permits by member countries, prompting the price to plunge by two-thirds. But James Cameron, a founder of Climate Change Capital, is optimistic. He has just raised an $830m fund to invest in carbon trading
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