AT first sight, a fuel-cell membrane that makes it easier for television addicts to watch their favourite programmes on a mobile phone has little in common with a 17-tonne metal buoy floating in the sea close to Pearl Harbor in Hawaii.
In fact the two are the little and large of the British stock market’s burgeoning alternative-energy sector. This now has almost 20 companies with a combined market value that broke through £1 billion at the end of last year and soared to £1.3 billion after last week’s launch of the government’s energy review.
Renewable power is an industry that fires the imagination, with its innovative wind, wave, solar, bio-fuel and fuel cell technologies. However, it also poses more valuation problems for British investors than anything since the rise of the dotcom and biotechnology stocks in the late 1990s.
Take that buoy in Hawaii. This is the first part of a pioneering wave-energy power station, ordered by the US Navy from Ocean Power Technologies, a £40m company quoted on London’s Alternative Investment Market (AIM), and it should start producing electricity within weeks.
George Taylor, chief executive of Ocean Power Technologies, said: “We think wave energy will end up being the most economic of the renewable power technologies. Energy in the waves is concentrated and very predictable, power stations are invisible from the shore, and fish treat them as artificial reefs.”
The methanol fuel-cell membrane for mobile phones is due to be launched in 2007 by Poly Fuel, another Californian firm that is quoted on AIM. The product sounds like a dream come true for Britain’s teenagers, but not quite so fantastic for their bill-paying parents.
Jim Balcom, chief executive of Poly Fuel, said: “The first TV phones are already being used in Japan and Korea, but consumers are complaining of low battery run times. With our technology, you should be able to watch TV on your phone indefinitely, as long as you carry a spare fuel cartridge.”
Investors cannot value Ocean Power Technologies and Poly Fuel on conventional yardsticks such as yield or price-earnings ratio — neither is yet profitable, and their most recent annual revenues were $5m and less than $1m, respectively.
Renewable-energy firms would be exposed to a sharp fall in world oil and gas prices, making many wind, solar, wave and bio-fuel projects suddenly look less viable — or competition from a large number of new nuclear power stations. Even those inside the industry concede that investors will have to keep their seat belts fastened.
Philipp Lukas, director of TMO Biotec, a bio-ethanol firm that may float on the stock market one day, said: “There are going to be a lot of disappointments in this sector, and a rocky road to success for others.”
Renewable energy has had sharp ups and downs even over its short history. One of the leading British-based funds, Merrill Lynch New Energy Technology, saw its share price fall 90% from November 2000 to the beginning of 2003, since when it has rebounded 270%.
Robin Batchelor, fund manager of the Merrill Lynch trust, said: “We launched our fund in 2000. There was some exuberance then, at the end of the tech boom, but now people are realising that a lot of those companies are still around, and have improved.”
Individual stocks have displayed hair-raising volatility at times. The shares of Biofuels Corporation have raced up from 68p to 311p, back to 80p and up to 140p, in just 18 months.
Fans of renewable energy argue that the fundamentals have improved — concern about global warming is mounting and the European carbon- dioxide emission-trading scheme has given utilities financial incentives to generate power by renewable means.
Julian Tolley, analyst at Dawnay Day, said: “With giants such as BP, Shell and Exxon moving into wind, hydrogen and methanol, many of the small companies are likely to be gobbled up. Some others will be successes in their own right.”
Investors have a complex task — to try to spot which renewable energies will be successful alternatives to oil, gas, coal and nuclear, and then to work out whether the profits will mostly go to equipment suppliers or to the companies that use that hardware to generate electricity.
General Electric, one of the largest turbine suppliers, said that the total installed capacity in wind energy worldwide is
48GW (gigawatts), and cites forecasts from analysts that this will grow to 117GW by 2009. Its biggest sale on this side of the Atlantic has been seven giant turbines at Arklow, off the east coast of Ireland.
Robert Gleitz, head of GE Energy’s wind operations, said: “In the past year, wind-turbine demand has been growing fast and furious on a global basis. Customers are requesting turbines for American wind developments — to generate not 10 or 20, but hundreds of megawatts.”
Batchelor said that wind power in appropriate locations was already competitive with fossil fuels, and he had invested 8% of his fund in Clipper Windpower, an American turbine maker quoted on AIM.
Clipper, headed by James Dehlsen, founder of a wind business in the 1980s later bought by Enron and then GE, expects to deliver 155 of its wind turbines in 2006, worth an estimated $400m (£225m), according to analysts.
However, margins in wind-turbine manufacturing can be tight. Losses are common. Vestas of Denmark, the world market leader, lost €105m (£72m) on sales of €1.4m in the first half of 2005.
Utilities such as Scottish Power and Iberdrola of Spain run wind farms, and there are two specialist AIM-quoted operators, Renewable Energy Generation and Renewable Energy Holdings.
The latter, based in the Isle of Man and with the promisingly named Mike Proffitt as chief executive, made a loss of £1.4m in the year to June, but recently bulked up by buying 41.7MW of wind-power assets in Germany for £33m.
Raymond Greaves, analyst at broker Collins Stewart, said: “If wind-farm operators select their sites well, they could make an internal rate of return of 15% or more thanks to local subsidies and carbon-certificate trading.
“The snag could be competition — too many people chasing each project, driving down returns.”
Solar has also attracted heavyweight interest. BP, which plans to invest $1.8 billion in renewable energy over the next three years, is already the world’s third-biggest producer of photovoltaic cells. These go into tiles for roofs, or for road signs, and convert the sun’s rays to electricity.
The only specialist stock in the London market is Solar Integrated Technologies, a Delaware firm quoted on AIM. Its photovoltaic roofing systems brought it revenue of $14m in the six months to June 30. It has orders worth $100m, including a project to equip school roofs in San Diego.
The renewable sector on AIM sports a striking number of American companies led by American entrepreneurs. Charlie Thomas, manager of the Jupiter Ecology Fund unit trust, said: “There is much more investor interest in the European market, and in the UK, than there is on the other side of the Atlantic. That is great news for London.”
How the cost of generating power compares
THIS YEAR the UK will have a total electricity-generation capacity of 75GW (gigawatts), with 35% coming from coal-fired stations, 38% from gas turbines, 22% from nuclear and only about 3% from renewables, including hydroelectric. The selling price of that power will be nearly £20 billion.
The government wants renewables to be responsible for 10% of UK generation by 2010, and double that by 2020, so there is a large potential market for suppliers of alternative energy.
How renewable technologies such as wind, wave and solar compare on cost with fossil-fuel generation is the subject of much debate.
A report by the Royal Academy of Engineering in March 2004 estimated that gas-fired generation cost 2.3p per kilowatt-hour, the same as nuclear and well below the 3.7p for onshore wind farms and 5.5p for offshore wind.
The independent Carbon Trust said that in 2003, gas-powered generation cost 2p per kilowatt-hour, compared with 3p for onshore wind, 5p for offshore wind, 7p for the embryonic wave and tidal technologies, and 24p for solar generation.
However, it is difficult to cover all the variables — for instance, wind-powered generation is intermittent, because the wind does not blow all the time, so back-up generation is required. On the other hand, the market price of gas has risen sharply since 2003-4 (from $3 a unit to $8.70, via a peak of $15), and a generator who wants to burn more gas may be forced to purchase extra carbon-emission certificates.
