Governments are backing the green energy cause, and money is being poured in. There’s profit to be made, say John Stepek and Eoin Gleeson.
Tony Blair wants to save the world. In The Sunday Times last weekend the former prime minister evangelised about his new love for the ‘green’ technology he believes will save us all from death by global warming. If anyone objects to the high cost of doing so, he said, “we will just have to find a way” to convince them otherwise. But asked about how he had made his own life more sustainable, he was a little less sure of himself, hesitantly claiming to have solar panels on one of his several houses, adding that he had “some insulation”.
This interchange with Mr Blair sums up what irritates many people about the green energy movement. Political movers and shakers seem to spend a lot of their time and precious resources these days flying around the globe, calling for lots of other people’s money to be spent on a problem that has no easy solution.
And this shows no sign of changing. Overall investment in renewable energy (or ‘cleantech’, as the new buzzword has it) has declined as a result of the recession, as you might expect. But the scale of investment is still far higher than it was just four years ago.
Research group New Energy Finance points out that $155bn was invested in 2008 in clean energy companies and projects worldwide – and that’s not including large hydroelectric power sources. Wind power attracted the highest new investment, at $51.8bn, with $33.5bn invested in solar power. This was down on 2007, but is four times as much as was seen in 2004.
The cutbacks came mainly from the credit-crunched developed world. By contrast, developing countries had a huge surge in 2008 – investment was up 27% on 2007 to $36.6bn, with China leading the way.
And governments – presented with a popular cause that also offers them a way to justify spending themselves out of recession – still back the green energy cause to the hilt. The G8 leaders are discussing climate change and new emissions targets this weekend in preparation for December’s Copenhagen discussions. Here, a follow-up to the 1997 Kyoto protocol (whereby most developed countries, except the US, agreed to try to cut their carbon emissions) is likely to be agreed on. Already, America and China have each devoted roughly $67bn of their stimulus packages to ‘green’ stimuli, according to a UN Environment Programme (UNEP) report.
Green energy won’t go away
You might worry that a lot of this money will be wasted – and you’re almost certainly right. But regardless of your personal take on climate change, this issue isn’t going away.
The scientific consensus agrees that something must be done, and governments love doing something. If even the recession can’t dent their enthusiasm, it’s hard to see what will.
Of course, you don’t have to be concerned about climate change to appreciate the other benefits of weaning ourselves off fossil fuels. When the global economy recovers, we expect to see higher oil prices once again in the longer run. Simply crossing our fingers in the hope that oil won’t run out or spike to more than $100 a barrel again would be unwise. And it would certainly be useful to be able to liberate ourselves from energy dependence on regimes that may not have our best interests at heart.
But what should you be investing in? It’s a very wide-ranging field, stretching from electric cars (which we’ll be looking at in more detail in a future issue) to smart grids to biofuels. You can buy various exchange-traded funds that track individual sectors, such as wind or solar-power stocks. But this leaves you very exposed to the fortunes of one particular technology. A better way to get broad exposure is through the Blackrock New Energy Investment Trust (LSE: BRNE), which invests in larger companies across a range of themes. The trust trades on a discount of just under 4%.
Invest in American energy efficiency
For more adventurous investors, one particularly promising area is energy efficiency. Steven Milunovich of Merrill Lynch has described it as “the low-hanging fruit of cleantech”. Rather than spending lots of money on grandiose power-generation schemes that might not work, energy efficiency focuses on making the power we have already go further. Take Las Vegas, for example. Every night, the city’s road lights and casinos fill the sky with an orange glare that can be seen over 150km away in the Nevada Desert. It’s as garish a display as you’ll see anywhere in the world. But it’s also enormously wasteful. As each neon bulb from the casino lights up the strip, it emits a huge amount of energy skywards. It’s about as visible an example of energy waste as you’ll find.
That’s why, just last week, Barack Obama announced an all-out war on the humble light bulb. With more than 7% of the energy consumed in the US each year used to light homes and business, Obama has made energy efficiency the centrepiece of his domestic policy. You can pour a fortune into developing fuel cells or putting electric vehicles on the road, but the simple act of replacing the country’s light bulbs could save consumers up to $4bn a year, says the White House. That’s equal to the emissions produced by 166 million cars each year, notes Sheryl Stolberg in The New York Times.
But what’s he going to replace them with? There’s a good chance he’ll plump for light-emitting diodes or LED lights, which can cut energy consumption by 85% compared to incandescent light. A normal light bulb, made of a wire filament encased in glass, emits only 5% of the energy it consumes as light. The rest is wasted as heat. You don’t have that problem with a semi-conductor-based light. And because you can focus the direction of the LED light, you don’t contribute to the nightly urban blaze.
When the City of Portland replaced 6,900 of its traffic lights with LEDs in 2001, it resulted in annual energy savings of $400,000, breaking even in less than three years. With that sort of return, cities and corporations across America are signing up fast. And with Obama setting aside $346m last week in his ‘recovery’ plan for developing energy-efficient technologies, more will follow.
NextGen Research expects the overall LED market to grow by 22% a year until 2013 and turn revenues of $33bn. Industry leader Cree (Nasdaq: CREE) has already soared – it’s now on a forward p/e of 37. But Carmanah Technologies (Toronto: CMH) looks a great way to ride this boom, says Tom Konrad on Alt Energy Stocks. The firm integrates LEDs into solar outdoor lighting, such as runway lighting and billboards.
Keeping track of energy loss
Another major plank in Obama’s energy-efficiency efforts is to perform home energy audits nationwide. Nearly 43% of a property’s energy consumption comes from heating and cooling it. So Obama is hiring and training thousands of energy auditors to travel the country recording wasted energy. One of the best ways to undertake an audit is to use an infrared camera and videotape the heat differentials across the building’s surface to see where heat is escaping.
This is where FLIR Systems (Nasdaq: FLIR) comes in. FLIR Systems is the largest thermographic and infrared camera manufacturer in America and is leading the way on energy audits, with 28% annual sales growth over the last five years. The stock is valued on a forward p/e of 12.9.