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Companies
How to make money from new energy plays
Peter Shmigel - December 5, 2007
 So, with all these climate change clouds around, is there a silver lining for investors? Is there a way to make greenbacks from green investments, like renewable energy (RE) companies?
Positive Side of Ledger
The idea of investing in companies that might be part of the climate change solution rather than part of the problem has real appeal. Doing the right thing – and making money. Some of the stars are aligning the right way.
The renewable energy (RE) sector now produces 15,000 gigawatt-hours per year or some 9.5% of Australia’s total electricity. RE players – such as technologists, plant operators and electricity retailers involved in solar, wind, hydro, wave/tide, geothermal and biomass - have long said they need the right policies and Government support for RE to reach its potential.
They’d be happy with the newly elected Labor Government’s pledge that 20% of total energy production in Australia by 2020 will be from more renewable energy sources.
Dominique La Fontaine, CEO of the Clean Energy Council (CEC), says: "Public policy is driver number one, two, three, four and five for the renewable energy sector. Both parties have now offered targets of some form and this will create drivers for the RE industry."
But while there are encouraging signs, the smart money will also consider a range of risks when it comes to the RE industry.
Broad, Narrow & New Players
The RE sector is characterized by ‘the broad’, ‘the narrow’ and ‘the new’.
The ‘broads’ are larger energy players building up their RE portfolios across a range of technologies, services and markets. Origin Energy, AGL Energy Limited and Pacific Hydro are in this group that tends to have highly experienced management teams and high profile Boards. These companies look to be involved with RE as a longer-term proposition, but they’re certainly not putting all their eggs in one basket.
The ‘narrows’ are companies that tend to focus on specific RE types or projects. Their technologies are usually well-established or further down the track, especially solar, wind and some forms of waste-to-energy. ‘Narrows’ include Babcock & Brown Wind Partners in wind power and Geodynamics in geothermal development. This group looks to combine an entrepreneurial spirit with strong governance.
Finally, there are the ‘news’, who are the numerous technology and engineering start-ups working on the ‘next big thing’. Some of these companies tend to know a great deal about their technologies (such as clean coal and wave/tidal), but perhaps less about how to make a buck out of them. A quick look at their management teams will show you whether they’re run by business people or by scientists and inventors.
Recent IPO action is a quick reality check. Of all 43 ASX IPOs since September, one has been RE – Kuth Energy Limited, a geothermal exploration company looking at opportunities in Tasmania and Queensland. (Kuth opened at 28 cents in late September and is largely unchanged.)
Looking ahead at IPOs, at least four RE-related companies are believed to have made application to be listed on the ASX:
1. Anaeco - treats household rubbish to capture gas and create energy;
2. Jatoil – produces biodiesel overseas from Jatropha plant;
3. Greenpower Energy – seeks coal-seam natural gas deposits, and;
4. Hot Rock – geothermal exploration company.
Costs & Logistics
If only 9.5% of Australia’s energy comes from RE, it doesn’t take a maths genius to work out that the vast majority is still from coal. This will continue for a considerable period of time, as there are abundant supplies and it’s cheap compared to all forms of RE, as confirmed by a recent report by the Energy Supply Association of Australia – which represents the whole range of producers.
The ESAA’s CEO sounds a further the cautionary note about the logistics of RE growth. Brad Page points out that it is unlikely that geothermal or solar technologies will be sufficiently advanced to make a significant contribution to targets now promised by our politicians.
"The bulk of the burden will fall to wind energy and that could involve building as many as 4500 wind turbines. This is a challenging construction task in itself, complicated by the maze of local, State and Federal planning and permitting laws and community consultation processes," Mr Page said.
Lay of the Land
So, if you’re interested in being part of the green future but don’t want to lose your wallet in the here and now, here’s a little risk management exercise you can apply to an RE company that you might look at:
1. What’s the make-up of their management team and Board? Mostly business people or mostly technologists?
2. Is the company diversified or concentrated? Chips spread across different RE involvements or all their chips on one technology or project?
3. Are the technologies in which the company has a stake existing and proven (such as wind or solar) or still being developed or going through exploration (such as clean coal, geothermal or wave/tidal)?
4. If you take away everything to do with RE, how does their last profit and loss statement actually look?
If your answer is "mostly business people, diversified structure, proven technology and profitable" your risks are lower, but so might be your future returns compared to the roughies.
If you see some potential, but are wary of the risks, another way to participate in RE investment is through fund managers who are supposed to do the homework for you.
Several fund managers – including Australian Ethical Investments, Hunter Hall and AMP - now ‘screen’ renewable energy companies into their eco-friendly specialist products.
More articles from this edition of CompareShares:
Investing: How to make money from new energy plays
Stocks: Stocks for the Long Haul: QBE and Leighton Holdings
Resident Trader: A frustrating foray into forex
Trading: The ultimate guide to trading shares for beginners - part 4
Markets: Cash injection won't help liquidity crisis
Economics: Inflation pressures just tommy rot
Outlook: The impact of commodities prices on mining companies
Rates: RBA leaves rates on hold
IPOs: Surge of IPOs deliver scant returns
Markets: ECB, US officials downbeat on recovery
Whatever your views, you can discuss this article - or any of Peter's articles - on our message board Your 2 Cents.
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