Alternative Outlook

Renewable Energy as an Alternative Investment

Introduction to Renewable Energy

Very simply, renewable energy is any source of energy that can replace conventional sources of energy with sustainable, green, renewable sources that are not finite like oil, coal and other fossil fuels. As oil becomes more scarce and harder to extract, and as governments intensify their efforts to combat climate change, there will be more and more opportunities to invest in renewable energy projects.

Why Invest in Renewable Energy?

The price of energy from renewable sources is supported by three fundamental drivers:

1.       The increased demand for energy

2.       The reduced supply of conventional fossil fuels

3.       The imposition of targets to increase the use of renewable energy

1. Increased Demand for Energy

The 2009 World Energy Outlook, published by the International Energy Agency, predicts that world demand for oil (often used as a proxy for world demand for energy) will increase from 2,000 million tons of oil equivalent (mtoe) to 16,800 mtoe in 2030. About 93% of this increase in demand is expected to come from China and India as they industrialize and as their populations grow richer and consume more energy

2. Reduced Supply of Conventional Fossil Fuels

The American Petroleum Institute estimated in 1999 the world’s oil supply would be depleted between 2062 and 2094, assuming total world oil reserves at between 1.4 and 2 trillion barrels and consumption at 80 million barrels per day. Nearly all of the easily extracted, readily available oil has already been obtained and we are increasingly reliant upon harder to extract and consequently more expensive sources such as deep water drilling and tar sands. As oil becomes scarcer, the price will continue to rise – as we’ve seen it rise steadily from $25 a barrel in 2003 to its current price of about $100.

3. Targets

As the effects of climate change and global warming become more apparent governments are increasingly setting targets for the use of renewable sources of energy to try and reduce the amount of carbon we are emitting into the atmosphere. European leaders signed up in March 2007 to a binding EU-wide target to source 20% of their energy needs from renewables, including biomass, hydro, wind and solar power, by 2020. The UK set a target of 15 per cent of energy from renewables by 2020. This target is equivalent to a seven-fold increase in UK renewable energy consumption from 2008 levels. Governments around the world are following a similar pattern. For example, the Australian government has also committed to sourcing 20% of their energy needs from renewables by 2020.

These three fundamental drivers behind the energy price are unlikely to change, giving a sound rationale for investing.

In addition to the fundamentals behind the investment, you can also take comfort from the fact that by investing you are playing a part in combatting climate change.

“The industrialised world’s addiction to oil is not just environmentally but economically irrational. By relying on fossil fuels, the west is not only risking catastrophic climate change and subsidising some of the world’s political regimes to the tune of US$1 trillion annually, it is also forgoing the opportunity to develop new energy technologies in which knowledge based societies such as Europe and America, would enjoy a clear competitive advantage”.

The Times – 16 June 2010

Renewable Energy Products

Solar:

Solar energy investments tend to revolve around the concept of “feed-in” tariffs. National Governments guarantee prices for electricity generated from Solar Energy for a set period of time, usually several years – for example, in April 2010 the UK government set the feed-in tariff at a very high 41.3 per kilowatt hour for 25 years and other European governments are setting similar feed-in tariffs.

The feed-in tariffs are designed to encourage early stage investments and once projects are completed, more solar energy plants have been established and the industry is more developed the tariffs are reduced and eventually removed.

For investors, this means that the opportunity is only available for a relatively short period of time. What they are usually offered is an investment structured like a bond, with a fixed payment guaranteed for the term of the investment, capital returned at the end of the term and the underlying asset (the solar plant and land) as security. Annual returns range between 7 – 12% –  certainly better then cash  and much less risky then stock markets.

Green Oil:

Very simply, green oil is the oil derived from the seeds of crops such as Jatropha, Oil Palm, Millettia and Silverleaf. The basic process involves planting fast growing trees that will be productive within two or three years. At this point the seeds can be harvested and crushed to produce green oil which can be used to generate electricity, run cars and even power planes – it can be a complete replacement for conventional oil.

Therefore a successful plantation project with a high yield of oil obviously has a very lucrative commodity to sell. Investors funds are used to establish plantations and the investments are usually structured so that the investor owns the lease on  part of a plantation and earns a return from the revenues of the plantation. The returns on offer can be very high – but it’s important to check what risks you are exposed to as this is a very young industry and many investment are in higher risk locations such as Cambodia and Thailand.

Conclusions

There are three fundamental drivers behind the price for renewable energy:

1.       The increased demand for energy

2.       The reduced supply of conventional fossil fuels

3.       The imposition of targets to increase the use of renewable energy

These drivers won’t change, so renewable energy makes will play a part in our future and there will be opportunities to invest at an early stage and earn significant returns –  the key will to find investments in good locations, managed by operators with proven track records and a sensible operating model based on conservative assumptions.