Cashing In On Renewable Energy

Published in Investing on 16 April 2012

What are the opportunities in the alternative energy sector?

To paraphrase the economist Herb Stein, anything which cannot last forever will end. One thing that will eventually run out is oil, and whilst the world's known reserves of oil are sufficient for many decades, sooner or later humanity will need to be weaned off the stuff.

If the oil runs out and we don't have a suitable alternative, that will be the end of modern civilisation. So we need to develop renewable sources of energy, such as wind and solar power, as well as increasing the investment in tidal barrages, hydroelectric power and nuclear energy.

Unless we see a radical breakthrough in physics, such as harnessing zero point energy or cheap fusion reactors like the one that Doc uses to power the DeLorean in "Back to the Future", the world will be increasingly reliant upon these sources. The problem for investors is that the renewable energy industry's economics are not particularly attractive at the moment.

Tax and give away

Most politicians love renewable energy, because it gives them a good excuse to increase the taxes on non-renewable energy, and it lets them buy votes and campaign donations by giving taxpayers' money to the renewable energy industry.

Naturally, whenever a government is giving away money, you get a big queue of people who want a piece of the action, and some renewable energy companies have been much more successful in getting subsidies than in producing commercially profitable applications.

Consequently, there have been several subsidy-related scandals, such as the one that surrounds the politically connected solar cell manufacturer Solyndra, which obtained hundreds of millions of dollars in US federal government loans and loan guarantees shortly before filing for bankruptcy. Solyndra is now being investigated by the Federal Bureau of Investigation!

Fewer subsidies

Competition from the traditional sources of energy, such as coal, gas, oil and nuclear power, has meant that most forms of renewable energy have only been profitable thanks to these subsidies and laws such as the feed-in tariff system, which Germany uses to overcharge consumers in order to support its solar industry.

The problem for the solar industry is that these subsidies encouraged producers to expand their manufacturing capacity, but once they were slashed the price of solar cells crashed. One of the more obvious effects of this has been the major job losses seen at some British companies, including the Wolverhampton-based Carillion (LSE: CLLN).

There has been carnage in the stock market and the shares in many major solar panel producers, such as First Solar (NASDAQ: FSLR.US) and Suntech Power Holdings (NYSE: STP.US), have fallen by over 90%, whilst many German solar cell producers have been bankrupted.

Increasing competition from China has put further pressure on the American and European solar industries, and as so often happens when technology changes, many investors piled into the sector and then lost their shirts because their forecasts were too optimistic.

Roll on peak oil

One thing that's guaranteed to improve renewable energy's economics is an oil crisis, preferably one which sends prices soaring to well above $150 a barrel for a long period of time.

Along with those of us who are overweight in the oil sector, anyone with an interest in the success of renewable energy should welcome rising oil prices, because it would dramatically improve the industry's economics by making renewables more competitive.

However, the industry could also resort to lobbying politicians for more subsidies and to pass laws that increase the costs of fossil fuel producers and users, as has already happened in the UK.

Making British business even more uncompetitive

In 2008, parliament passed the Climate Change Act to encourage the adoption of renewable energy by deliberately increasing the cost of non-renewable energy. I also see it as providing a strong incentive to invest overseas, as it will damage British industry, since our energy costs are going to increase at a much greater rate than those of our foreign competitors.

The government's own figures indicate that this act will cost industry some £400 billion and increase the average British household's energy costs by around £760 a year. That's a big burden to bear, and it looks as if green policies will continue to put pressure upon domestic and commercial budgets.

Investing in the sector

Britain has a few quoted companies that specialise in renewables, but they haven't exactly set the world alight. One such is the AIM-listed Renewable Energy Holdings (LSE: REH) whose shares were listed at 50p in 2005 and are now just 9p. But the main interest is in European companies and two names that stand out are the wind turbine producers; Spain's Gamesa Corporación Tecnológica and Denmark's Vestas Wind Systems.

I don't have the expertise to differentiate between companies which specialise in renewable energy technologies, so if I was going to invest in this sector I'd first consider at a specialist fund such as BlackRock New Energy (LSE: BRNE), Impax Asian Environmental Markets (LSE: IAEM), Jupiter Green Investment Trust (LSE: LGC) or Ludgate Environmental (LSE: LEF).

Some other companies

Many large engineering groups, like Germany's Siemens, have substantial interests in renewable energy and it may come as a surprise to find out that the two "British" oil majors BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) are fairly big players in this sector.

For many years, BP has been playing up its alternative energy division by saying that BP now stands for "Beyond Petroleum", whilst Shell focuses upon biofuels and is also developing carbon capture technology, which it expects to use on the Oil Sands of Alberta.

There's a lot of money to be made (and lost) in the renewable energy sector, though it may take a long time for the technology to become truly competitive. In the meantime you can pick up some pointers on the sector from our Renewable Energy & Fuel Cells discussion board.

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Comments

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johnlatkins 16 Apr 2012 , 10:05am

I like ITM Power, a Sheffield based company which has patents on electric powered hydrogen generators. These may give a cheap, clean and sustainable way to store energy from windfarms and solar farms, by making hydrogen and using that as a fuel. They are working on hydrogen vehicles and hydrogen power generation. They have tie-ups with many major companies in hydrogen technology but could still be some way from profitability.

UncleEbenezer 16 Apr 2012 , 10:09am

I have a number of investments in renewable energy. Financially speaking, their performance ranges from moderate to disastrous (though I still hope to see PVCS recover).

Those looking for less risky investments might want to consider SSE, which leads the big utilities in renewable investment, and where a juicy income supplements slow capital gains (to date) and lower risk.

F958B 16 Apr 2012 , 11:09am

Or get a solar array installed on your roof.
I seized the opportunity a few months ago, while there were still generous (too generous) Feed-in-Tariffs available.
Although the higher FiT was withdrawn several weeks ago, the price of solar is also coming down which partially offsets this.
With the current reduced FiT rates, I estimate average annual total returns in the high-single-digits but maybe more if inflation picks up (the FiT payments are inflation-linked).
Just watch out because some installers are still charging high prices.

My solar array's outputs are available to view here:
http://www.pvoutput.org/list.jsp?id=6909&sid=5657

I also have a large holding in SSE.

tux222 16 Apr 2012 , 11:51am

There's now a huge question-mark in my mind over the future of solar in the next decade (and maybe longer). It's the success of "fraccing" in the USA, tapping huge new reserves of natural gas from rock formations that previously were formerly thought unproductive.

This is likely to make solar uncompetitive within the USA for the forseeable future (and will turn the USA into a natural gas exporter). It's also likely that the same drilling techniques will work elsewhere in the world.

So unless there's global agreement to tax natural gas and/or to subsidize zero-CO2 energy production, or some new breakthrough in solar technology, I don't see the tipping point for solar versus fossil fuel arriving any time soon. IMO that's a shame.

F958B 16 Apr 2012 , 12:20pm

Hi tux222

While solar may be cost-inefficient relative to other options, for domestic use it would manage to recoup the initial outlay even without a subsidy.
Since the government published SAP2009, solar equipment has improved, and so has the installers skill at optimising a system for a particular roof; the lads who fitted mine had done 200+ before, so they could do it quickly and efficiently, having had lots of practice.

My 3.75kWp system - which faces SouthEast and is therefore inferior to South - should, according to SAP2009, generate around 3000kWh per year.
However, most well-installed systems are comfortably exceeding SAP2009 estimates - typically by 10-20%.
So that 3000 annual estimate is turning into a reality of 3300-3600kWh per year for me.
At recent electricity prices of 14p per kWh, that's £450-£500 of electricity at retail prices (wholesale prices being a quarter of that).
For a South-facing system, it would be 10-15% more generation per year (i.e. £500-£550 at retail prices).

At around £8500 purchase cost for an equivalent system at the moment, it therefore takes 15-20 years to pay for itself. The lifespan is considered to be 25-30 years - maybe more, although, like a central heating system; it may need occasional repairs (probably a replacement inverter every 10-15 years).

The Feed-in-Tariff subsidies bring down the payback time to 7-10 years.

People's own projections for inflation (to which FiT subsidies are linked) and the future direction of electricity prices will determine how "valuable" each person considers a solar array to be.

UncleEbenezer 16 Apr 2012 , 1:51pm

F958B, yes, that would've been my first port of call if I had a roof to install panels on. And if you discount FITs, solar water heating panels are cost-effective without subsidy, on the grounds of being so much cheaper than solar PV.

mcturra2000 16 Apr 2012 , 4:08pm

Of course, all you guys realise that this is a faddish investment theme, right?

Lftrsuk 17 Apr 2012 , 1:46pm

The political consideration of GE Hitachi's PRISM reactor to obviate the problem of the UK's plutonium stockpile is a sure pointer to the inevitability of emission-free breeder reactors being globally deployed to supply base load electricity to everyone on the planet. It will commence as early as the 2020s. Energy from renewables will be economically driven down to a low single-figure % of total energy produced, which is where it needs to be for isolated rural communities with their tiny % of the world's population.

Industrialised countries living the pipe dream of supporting their standard of living from renewable energy will watch these wasted resources rot as they 'import' cheap electricity from the dominant breeder reactor technology.

The only thing the paying electricity consumers have to decide is will the electricity be from IFRs or LFTRs? See: http://lftrsuk.blogspot.co.uk/2012/03/breeder-reactors-it-is-but-will-it-be.html

So get your medium/long term money into GE Hitachi and the like for fast breeders, or Flibe Energy for MSR Breeders.

Maximus1986 17 Apr 2012 , 2:31pm

Hi guys and girls,

Just thought I'd explain how the costs of a solar system can be so much cheaper if you buy the parts yourself and install it yourself (except for the wiring in to fuse box).

I live in Holland and here there is no feed in tarrif, but electricity costs about 21 cents per kwh (over half is tax) and we all know that energy prices generally only go in one direction. I live with myself and my girl friend and we average 4000kwh per year so around 840 euros per year in electricity costs.

Now the system I've bought:

16x240wp solar panels costing 3100 euros delivered including VAT.
A fixing system for the tiles: 725 euros
A second hand inverter from German eBay: 500 euros.
Therefore in total, including cables and an electrician to connect to the fuse box it costs around 4500 euros in total for a 3840wp system.

My roof faces south West and I've been told this should produce around 4000kwh per year. When it's sunny my electricity meter spins backwards. So therefore even without a FIT I have a return at today's prices of just over 18% and a payback period of just over 5 years. This goes to show how much you can save if you are confident enough to DIY.

F958B 17 Apr 2012 , 3:30pm

Maximus

A problem in the UK is that "professional" solar installations only attract 5% VAT, whereas home-installed attracts 20% VAT.

Additionally, a UK system is only eleigible for Feed-in-Tariff subsidies if the components and installer are MCS-approved. In fact, it may even be that it is not allowed to be connected to the grid unless signed-off by an MCS-qualified electrician.

Furthermore, it's not as simple as chucking together a few parts and hoping they will work. A professional installer will ensure that the components are matched to work together, and that the wiring is also suitable for the load it will carry.
They will also be able to assess and mitigate shading issues due to chimneys, TV aerials or nerby buildings which, due to the layout of the circuits on a solar panel, can cripple the output form the panels if not given careful consideration.

So I would caution against anyone in the UK getting to many ideas without investigating the pro's and con's beforehand.

bouleversee 17 Apr 2012 , 5:52pm

F958B -

What about trees? How far away do they have to be? Who installed yours and could one trust them to give an honest opinion re feasiblity due to location? We get a lot of moss on our roof (bungalow). Would this form on a solar panel as well and do you have to clean the damn things? If so, I'm out!

I heard today that fraccing re shale gas is going ahead in the UK despite the earth tremors. Which firms are involved in that?

Maximus1986 17 Apr 2012 , 6:25pm

F958B,

I didn't realise it was so regulated in the UK in order to get the FIT and VAT benefits. I did do a lot of research before installing them in terms of positioning, angle of roof, and I know that any shade on one panel will be the weakest link. The system is only as good as the weakest panel. I did make sure that my roof is not obscured by anything before making the decision.
As for the inverter you simply need to get one that matches your kwp of the panels.

I was highlighting that a big chunk of the installation cost is man hours (like a lot of things). Therefore if you do ample research, shop around and have the confidence to manually install the panels you can save a fortune.

Bouleversee,

Any shade on the panels will be the weak point, therefore I guess you get rid of the trees shading your roof or don't get them.
Solar panels are designed to be self cleaning so any dust that forms on the panels should blow off or be washed away in the rain. I don't know if this is true of moss and I'm guessing that the moss thrives on your roof due to the shade from the trees?

F958B 17 Apr 2012 , 7:52pm

bouleversee

Roughly speaking, a sunny day generates about five times the power of a rainy day.
Shading is much the same as a rainy day.

However, due to the nature of the way the power flows through the panels, the group can only work as well as their weakest link.
To some extent this is mitigated by "bypass diodes" which, if a panel is shaded but the other panels are in sun, the shaded panel drops out and activates its bypass diodes so as not to limit the flow of power from its neighbours.
It is also possible for an array to be wired with more than one string of panels, so that panels which may suffer shade can be on a separate circuit to the panels which will never be shaded.
Separate strings are also required for different roof aspects (e.g. East/West split), due to differing amounts of sun on each roof as the sun moves during the day.
For example: East facing panels are shaded in the afternoon because the sun is behind them, while West facing panels are shaded in the morning for the same reason.

Regarding moss/muck on solar panels.
Many solar panels are manufactured with non-stick, anti-reflective coatings, which makes them mostly self-cleaning (mine accumulate some bird poo, which gets baked on in the sun, but it's usually washed itself off once we get some decent rainfall).
Muck is also less likely to accumulate the steeper the panels are mounted. Mine are 40-degrees, so keep reasonably clean. But flat roof mountings would be a nightmare.

Regarding installers....
Although I am happy with my panels (from salesman to schematics to installation to operation), I don't think I'll give the company free advertising (but by all means email me for a private discussion of what I think of various companies and who I would shortlist).

If you choose an installer, they must be MCS registered (which you should double-check on the MCS database:
http://www.microgenerationcertification.org/mcs-consumer/installer-search.php

Additionally, if they adhere to the R.E.A.L regulations, they should not stay longer than two hours if they come for a sales visit, and they are not supposed to use pressure-sales tactics such as incentives to sign on the spot, or special discounts.
They are also not supposed to engage in haggling.
However, a few may find clever ways around these rules.

Since I am interested in sustainability (did you notice the grow-my-own in my profile?) I have quite an interest in solar PV and other renewables. I therefore have spent quite a bit of time looking at solar and other renewables, so I could probably give you a good idea of your property's potential - using your postcode and google maps to snoop around your roof.

Regards,
F

bouleversee 17 Apr 2012 , 9:52pm

Thanks, both. I will take up your offer F.

snoekie 17 Apr 2012 , 11:06pm

Thank you john, I will try and remember ITM, that makes sense.

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