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US catches on to the green fuels revolution
By
Euan Stuart
Dec 12, 2005
With the oil price rising fast and environmentally friendly fuels becoming increasingly desirable as a result, it looks like green may soon be the new black, says Steven Frazer in Shares. The US government in particular is keen to see some of its fossil-fuel consumption replaced by the use of biofuels. Biofuels are renewable forms of energy made from sugar or various oils, such as palm oil and even vegetable waste matter, such as peanut husks, which can be used either as total replacement for conventional fuels, or as an additive to the more traditional petrol and diesel. At the moment, bioenergy makes up about 15% of the world’s energy consumption, mainly in developing countries, where it is used directly for heating rather than to make electricity, as is the plan in developed nations. However, some first-world countries are more ahead of the game than others: Sweden and Finland already supply 17% and 19% of their energy needs respectively with bioenergy.
Still, the US is keen to catch up. In some states, such as California and New York, 5%-10% of every gallon of petrol sold is made up of ethanol derived from sugar cane. And every year the US comes up with more legislation to encourage greater use of eco-friendly fuel – creating a rapidly expanding market. While it has refused to sign the Kyoto protocol for emissions reduction, the US government has not been shy to talk up its recently passed energy bill, says Christopher Swain in the FT. According to energy secretary Samuel Bodman, the bill meets “virtually all” of the administration’s energy policy goals, encouraging diversification into nuclear power, ethanol, natural gas and sources such as wind and biomass. Not everyone’s convinced the bill will end up doing anything to stem demand for imported oil or slow the growth in greenhouse gas emissions, but it is still good news for some.Biofuel producers in general are thrilled with the administration’s aim to double the amount of ethanol used in US petrol. Farmers are excited at the prospect of a flood of new demand: it takes 56 pounds of corn to produce one gallon of ethanol. And garage owners are happy because they get tax credits on every gallon of ethanol petrol they sell.
Little wonder, then, that both farmers and petrol station owners are lobbying the UK government too. Shell, for one, is calling for compulsory targets on the amount of transport fuel to come from biofuels in the future. And in Europe, the biofuels agenda is being pursued very aggressively, says Fiona Harvey in the FT. The EU is putting a scheme in place that caps the amount of carbon dioxide companies within certain industry sectors are allowed to emit. This should encourage firms to cut emissions by improving energy efficiency – or installing biofuel technology. Carl Mortished, writing in The Times, is far from impressed with the scheme. It is, he says, no more than an excuse to pay more expensive subsidies to Europe’s farmers. If we want cheap biofuels, why throw more subsidies at France’s already overpaid farmers? After all, Brazil produces very cheap sugar cane, says Mortished. If we want energy efficiency so badly, why don’t we just buy it from them?
But whether the shift towards biofuels is a genuine attempt by governments to encourage fossil fuel reductions, or whether it is a backdoor way to win political support from farming communities, is by-the-by to investors: the more governments encourage and enforce the use of renewable biofuels, the more the companies already involved will profit.
How to profit from biofuels
There are about 80 to 85 ethanol producers in the US, says Steven Frazer in Shares, but one that looks promising is the recently Aim-listed Renova Energy (RVA). It is a small operator based in the midwestern US, a “profitable niche region”. Revenues have grown quickly in recent years and the firm is profitable, a rarity in this industry. The stock trades on a p/e of just six times 2008 estimated earnings and the company is likely to be paying out “over half” of these earnings in dividends by then.
Biofuels Corporation (BFC) floated last year at 75p per share on Aim, says Lucy Smy in the FT. It is ontrack to open Europe’s first big biodiesel plant in September in northeast England, and, thanks to high demand, is planning a second plant. The firm already has a contract with Petroplus, a fuel supplier, and has signed another with a “household name”.
The Invesco Perpetual UK Smaller Companies Fund and the Invesco English & International Trust are exposed to the renewable-energy market in part through producers of biofuels, says its manager, Andy Crossley, in The Independent. He has invested in D1 Oils (DOO) which is growing Jatropha curcas trees, the seeds of which can be used to produce low-cost biodiesel. D1 Oils recently signed an agreement to cultivate a plantation in Saudi Arabia, and operates “widely” in Africa and Asia.
Published in Investment-Advice
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