Sarah E. Douglass - alternative_energy_IMT.pdf - elektrotechnika - draco888888

Special Report

Identifying the Opportunities

in Alternative Energy

Identifying the Opportunities

in Alternative Energy

Prepared by:

Table of Contents

Sarah E. Douglass, ASIP

VP, Investment Research Publications

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Editorial Review:

I. Alternative Energy:

What Are the Major Sources and Opportunities?. . . . . . . . . . . . . . . . . . .5

Dean A. Junkans, CFA

PCS Chief Investment Officer

Nuclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Lloyd S. Kurtz, CFA

Senior Investment Manager

Hydro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Wind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Solar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Hydrogen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Biomass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

II. Distributed Energy: Increasing the

Attractiveness of Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Energy Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Distributed Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

III. How to Invest in the Alternative Energy Market . . . . . . . . . . . . . . . . . . 15

Large Companies in Established

Alternative-Energy Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Small Publicly Listed Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Privately Held Start-Up Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Executive Summary

The prices of fossil fuels, particularly oil and natural gas, have risen sharply over the past few years. As a result, alternative

sources of energy — used specifically in electricity generation and transportation — are garnering increasing attention.

Although they still meet only a small percentage of global energy demand, the more commercially viable alternative

energy sources are growing rapidly, presenting investors with the potential for attractive long-term opportunities.

What Do We Mean by Alternative Energy?

in Europe, where political incentives to develop renewable

energy have been particularly strong. We believe that the

wind-energy industry is likely to continue to expand rapidly,

benefiting from improved turbine technologies that can

generate a greater amount of electricity per turbine and

reduce the problem that can make power generation

intermittent. Newer technologies may also pacify critics who

are concerned about noise and the impact on the bird

population. In addition, the move toward distributed energy,

which is energy supplied on a more local scale, rather than

through a national grid, may benefit the wind-energy industry.

The alternative-energy segment of the energy industry covers

a broad range of sources. These sources range from well-

established technologies, such as nuclear energy and

hydroelectric power, through high-growth segments such as

wind and solar power. They also include less tried and tested

alternatives, such as hydrogen-powered, fuel-cell technology

for use in both electricity generation and as an alternative to

gasoline in the automotive industry. These sources cover the

gamut from commercially viable and fully competitive with

fossil fuels to those that are at a more experimental stage of

development, presenting a bigger risk for investors who want to

take advantage of the increasing attractiveness of this sector.

Other energy sources that also may ultimately gain from the

trend toward distributed energy are the biomass segment,

solar power and hydrogen-powered fuel cells. The latter two

are still expensive versus traditional fossil fuel sources, with

commercial viability resting on improved technologies. In

spite of higher costs, both industries are experiencing good

growth. With rising interest in alternative and specifically

renewable energy sources, there is plenty of funding available

for companies seeking to reduce the cost of producing

electricity from these types of fuel. Unlike more established

industries, such experimental technologies offer attractive

potential returns, but also are riskier.

The Most Promising Opportunities

Electricity Generation

Currently, the three most commercially viable sources of

alternative energy—in that their cost per kilowatt hour is

comparable to that of coal and natural gas—are nuclear,

hydroelectric, and wind energy. Due to long lead times and

the potential for political considerations to stall the

development of nuclear power plants and new dam projects

in developed countries, we believe that the best opportunities

in the nuclear energy and hydroelectric segments are in

rapidly developing countries. In the developing world,

countries such as China are keen to diversify their energy

supply and face less opposition to such projects.

Transportation

The two renewable energy sources that could one day replace

gasoline in the automotive industry are hydrogen and ethanol

produced from biomass such as corn or sugar cane. We

believe that the prospects for ethanol are more attractive than

for hydrogen-powered vehicles in the near-term, as ethanol

already is being used as a fuel additive in traditionally

engineered combustion engines and as a primary fuel source

The third of these commercially viable sources, wind energy,

benefits from an improving but established technology and

from being a renewable energy source. As a result, this

industry has grown rapidly over the past decade, specifically

Identifying the Opportunities in Alternative Energy | 1

in flex-fuel vehicles. Established markets for ethanol-

compatible biodiesel vehicles in Europe and flex-fuel cars in

Brazil have enjoyed strong growth because of the rise in the

price of gasoline. 1

established growth markets, such as nuclear, hydroelectric

and wind energy. Second, there are small (and some large)

publicly listed companies in developing energy technologies

such as biomass, solar and fuel cells. The third tier is privately

held, non-listed companies developing experimental

technologies such as nanotechnology-based solar panels.

Meanwhile, hydrogen-powered vehicles face headwinds from

not only ethanol but also from hybrid–gasoline/electricity-

powered cars. Hybrids sell only at a small premium to their

gasoline-fuelled counterparts, are accepted by consumers and

are a rapidly growing segment of the automotive industry. In

contrast, the first hydrogen car to be leased to a member of

the general public cost $1 million. 2 This indicates a much

longer lead time for this technology, which is likely to be

dependent on breakthroughs in the technology itself and

possibly an extended period of higher oil prices.

In the first tier, it is possible to add individual, well-established

publicly traded companies to your portfolio. To ensure

adequate diversification and access to the potential for rapid

growth in second tier, smaller publicly listed companies

operating in newer technologies, you may want to consider

investing in an exchange traded fund (ETF) or a mutual fund

that specializes in renewable energy.

The final tier, comprising privately held, venture-funded

companies, only is available to accredited investors. This

includes individuals or couples who jointly have more than $1

million in investable assets; an individual who earns more than

$200,000 per year; or a couple who earns more than $300,000

per annum. If you meet the criteria, you also need to consider

whether such investments are suitable for you.

How to Invest in Alternative Energy

If you are interested in allocating some of your assets to

alternative energy, you have a number of options spread

across three tiers of opportunity. First, you may want to

consider large established companies that are operating in

1 “Where Do You Get Your Energy from? Latest on Alternative Liquid Fuels,” Energy Bulletin , 10/03/05

2 Honda press release, 06/29/05

2 | Identifying the Opportunities in Alternative Energy

Introduction

The price of oil has risen dramatically over the past couple of

years, as has that of natural gas. (Figure 1) The market has

been stoked by increasing global demand, but also by fear of

disruption due to geopolitical and weather-related concerns.

Not surprisingly, energy has been the best performing sector

of the large-cap benchmark S&P 500® Index this year. 3

accounts for 18 percent of electricity generation. 4 Uranium,

through nuclear energy, and hydroelectric power also

contribute a significant share. 4 Natural gas is mainly used to

generate heat, while oil dominates the transportation

segment. Other than hydroelectric power, renewable energy

sources such as wind power and solar energy don’t even

for just 0.7 percent of the market in 2004. 4

Figure 1

Gas Prices — Bloomberg U.S. Gas Index

Index Level

Figure 2

U.S. Fuel Sources Used in Electricity Generation

180

160

Other Renewables

Hydroelectric

140

BBG US Gas Index

120

Nuclear

100

Coal

Oil

Gas

Source: Bloomberg, 11/11/05

Source: Energy Information Administration, 11/05/05

With such a sharp run-up in the price of both crude oil and

natural gas, as well as in the prices of the stock of companies

involved in oil and gas production and servicing, do the

potential opportunities in the energy sector instead lie with

companies that are investing in alternative energy sources?

Interestingly, since the last oil crisis in 1979, coal has seen the

most significant growth in U.S. consumption. In contrast, as

Figure 3 shows, consumption of oil was actually falling until

the late 1990s, partly as a result of increased efficiencies in oil

use and its declining role in electricity production.

In this report, we look at the different types of alternative

sources to determine which are the most viable over the

longer-term and, as a result, have the greatest growth

potential. We also review the investment vehicles that can

enable individual investors to take advantage of this potential.

Figure 3

Growth in Fuels Used to Generate Electricity

Billion BTU

25,000

Coal

20,000

Before we delve into the pros and cons of alternative fuels,

however, it is worth offering a snapshot of the energy market

as it is today.

15,000

Snapshot of the Energy Sector

10,000

Nuclear

Gas

There are three primary uses of energy: electricity, heat and

transportation. As shown in Figure 2, electricity generation in

the U.S. is dominated by coal, which remains relatively

abundant versus oil and gas. Natural gas, however, has been

making inroads into this segment of the market and now

5,000

Renewables

Oil

Source: The Bottomless Well

3 Bloomberg, 08/31/05

4 Energy Information Administration (EIA), 09/05/05

Identifying the Opportunities in Alternative Energy | 3

Sarah E. Douglass - alternative_energy_IMT.pdf

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