Green investing
Alternative energy - clean, green and lucrative to know
It took 150 years for the world’s population to double from 1
billion to 2 billion in the middle of the last century. It took
only 50 years for the population to triple to the 6 billion it is
today and the United Nations predicts the population of earth will
be 9 billion by 2050. Basic economic theory demonstrates a direct
link between population growth and gross domestic product (GDP)
growth. Between 2000 and 2030 global GDP is expected to double from
US$31.5 trillion to US$70 trillion. To support this increase in
economic activity, the International Energy Agency predicts a
worldwide increase of over 50% in primary energy demands by 2030.
However, in the fast developing regions of the world, such as South
East Asia, energy demand is expected to increase by well over
100%.
How will all this additional energy be sourced
and generated - especially against the backdrop of ‘peak oil’? This
concept was introduced by a former Shell Oil geologist named M.
King Hubbert who used statistical analysis to project the moment in
time when oil production from a well, region or indeed the world
would reach its peak year, when maximum production is attained. In
1956 he predicted ‘peak oil’ for the US would be 1970 and this has
subsequently proved to be correct. Debate surrounding the
date of global ‘peak oil’ is ongoing; however, the consensus
suggests the date will be some time between now and
2020.
The search to find alternative sources of
energy is underway. The surge in energy demand caused by global
economic development is a key driver; however, it is not the sole
driver. Other factors have been catalysts for this search too and
these include:
- Energy security – political conflict between oil supplying and
consuming nations has raised the spectre of energy security. The
need to secure energy supplies is essential for any country to help
secure long term economic prosperity.
- Climate change – the debate surrounding the detrimental impact
mankind is having on the environment by releasing carbon from the
earth’s crust into the atmosphere appears to have ended. The
Intergovernmental Panel on Climate Change has stated with a 90%
probability that humans are causing climate change.
- Legislation – in recent years there has been a marked
transformation in social and political attitudes towards the need
to source alternative and cleaner sources of energy. The Kyoto
Protocol has triggered a wave of legislative demands issued by
signatory nation governments to their domestic corporate sectors.
Moreover, the US Energy Bill, signed by President Bush in December
2007, is a clear indication from the world’s largest polluter of
its commitment to cut emissions and look increasingly towards
alternative sources of energy to power its economy.
The search is not, therefore, simply for
alternative energy - but for clean alternative energy. Substantial
research and development, and infrastructure capital expenditure is
being committed globally to the sector, which in turn also enjoys
governmental and related agency subsidies. The current sources of
clean energy are solar, fuel cells, wind, wave, hydro, geothermal
and bio – based. The estimated revenues in alternative energy are
around US$65bn per annum and are currently growing at 20%-30% a
year. This growth rate looks potentially very attractive to
investors, especially from a sector that is still in its relative
infancy.
It is very easy to get carried away with the
prospects of capturing substantial returns and it is important to
be aware of the risks. Within the sector, there are only 42
companies globally with a market capitalisation in excess of
US$500m – the investment universe is limited. The potential market
size is not clearly defined nor is the true commerciality of some
of the technologies in the clean energy space. This environment
tends to result in share price volatility as momentum trends
outweigh fundamentals. A significant threat to the clean
energy industry is the traditional energy sector, as participants
will not want to lose market share. Additionally, the clean energy
industries face a wide variety of political pressures particularly
from the oil exporting nations.
For those clients willing to accept the
volatility and able to commit monies for the medium to long term,
the bank believes investment returns will be attractive over time.
To manage the risks involved, the bank recommends access to the
sector via collective investment vehicles which offer
diversification across the key industries, and managers who have a
demonstrable skills set in selecting market leading companies in
the sector.
Source: Morgan Stanley Research. Clean Energy Sustainable
Opportunities (16 Oct 2007)