The windfall from clean energy

"We will harness the sun and the winds and the soil to fuel our cars and our factories", were the words uttered by President Obama when referring to energy policy during his inaugural Presidential address on 20 January 2009. More recently, in the run-up to the recent Copenhagen summit, he announced a specific target for a 17% reduction by 2020 in greenhouse gas emissions in the USA on the basis of 2005 levels.

In parallel, China announced a 40% to 45% cut in its 'carbon intensity' by 2020, also with respect to 2005 levels. Beijing thus openly declared for the first time a specific target as part of the overall campaign to lower CO2 emissions.

We have seen a radical sea-change in the policy agendas of these two global economic powerhouses by comparison with their attitude at the time of the Kyoto summit in 1997 when both Washington and Beijing were deliberately dragging their feet. This shift is significant as the two countries combined are responsible for generating some 40% of all CO2 emitted worldwide. 

If both the USA and China honour their pledges, investment in equipment and plant capable of generating clean energy will continue at a sustained tempo over the coming decades. It is worth noting that this show of political resolve has come at a time when installations capable of generating clean energy are competing increasingly with more conventional sources of energy. This turn of events should whet investors' appetite.

The US Administration has announced its intention to allocate some 150 billion dollars over the next 10 years to purchasing equipment capable of generating clean energy. It has also made a pledge towards green energy, earmarking some 118 billion dollars in its economic stimulus package on this front. Investment commitments to green energy total some 218 billion dollars in China's reflationary programme. Europe is not being left on the sidelines either as it intends to invest funds in clean energy as it strives to meet its target of 20% of energy from renewable sources by 2020.

As a result, a selective approach to investing in this particular sector looks a particularly attractive proposition today. Some companies can offer the ideal blend of bright earnings growth prospects and reasonable valuation levels. The latter can be attributed to the lending crisis in recent months during which companies needing considerable financing from banks to build up their renewable-energy installations have come in for some punishment on the markets.

The ongoing process of innovation in equipment for generating, for instance, solar or wind power calls for huge investment. A set of circumstance asymmetrically angled to the advantage of investors is thus taking shape in the area of clean energy: growth prospects are being unmistakably boosted thanks to governments' investment programmes and the revitalisation of lending mechanisms whereas share prices are still factoring in some of the upheavals flowing from the financial crisis.

However, the main factor over the long term that will drive growth in the energy industry overall and in clean energy in particular will be population trends. It is currently being forecast that the world population will reach 9 billion by 2050, that is an increase of over one-third from today's level. In the past, growth in the world population has, understandably, been matched by a proportional increase in energy being consumed. This pattern is likely to persist in both the developed world and emerging nations. The accompanying chart shows how energy consumption worldwide, with a breakdown into the various sources of energy, has evolved since 1965.

As safeguarding the environment for future generations is fast becoming a global priority, the non-stop rise in energy consumption will inevitably involve an ever climbing proportion coming from clean or renewable energy sources. Furthermore, even though new deposits of crude oil and gas are constantly being discovered, exploiting these new energy fields requires ever more capital and effort. To understand this phenomenon, it needs to be borne in mind that, back in 1900, energy worth one barrel of crude oil needed to be expended in order to extract another 100 barrels. Today, with access to energy resources becoming increasingly tough, one barrel will only be enough to extract a further 15. Moreover, according to a number of sources , known and proven resources worldwide now amount to no more than 42 years for crude oil, 60 years for natural gas and 122 years for coal.

Awareness that alternative energy sources have to be adopted is spreading increasingly at both government level and among individuals. On this score, solar and wind power are probably among the most promising in terms of both innovation and stock-market investment. For the former, there are several attractive companies marketing patented products and enjoying significant market shares. As for wind energy, there are outstanding opportunities to be found among companies operating wind farms on which yields are predictable. There are also other energy sectors, such as hydroelectric, geothermal or even biomass, that look to offer some attractive openings for investors.

Before the time when renewable energies can be deployed on a genuinely large scale, investors should also take a look at those companies offering solutions rendering it possible to boost energy efficiency and reduce CO2 emissions. On this front, the smart grid looks a particularly interesting area to explore. The smart grid is an 'intelligent' electricity distribution network that makes use of IT to optimise power generation and supply,

and manage efficiently the ever fluctuating demand/supply balance between producers and consumers. At the level of the energy consumer, the smart grid involves the use of smart meters capable of providing energy billing by the hour. This makes it feasible to choose the most attractive rates from the various suppliers and to fine-tune times when energy is consumed on the basis of the tariffs being offered. Moreover, the lighting sector also offers some significant potential for energy saving, especially in the area of light-emitting diodes (LEDs).

As we can see, it would be a mistake to believe that we will be able to rely solely on renewable energies soon. Until that day dawns, other realistic possibilities need to be brought into the reckoning. Natural gas is thus worth looking at as combustion of natural gas produces proportionately much less CO2 than either oil or coal does. There are several opportunities for investors to place their money in this sector.

All in all, achieving consistent and above-average performance through managing investments in clean energy will hinge on adopting a selective and diversified approach. This area is populated by some highly promising small companies that, more often than not, are associated with a high degree of specific company-risk. As a result, a portfolio encompassing an array of selected stocks or an investment fund can offer investors the prospect of securing a double reward: an ethical reward in that the investor will be able to contribute towards protecting our global environment for the generations of the future and a pecuniary reward in the shape of, most likely, handsome returns being notched up over the long run.