Wednesday, May 23, 2007/
For investors keen to put their money where their best intentions are, renewable energy companies are an admirable, but slippery, investment beast. But doing the right thing, and making money from it, is becoming easier. By BETH QUINLIVAN.
By Beth Quinlivan
In these days of heightened awareness of all things environmental, green investing has a lot of appeal for a lot of people. Who doesn’t want to support companies that are in the business of reducing carbon emissions or reversing environmental damage, especially if you think you can make a dollar out of it?
The problem is that although there is a high level of interest in clean and green, for investors it has not been a particularly easy area to get a grip on – or do well out of.
The companies are diverse, the businesses and technologies complex. Profits are not easily generated and unless there are fundamental changes to the way energy is priced in Australia, some of the companies will never be competitive.
Even following the listed companies is not straightforward. Unlike other emerging sectors like, say, biotechnology – where there is an ASX industry group that lists all the biotech companies – the environmental or renewable energy companies are spread across several ASX industry groups.
There have been a few investment successes, but there have also been disasters.
Is that likely to change, as concern over the environment grows? With a carbon emissions trading scheme looking more certain, will the local green investment scene be able to secure a more solid foundation?
On the experience of recent years, for people who want to have some money in sustainable or renewable companies, the challenge is to find opportunities that will help – not harm – their savings.
Green and growing
Green investment options have grown in recent years as the number of companies has increased. In a recent survey, broker ABN-Amro Morgans detailed more than 40 environmental or renewable energy companies listed on the ASX. And that didn’t include those such as Linc Energy or White Energy, which are developing new “clean” technologies to be used in the coal industry.
As well as the companies, there are a few managed funds, including Australian Ethical Investments and CVC Sustainable Investments, that have a fair concentration of clean and green assets. A number of the socially responsible investment funds also have small exposures to renewable or sustainable companies.
The renewable companies cover a wide range, including wind, solar, geothermal, biodiesel, ethanol and tidal energies. A number of green companies are also focusing on the new high tech and environmentally sustainable waste disposal or management area.
Many of the companies are small, although there are exceptions, such as Babcock & Brown Wind Partners and GRD. Many are still in development stage of building plants or developing technologies, some have limited earnings history.
Investment performance, as a consequence, has been mixed. After a burst of initial enthusiasm, the biodiesel and ethanol companies, for example, have had a nightmare year, with some trading at less than half the price of six months ago.
The fact of life for the local renewable energy companies – and their investors – is that the energy they generate almost always costs more than fossil fuel alternatives. Local coal-fired power is among the cheapest in the world, and until coal energy prices take some account of the pollution caused and water used, the renewable companies have a tough battle to be competitive.
In a recent paper, the Australia Institute compared the cost of various types of renewable energy to fossil fuel-generated energy. The cost of wind energy was approximately double that generated by coal and gas, while solar and tidal were more expensive again. Of all the renewable energies, the closest in price to coal and gas was geothermal energy, which was nonetheless about 30% more expensive.
Biodiesel and ethanol companies have similar problems. The cost of production of biodiesel makes it uncompetitive. Ethanol is more price competitive, but the local industry has recently been affected recently by other issues, including high prices for feedstock as a result of the drought.
What would change the dynamics of the renewable energy sector is a carbon tax or emissions trading scheme. Although the consensus is that Australia will eventually join an international emissions trading system, it is still likely to be a couple of years off.
One of the few brokers to follow the renewable energy sector is ABN-Amro Morgans. In its latest newsletter, the broker looked at the financial implications for Australia of joining an international trading scheme at the price levels nominated in the report by British economist Sir Nicholas Stern. Stern estimates the long-term social cost of carbon is $US85 per tonne of CO 2. If that price were used as the basis of the trading scheme, the broker calculates the cost of permits for using carbon would be around $377 a tonne.
Senior analyst Roger Leaning is confident that an emissions trading scheme will be implemented, although probably not until after 2010.
“The obvious beneficiaries of any such initiatives will be renewable energy generators, their costs will be more competitive with those of traditional methods,” he says.
But he is still extremely cautious about the prospects of many of the small companies – even with a carbon trading scheme on the horizon.
“I’m an advocate of businesses that can break even without any sort of subsidy. That makes anything on top upside,” Leaning says.
“There is very strong demand,” says Richard Whan, portfolio manager for specialist financial advisory business Ethical Investment Services. “The reasons are often beyond financial, and we see part of our role as reining clients in, stopping them having too much of their portfolio in companies that sound good but are speculative, which don’t have any track record.
“A carbon scheme is still a few years away, so you have to ask whether some of the companies will survive until then,” he says.
Leaning believes that geothermal, followed by bioenergy, have the most potential of the different renewable energy categories in the Australian market. Geothermal describes energy obtained from hot areas under the earth’s surface. Bioenergy is energy made available by the combustion of renewable biological sources.
“Technically, Australia is at the leading of development of geothermal energy. It is viable source of energy and could be competitive without green credits, both on a national basis or as a small or remote area source of power,” he says.
ABN-Amro Morgans says the sector pick in geothermal is Geodynamics, although it currently has a Hold rating on the stock. It also likes Energy Developments, GRD, and Viridis Clean Energy. In any stock picks, Origin Energy is probably also worth considering. Its enormous cash flow, some of which is being reinvested in renewable energies, means it is well placed for future growth.
Market capitalisation: $189 million
Last sale: $1.09
Year high/low: $1.39/0.65
Share price 12 months: –6%
Geodynamics was floated in 2002, and has since been working through its milestones on the way to developing the country’s first hot fractured rock geothermal power plant in South Australia’s Cooper Basin.
Market capitalisation: $455 million
Last sale: $2.33
Year high/low: $2.64/$1.80
Share price 12 months: +10%
GRD is an engineering company that started life consulting to the mining sector but more recently moved into management of waste in landfills. Its Global Renewables division operates in Australia and Britain, and technology allows it to capture more than 70% of household waste. It generates renewable energy in the form of biogas, and reduces greenhouse gas emissions by more than one tonne for every tonne of waste that doesn’t end up in the landfill.
Market capitalisation: $193 million
Last sale: $1.07
Year high/low: $1.11/$0.84
Share price 12 months: +14%
Viridis Clean Energy Group is an energy infrastructure fund that invests in environmentally proven fuels and technologies in developed countries. It has wind energy investments in Germany and Britain, and exposure to US and British landfill gas energy.
Market capitalisation: $650 million
Last sale: $4.46
Year high/low: $5.45/$3.52
Share price 12 months: +6%
Energy Developments is an international renewable energy provider with operations in Australia, the US, Europe and Asia. It has three core business areas: remote area power generation, landfill gas power generation, and coal mine waste methane power generation.
Market capitalisation: $7.6 billion
Last sale: $8.71
Year high/low: $9.80/$6.23
Share price 12 months: +23%
Origin Energy is the largest of the green energy companies. It is an energy retailer with interests in several oil and gas exploration and production projects. It also operates in power generation, distribution of gas, with projects in Australia, New Zealand and the US. In recent years, it has invested in a number of renewable energy areas including solar and geothermal.