A wind of change blows through alternative energy

With the growth of emerging markets and the Far East continuing unabated, it is perhaps unsurprising to see the demand for energy remains sky-high and unlikely to dampen for decades to come.

A cursory glance at the signs outside petrol stations or a peek at your latest gas bill reveals the cost of energy has never been higher, with demand from China and India in particular driving up prices.

Countries across the globe are becoming increasingly aggressive at staking claims to deposits wherever they see fit, with Canada and Russia both laying claim to vast areas of the Arctic recently.

However, with concerns over climate change and global warming growing, and prices of gas and oil hurting economies globally, alternative energy sources are becoming increasingly more economically valuable.

Investors are willing and eager to hunt for the next big thing in energy, and many fund management firms have unveiled alternative energy products as part of a far-sighted strategy to capture the tremendous potential of renewable energy sources.

But what are the key areas investors should be exposed to, and what is the best way to access alternative energy sources?

One of the main areas investors are turning their attention to, and which is already generating returns, is solar power.

Edward Guinness, who runs the Guinness Alternative Energy fund alongside commodities investor Tim Guinness, says alternative sources of energy are the ones to watch in the next decade.

‘At the moment areas which are exciting us include wind and solar power,’ Guinness says.

The manager notes that solar power currently meets just 0.1% of electricity demand, but has been increasing its share of the energy market by 35% for many years and has a lot of scope to grow further.

‘It’s already making sense for people to use it as it is subsidised at present, meaning people can get grants to put solar panels on their houses. That will help longer-term growth,’ he says.

However, Guinness is keenly aware that solar has a long way to go before it is economically viable enough to account for a large portion of any portfolio.

He says: ‘Solar currently costs twice as much as it needs to in order to be competitive, so it’s about making it economically attractive for investors.

‘However, over the next five to seven years there is a path to cutting the cost, as things like the process used to make solar panels become fully automated.’

Other investors, such as the senior portfolio manager on the SAM Smart Energy fund, Thiemo Lang, are particularly keen on the development of solar energy.

Lang sees solar power as an area likely to experience massive growth in the next few years and he currently has more than 50% of his portfolio in stocks that play the solar energy theme.

He says: ‘What is striking with solar companies is that they could surprise on the upside in terms of margins; no other alternative energy source has the potential of solar.

‘However, the price does need to come down so they reach parity with other electricity producers.’

Another sector already bearing fruit for investors is wind energy, with a variety of firms linked to generating power through wind already running at profitable levels.

Guinness notes that companies operating in the space are competitive already, while new wind turbine manufacturers are also growing their businesses by 15 to 20% a year.

The manager says the wind theme, which accounts for 31% of his portfolio at present, has solid prospects as production is constrained, meaning prices will rise.

The manufacturers also have the advantage of being able to protect their outlay, as they can pass on material costs to buyers.

Private client wealth managers are also keen to play the growth in alternative energy sources via the wind story, holding direct investments as well as collectives.

Jon Gumpel, investment director at Brooks Macdonald Asset Management, explains that while alternative energy as a whole is not yet mainstream, wind is one of the themes the firm favours.