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Renewable Energy is No Corn-fed Fad by Graham Bowley Financial Times, July 24, 2006

Trucks and trains carrying 100,000 bushels of corn a day shunt into VeraSun's 417-acre ethanol plant in a cornfield near Aurora, South Dakota. VeraSun buys the corn from local farmers in America's Midwest. It is milled, mashed, fermented with yeast, and distilled to make ethanol, a type of alcohol. Then the ethanol is shipped out by train, mixed with gasoline, and sold to motorists at filling stations as a green fuel for cars.

Don Endres, a 45-year-old former internet entrepreneur, founded the Aurora plant in 2003. He has added more plants in nearby Iowa. Now VeraSun contributes 1/20 of America's total ethanol production. In June it attracted $420m from investors in an initial public offering on the New York stock exchange, which valued Endres' start-up at about $1.75bn. The company's shares rose by a third on the first day of trading.

Endres and VeraSun are not the only ones benefiting from the current boom in renewable energies. As oil prices climb above $70 a barrel, governments, consumers and investors have been forced to seek an alternative to burning fossil fuels, such as ethanol and other biofuels, solar power and wind power.

Sceptics believe the boom is unsustainable. They think the bubble will pop, or badly deflate, when world oil prices drop. But others believe renewable energies have gathered a momentum that cannot be stopped. "It is not about alternative technologies any more, but mainstream technologies," says Ron Pernick of Clean Edge, a US-based research group, one of many that now follow this market. Mr Pernick believes the total global clean energy market could grow from $40bn currently to $167bn by 2015.

New companies are springing up to meet this anticipated demand and investors are taking them seriously. About $1bn of US-based venture capital flowed into ethanol and the other new energy technologies in 2005, according to Clean Edge and Nth Power, a venture capital group.

Investors include some well-known names. Last November Bill Gates' Cascade Investment fund bought an $84m share in Pacific Ethanol, a California producer. Vinod Khosler, one of the founders of Sun Microsystems, has set up a fund that invests in renewable energy.

Even Richard Branson says he wants Virgin to consider producing ethanol somewhere in the US. Robert Wilder, whose WilderHill Clean Energy Index is one of several indices tracking the growth of the US market, says the alternative energy fund he runs had $187m under management at the start of 2006 and by June had $650m. "There are strong net inflows of about $20m a week to the fund that tracks our index," he says.

The index rose dramatically to a peak in May this year but has sold off since then. It is still up by about 46 per cent since its launch in August 2004 and is up about 8.5 per cent over the last 12 months. The recent decline, Mr Wilder says, is in line with the general fall in stock markets and is to be expected in a young, volatile sector. "The gloom of late is serious yet vague and seems to extend to all areas of higher risk. Clean energy stocks are just the sort of smaller, riskier pure plays that get hit especially hard in these conditions," he says.

Solar power was probably the hottest sector last year. Clean Edge estimates that $150m of venture capital went into US-based companies in 2005, double 2004's level. One of the biggest new companies, Suntech Power, a Chinese manufacturer of solar cells based in a factory in a high-tech zone west of Shanghai, had sales of $226m in 2005 and, in December, listed its shares on the New York Stock Exchange.

Zhengrong Shi, a 43-year-old Chinese former academic who founded the company in 2001, expects revenues in 2006 of $450m.

Suntech's biggest markets are Germany and Japan but the US is increasingly important. At the moment the solar industry is being held back by a chronic shortage of silicon, which goes into the cells, and prices have risen 50 per cent compared with two years ago but Mr Shi expects prices to drop drastically when silicon supply accelerates, boosting retail demand even further.

"Solar power is where the mobile phone industry was about 10 years ago," says Mr Shi. The global sales market for solar power, currently $13bn-$15bn, could be worth more than $50bn by 2010, he estimates.

Wind energy also prospered in 2005 when more than 11,500 megawatts of wind power were installed around the world, 40 per cent more than in 2004, according to the Global Wind Energy Council. European manufacturers dominate the wind industry but other companies such as GE have pushed aggressively into this sector. Clean Edge says the global wind market, worth about $11.8bn in 2005, could grow to $48.5bn in another 10 years.

But ethanol is the sector of the moment. It is added to gasoline in cars because it contains high levels of oxygen helping the fuel burn more cleanly and producing less carbon monoxide and other pollutants from the exhaust. As it is mixed in increasingly greater proportions in the fuel, it displaces more and more gasoline. Its use has grown steadily in the US as refiners and more than 20 states, including California and New York, have cut back or banned another longer standing gasoline additive, methyl tertiary-butyl ether (MTBE), which was found to contaminate ground water. In April President George W. Bush said the "best way and the fastest way" to reduce America's dependence on oil was "to expand the use of ethanol".

There are more than 95 ethanol production plants in the US and more are being constructed, producing almost 4.3bn gallons of ethanol every year, according to the Ethanol Promotion and Information Council. Ethanol's supporters hope the US goes the way of Brazil, the world's biggest user of ethanol for cars. Clean Edge predicts the US biofuels market could grow from $15.7bn to $52.5bn by 2015. In Brazil, ethanol is distilled from sugar cane. In the US, corn is most commonly used, which is why many big producers are in the Midwest.

Archer Daniels Midland, one of the world's biggest grain processors and number one US supplier of ethanol, said earlier this year it would add more plants, including some in Iowa and Nebraska, to raise annual production by 50 per cent. Its share price has rocketed this year.

The big US car manufacturers expect American motorists to begin shifting to ethanol in growing numbers. They are increasing production of flexible-fuel vehicles, cars that can use E85 or regular petrol, a blend of 85 per cent ethanol and 15 per cent gasoline. Chrysler, for one, says it will produce 500,000 of this type of car a year by 2008, about a quarter of its US annual production. Others such as GM, Ford and Toyota are putting flex-fuel vehicles on the road.

The trouble is, say the sceptics, this has all happened before and ended badly. After previous oil shocks, in the 1970s and 1980s, companies made expensive investments in alternative energy that proved largely redundant when the oil price fell again and fossil fuels were once more economical. Leonardo Maugeri, oil strategist at ENI, the Italian oil group, says his company, like most oil companies, uses a long-term planning price for oil of $30-$35 a barrel, partly because, he says, there are plentiful reserves of oil yet to be discovered in the world. "The only countries that have been fully explored are the US and Canada," he says. "The US and Canada hold only 3 per cent of proven oil reserves. There are countries such as Iraq that are quite virgin."

If the oil price halves, then many new young alternative energy companies might be vulnerable, although their cheerleaders insist green energy's current upward cycle is very different from any previous one. "There is no going back," says Suntech's Mr Shi. Global warming, for example, is perceived as a more real threat, as underlined by the popularity of Al Gore's recent film about environmental damage caused by pollution.

Technological breakthroughs have brought production costs down. Even if more oil is drilled, the geopolitics of getting it to the west may prove tricky. Then there is the added uncertainty created by the growth of energy-thirsty economies such as India and China.

Companies today, says Nancy Floyd, managing director of Nth Power, a venture capital business, want to isolate themselves from these global energy uncertainties. That usually means turning to alternative sources they can control themselves. What is driving this now, says Ms Floyd, is "the need for reliability. Companies that want power, want on-site generation".

But perhaps the biggest reason why this cycle may really be different is stricter, greener government regulation. Many governments are embracing policies supporting renewable energy. The 2005 US Energy Policy Act, passed last summer, requires an increase in annual renewable energy production to 7.5bn gallons by 2012, almost double the 2005 output of 4bn gallons.

According to Clean Edge, nearly 20 US states have renewable energy standards that require power suppliers to provide a certain percentage - often up to 25 per cent - of electricity from clean energy. In Europe, farmers get subsidies worth Û45 per hectare for growing energy crops, and the European Union has set a target that biofuels should make up 5.75 per cent of transport fuel consumption by 2010.

The European Commission is considering legally obliging oil companies to mix plant-derived fuel into gasoline they sell to consumers. Europe has tended to have tougher green legislation than the US. As a result, the biggest markets for renewable energies are in Europe, although the US is catching up. This has often determined where the new companies have chosen to list their shares - many have preferred to list on London's junior stock market, AIM, for example.

But even if the new companies can survive a drop in the oil price and prosper, critics say renewable energy will never have the scale to meet the world's growing energy needs. The 4bn gallons of ethanol produced annually in America represents just 1 per cent of US fuel consumption. Brazil's ethanol industry, says Nicholas Parker of Cleantech Venture Network, has relied on big subsidies and "went through two booms and busts and has taken 30 years to get where it is".

In the US, there are no extensive supply networks for ethanol: E85 is available at about 700 of the US's 165,000 filling stations.

"There are 230m light vehicles in the US and only 1.5m-5m can burn ethanol," says Peter Tertzakian, chief energy economist at Arc Financial Corporation. If every car in America were converted to flex-use, says ENI's Mr Maugeri, virtually all the US's soil would have to be turned over to corn production to fuel them. It may not even be that green. Think of all the nitrogen and fertilizer it takes to grow the corn. Wind and solar power are held back by the expense of steel and silicon.

One alternative, says Tertzakian, is to look across America's northern border to the Canadian tar sands in Alberta.

Oil from the tar sands - thick, gooey, and mixed with sand and rock - is notoriously expensive to extract and incurs high environmental costs. On average, it takes the equivalent of about 0.7 barrels of oil energy to extract 1 barrel of light oil from the oil sands. But it too has become more profitable now world prices are higher. Technological advances, such as injecting steam deep into the ground to soften up the oil before drilling or more automated machines to excavate it at ground level, have helped.

In theory, there could be as much oil in Alberta as in all of Saudi Arabia. Last year C$10bn in new investments poured into the tar sands as companies rushed to get at it, according to Tertzakian. Production is rising - currently 1m barrels a day, it could get as high as 3m a day in 10 years, says Tertzakian. "That is 3-4 per cent of world supply," he says. "That is not trivial."