The New "Juice"
as appeared in the June 2001 Semi-Annual report.
Over the last year the market has witnessed the birth of a new sector which promises to lay the groundwork or cleaner and more efficient energy production. Commonly referred to as either 'alternative energy' or 'distributed generation technologies', companies in this sector are developing new technologies for power generation, transmission and storage. Several trends have driven the birth of this sector.
New Demand Requirements
Despite increases in energy efficiency over the last three decades, global energy demand is expected to increase 57% over the next 20 years. Developed nations continue to demand more power for growing economies while developing nations face the momentous task of meeting the needs of over two billion people who do not have access to basic energy services 1. At the same time, the productivity gains achieved by the increased use of software and hardware has a contingent reliance on high quality power. Much of the 'new economy' demands power that is 99.9999% reliable, representing an annual outage of less than one minute per year, compared to a current power grid at 99.9%, approximately 8 hrs. per year. At the same time, governments are aggressively mandating higher standards for local air quality, and negotiating new air pollution agreements on the international front. The recent climate change negotiations in The Hague in November 2000 represented the latest official efforts to achieve agreement on reductions in climate change gas emissions. Where market mechanisms are being used to support these policy initiatives, for instance, with nitrous oxide emissions trading in the U.S., firms using clean energy technologies are benefiting from reduced compliance costs.
Rising Energy Costs
During 2000, global energy prices have risen dramatically. Crude oil continued its upward trend peaking at over $37 per barrel in September, up from $11.37 in early 1999. Natural gas prices rose over 300% in North America with some regions exhibiting even more marked increases due to tight supply conditions.
Reduced Infrastructure Expenditures
Over the last decade, utilities have avoided expenditures in new generation, transmission and distribution as many jurisdictions began to move toward deregulation of electricity markets. Private power producers also were hesitant to invest in new production capacity due to the inherent uncertainties of the market changes. The result has been declines in the margin between electricity supply and demand, even to the point of rolling blackouts in some regions.
1 International Energy Agency, World Energy Outlook 2000. Alternative Energy Companies Respond
These trends, when coupled with efficiency and cost improvements achieved by firms developing solar, fuel cell, microturbine, flywheel, battery, wind turbine, and superconductor technologies, have focussed investor interest on the sector. The technologies are currently enabling the premium power market, defined by customers who require high reliability or who are subject to already high power prices, to remove themselves from reliance on the centralized grid. As production experience grows, further cost gains will be made which will enable direct cost competitiveness with traditional power technologies.The markets for these technologies are also supported by governments, through R&D funding, clean energy targets and preferential tax treatment.
A Sustainable Trend?
While energy prices are expected to subside from their highs for 2001 and beyond,they are not expected to return to the lows experienced in recent years. Rising energy demand, tightening environmental regulations and the need for reliability will all continue to contribute to an overall strong market for new energy technologies.
Clean Environment Companies
A number of companies that are leaders in the distributed generation market are held in Clean Environment Mutual Funds. Ballard Power Systems Inc. and Global Thermoelectric Inc., both Canadian firms, are global leaders in the development of fuel cell technologies for the transportation and stationary markets respectively. Fuel cells, which will eventually be found in any application where power is needed, do not involve combustion of fossil fuels and are therefore emission free. Astropower Inc. is a leading international manufacturer of solar cells for the residential and industrial markets, a market that is witnessing steady year over year double-digit growth. Innovative, well-established independent power producers are also benefiting. Calpine Corporation and AES Corporation are currently striving to meet the huge demand for natural gas fired and geothermal power in North America. Calpine, for instance, is increasing its capacity from under 5000 megawatts to over 43,000 megawatts of natural gas generation, a ramp-up that is unparalleled within the electrical industry.