Oil’s recent push to prices as high as US$147 per barrel acted as a bucket of cold water in the face of the oil dependent world. This has therefore put the spotlight on the alternative energy sector.
The growth of alternative energy is likely to be encouraged in Australia by the introduction of the Rudd Government’s carbon trading scheme. The scheme, which is scheduled to begin in mid-2010, will set a cap on total carbon emissions and allocate permits up to the limit. This provides a competitive advantage to alternative energy companies, who may also be able to sell their carbon allowance.
In terms of investment opportunities, the sector is likely to produce one or two highly successful companies. However, for every success there will probably be many more failures. And so, while there is no need for investors to rush into the sector at this early stage, it is important to build knowledge in order to take advantage of future investment opportunities.
With that in mind, this week we briefly look at the major areas of alternative energy generation. Next week we will look at the sector’s investment opportunities that are available to Australian investors and outline which companies we think offer the greatest potential.
Broadly speaking, we can break down the different alternatives into two main groups. Firstly, there are the various methods for producing energy suitable for motor vehicles and other domestic uses such as heating. Secondly, there are the alternative methods of generating base load electricity that could supply the national electricity grid.
Probably the most widely understood sources of alternative energy for base load power are from waves, wind and solar energy. We assume most Members are familiar with the concept of harnessing the motion of water, wind farms and solar panels. However, a less well known source of energy from the elements is the “hot rock” sub-sector of geothermal power.
Geothermal:
Geothermal literally means heat from the earth. This is typically associated with harnessing the earth’s heat where it is near surface in the form hot water. In addition though, a number of companies are developing hot rock technology, which refers to rocks that generate heat through their own radioactive decay.
These rocks exist at depths of around 3 kilometres beneath the surface, which makes harnessing their energy a serious engineering challenge. Particularly given the process involves pumping water over the rocks. As shown in the diagram below, the water returns to the surface as steam and can then be used to spin turbines and generate electricity.
Although the engineering challenges are tremendous, from an environmental perspective, geothermal energy is clean and does not produce greenhouse gases. Moreover, in theory at least, much of the water can be re-cycled and the process is therefore self sustainable with very little additional input.
Biodiesel:
As its name suggests, Biodiesel is derived from biological sources such as vegetable oil and can be used in diesel engines without any modification. In addition to reducing reliance on oil, biodiesel also produces significantly less carbon dioxide than ordinary diesel.
Furthermore, biodiesel is a better solvent than standard diesel and effectively 'cleans' the engine by removing deposits in the fuel lines. Despite this, many car manufacturers’ warranties are breached if more than a small percentage (5% in some cases) of biodiesel is blended with conventional diesel.
In addition to powering motor vehicles, biodiesel can be used as a heating fuel in both domestic and commercial boilers. However, the lack of wholesale acceptance of biodiesel by the auto industry is a serious impediment to the fuel’s future viability.
Ethanol:
Similar to biodiesel, ethanol can be used as a motor fuel either independently or as an additive to petrol.
For ethanol to be suitable for use as a replacement to petrol, it must be distilled to at least 70-80% purity. Although this is not the case where it is added to petrol, most of the water must be removed. If this is not done then the water will separate from the fuel and cause the engine to stall.
The most popular feedstock for ethanol production is sugar cane, because it has a greater concentration of sucrose which is fermented to produce ethanol. Sucrose is also easier to extract from sugarcane, making the production process simpler and therefore cheaper.
However, ethanol is not considered a truly viable alternative to fossil fuels because of the resources that are required for meaningful production. Indeed, it has been estimated that switching all of America’s production of corn, wheat, rice and soybean to ethanol would cover only 4% of the country’s energy requirements.
More to the point, ethanol production is energy inefficient. The amount of energy it takes to grow, harvest and process a crop into ethanol is greater than the energy the ethanol would produce. Pointless.
Fuel Cells:
Fuel cells differ from batteries in that batteries have all their chemicals stored inside and eventually run out of juice and must be re-charged. As long as a fuel cell receives its chemical inputs, it never goes dead.
Most fuel cells in use today use hydrogen and oxygen as the chemical inputs, however, many other options are available. A fuel cell used to power a car requires a separate tank to store the hydrogen, while the oxygen would be extracted from the atmosphere.
Fuel cells are exceptionally clean, with the only waste products being heat and water. Furthermore, because there are no moving parts, fuel cells are incredibly reliable and are therefore suitable for use in remote locations.
Fuel cells are great in principle, but in reality they are a long way from achieving commercial success. A recent US government study recently concluded that hydrogen fuel-cell vehicles are 15 years away from becoming a viable alternative for car manufactures. And that’s even with government subsidies and assuming technical challenges are overcome.
This is high level fly through of the various areas for alternative energy, designed to provide an awareness of the potential solutions that could become more prominent in the future. In future weeks we’ll look in more detail at the economics and companies that are behind the various concepts.
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