Professional Investor: Price rises and climate change fuel opportunities

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The Independent Online

With oil close to nominal highs and petrol prices threatening to breach £1 a litre, the economic case for alternative energy has never been stronger. Whether the era of cheap fossil fuels has come to an end is a debate that is not settled, but there seems to be little chance of oil prices falling significantly in the short to medium-term.

There are a variety of themes that Jupiter's socially responsible investment team has identified as the most important in the current environment. These are clean energy, water management, transport, waste management, sustainable living and the regulatory change.

But of these six themes, clean energy is perhaps currently the most politically significant, in the light of recent events. This means that technologies that were uneconomical in an era of cheap oil are now viable.

From an investment perspective, the need to reduce dependence on fossil fuels means that the alternative-energy industry is a long-term structural-growth story. A number of companies that specialise in these markets are listed on London's Alternative Investment Market (AIM).

Wind power continues to be the fastest-growing sector of the global electricity generation sector, having averaged 28 per cent annual growth for the past five years. There are a number of wind-power stocks for investors to choose from, but one we hold in both the Jupiter Ecology Fund and the Jupiter Environmental Income Fund is Clipper Windpower, a US wind-turbine manufacturer and wind-park developer that AIM listed in September.

The company produces highly efficient turbines which can each produce 2.5MW of electricity, sufficient for 800-1,600 homes. Clipper plans to use the funds raised from its IPO to develop a portfolio of wind farms in the US and the UK.

Biofuels, where fuel for transport is made from natural, organic products, is another theme that we have played out in our portfolios. This is still a somewhat marginal technology for most UK car-owners, but that will soon change. The European Biofuels Directive requires that each EU member has to sell a minimum level of biofuels as a proportion of total fuel sold, starting with 2 per cent in 2005 and rising to 20 per cent by 2020. In France, all diesel is already blended with 2 per cent biodiesel.

There are two types of cleaner fuels on offer: bio-ethanol and biodiesel. The former is a clean-burning alcohol made from sugar-cane, corn or wheat which, when blended with petrol, can be used without any modification to a car's engine. Biodiesel, by contrast, is blended with diesel and is made from crops such as sunflowers and soybeans. Both of these fuels result in significantly lower and also less toxic emissions than their mineral equivalents.

For investors, there are some interesting stocks out there. D1 Oils is a UK biodiesel developer that has discovered that jatropha trees - succulents from the Euphorbia family - are a high-yielding, fast-growing, drought-resistant source of oil which can be refined into biodiesel. We've held it since October 2004, and it has been an excellent performer, even though its business plan is still very much in its infancy.

There are a number of other ways into this sector, such as Renova, also an AIM-listed firm, which makes bio-ethanol from corn in the US, a market where demand is currently outstripping supply. A more indirect play is Abengoa, a Spanish construction firm that makes biofuel plants as well as solar stations and recycling facilities.

While biofuels are a commercial reality already, there are also some opportunities for investors which offer a glimpse of what may eventually amount to a paradigm shift in energy generation. Ceres Power, another AIM stock, manufactures fuel cells, based on technology developed at Imperial College in London. Their fuel cell runs on natural gas, propane or LPG rather than new hydrogen technologies, which gives it some interesting openings.

For example, it has formed a partnership with British Gas to develop a fuel-cell-driven domestic boiler that uses natural gas to drive a combined heat and power unit - effectively a highly efficient mini-home-power-station. Exciting though this sounds, a commercial product is still at least five years away.

Clearly some of these examples are young, early-stage companies, which are not suitable for every portfolio, but there are plenty of mature, highly profitable businesses listed in the UK.

Emma Howard Boyd heads Jupiter Asset Management's socially responsible investment and governance team.

cash@independent.co.uk

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