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They’ve got the power: six strong prospects for energy investors

But it’s a fast-changing landscape so be careful with the risk factor

1 October 2016

8:00 AM

1 October 2016

8:00 AM

All eyes are on North Korea. Not as an investment opportunity, I hasten to say, but as a nuclear threat, following its fifth and largest test explosion last month. The news struck fear into its neighbours, particularly Japan — still scarred by the Fukushima reactor meltdown, which has left a-contaminated no-go area for at least a generation. For Japan, the threat of drifting radiation clouds is more real than the Koreans’ crazy sabre-rattling.

In this country, too, fears of radiation leaks from Sellafield were recently exposed on a BBC documentary. Yet we’re told nuclear power is still vital to our energy mix. Despite a temporary hold-up by Theresa May, the Hinckley Point project is now going ahead, and we must hope that our Chinese and French-partners in the next phase of UK nuclear development exhibit world-class expertise in decontamination and storage of nuclear waste.

The delay in exploitation of the UK’s vast resources of shale gas have now forced policy-makers to adopt two problematic solutions to the looming energy gap as coal-fired power generation is reduced: expensive imported gas and the uncertain costs and hazards of nuclear power. The only possible solution to this dilemma is the realisation by government that battery storage technologies are now close to take-off, and will in turn allow solar, wind and tidal generation to play a more significant part. In a recent report on power generation, the Australian investment bank McQuarrie, a specialist in infrastructure investment, identified ‘a myriad of technologies for storage’. These included hydro, lead/acid, flywheels, hydrogen, zinc/air, vanadium flow, nickel/cadmium, hybrid flow, lithium ion and organic flow, explanations of which are well beyond the scope of this article. But what’s clear is that leadership is required to adopt some of these technologies — and that can realistically only come from government.

For example, hydrogen fuel-cell technology offers a zero-emissions solution to motoring. But funding is needed so that fuel stations are available all over the country, not just within the M25. Governments also need to incentivise car manufacturers until volume production of early new-technology models allows unit costs to fall.

But while we wait, the power-to-gas concept is already proven (in Germany) and waiting to be used in the UK. So where does the intrepid investor go to identify potential winners in this race?

It should never be forgotten that there are hundreds of private companies in the same space and that research and development is taking place throughout the world. And most major utility companies are already heavily invested in green energy. So the odds are stacked against the handful of smaller companies that have unique technologies and are tradeable in London or elsewhere. With these caveats in mind, here are six names to conjure with: two low-risk-utilities, two battery ventures and two more speculative power plays. (Prices as at 20 September.)

 

CENTRICA

Share price £2.27
Market cap £12.4bn

Let’s start, unusually for me, with a very large company, but one that’s well aware of change in its sector — which chiefly means the declining role of central grid-based energy systems. With access to 28 million customers, Centrica is well positioned to introduce smart metering and other carbon-reducing initiatives. Recently it has been buying smaller companies with developing technologies that have the potential to be scaled up.


For the time being its fortunes remain intimately connected to gas distribution, but it is responding to emerging new scenarios. As a beneficiary of rising gas prices — which must be a reasonable assumption for the next few years — and with a safe yield of more than 5 per cent, it may look a bit boring but it’s one to tuck away.

 

DRAX

Share price £3.16
Market cap £1.3bn

Another low-risk company that has responded to a changing world: Drax is the UK’s biggest generator of renewable power. Its problem is that it was ahead of the pack when it started converting EU-condemned coal-fired capacity to biomass, only to have the required subsidies challenged by Brussels. What’s clear is that, whether with coal or biomass, Drax is vital to the UK economy and, whatever the outcome in the dispute with Brussels, no UK government could allow it to go out of business. An eye should also be kept open to see if the present government champions Carbon Capture and Storage, as Lord Oxburgh’s recent report says it should. If so, Drax will be a significant beneficiary. The next phase of conversion to biomass (with more state support) could also trigger a long-awaited recovery in the share price.

 

RED T

Share price 12.2p
Market cap £56m

I brought this battery venture (in which I’m an investor) to readers’ attention nearly a year ago at 4.75p. Since then it has been testing prototypes of its Liquid Vanadium Rechargeable system in commercial situations from farms in Africa to research facilities in Scotland. Recently it received approval from SSE and the Scottish government to install seven units (1.7 MWh) of the world’s first vanadium battery system on the Isle of Gigha, off the west coast of Scotland. Following this breakthrough, it expects to win orders wherever power from wind or solar is intermittent. A successful fundraising of around £3 million took place earlier this year at 6.5p. As ever, more money will be needed, but let’s hope the company can survive until more commercial deals are announced. An interim statement after we go to press may answer these queries.

 

LECLANCHE

Share price 2.62 Swiss francs
Market cap 126m Swiss francs

As probably the oldest-established battery company in the world, the Swiss firm Leclanche really ought to know how to stay ahead of the game. But the truth is that only recently did new management rouse it from its slumbers. The company has two Lithium ion technologies, Lithium Titanate Oxide and Lithium Graphite, with differing capabilities, and is working with the UK’s National Grid and many other power generators and utilities throughout the world. Revenues for the full year will be about 30 million Swiss francs, at a growth rate of over 60 per cent. Funding such rapid growth has strained the balance sheet, but a successful equity funding was finalised recently. The current share price is well below its high of 3.45 francs. With strong orders and experienced managers, this one (in which I’m also an investor) could be the toast of Spectator readers.

 

CERES

Share price 10.3p
Market cap £80m

Ceres has spent a decade developing a low-cost fuel cell made of steel and ceramics that converts gas, hydrogen, or other fuels into electricity in an efficient way — and crucially reduces carbon emissions. This is based on research by the late Professor Brian Steele of Imperial College London, who began work in the field as far back as 1981. Ceres’s technology is being trialled in homes throughout Europe (with EU funding) and has been adopted by Cummins in the US for trials in data centres. This comes on top of arrangements with Honda and Nissan. However, despite these endorsements of the technology from some major industrial names, the market is not likely to recognise Ceres as a growth stock until new funding arrives — this was mentioned in the interim statement as long ago as February. Perhaps Centrica should step in as a buyer?

 

OPG Power Ventures

Share price 63.5p
Market cap £227m

Lastly, an Indian company which grabbed my attention recently as both a power generator that is radically changing its energy mix and a gamble on growth in India. OPG generates over 750 MW of energy and has grown profits and earnings per share consistently for five years. With prime minister Modi leading the charge, solar and other renewables are on a rapid growth track and OPG is part of it. Solar installations are much cheaper and quicker to install than larger power stations, especially in India, so operators such as OPG are keen to oblige the political masters. They have already started a solar generation programme which will produce 62 MW within a year. That programme is likely to grow and grow. At around 12 times earnings, this well-managed company is worth a look.


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