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Blowing in the wind

Renewable energy is all about looking to the future. Solar panels, wind farms, low carbon power cells are all energy sources designed to save the planet for future generations.

But, experts say anyone interested in investing in alternative sources of energy will also have to look to the future for returns.

Fund managers and investment advisers say a repricing of renewable energy stocks has finally occurred and that the market is ready to grow. They are encouraged to remain patient with the sector since a gradual approach to sustainable energy allows technology and skills to improve, lowers risk and improves financial returns.

The all-or-nothing route can prove expensive, risky and can mar the reputation of the fund over a long period.

Predictably, oil is set to become one of the main financial issues of the US presidential election race. Democrat John Kerry is setting out proposals to boost investment in more sustainable sources while George Bush is expected to boost levies and drilling opportunities for the oil industry.

The price of oil has soared and with reserves falling and demand high, many believe that prices will not fall dramatically. A short-term rise in oil prices may have little effect on renewable energy stocks but a sustained high price level could see a new renewable energy bubble. The last one of these was in 2000/01 following on the Californian power crisis when green energy stocks,particularly in firms that invested in lower carbon fuel cells, became overpriced.

As a result, prices across the board in firms that were helping to improve infrastructure in the energy industry and in developing renewable energy have dropped. The attractiveness of investments in alternative energy had been hind- ered because most firms developing renewable and alternative propositions had been small. The alternative energy investment market could also be bolstered by an interest shown by multinational corporations looking to expand their business away from gas, oil and coal.

Last year, General Electric became the third-biggest player in wind turbines when it bought Enron Wind and other companies are following suit.

Jupiter ecology fund manager Charlie Thomas says: “Previously, you could just look at stocks and expect a return but the sector is more about investing in companies now. You have to have confidence in that product and confidence in the management and the way they are doing business.

“The renewable element is going to become quite important in the next few years. Now that we have seen a repricing of stocks, the market can really develop.”

Last year, Thomas invested in Spanish energy firm Gamessa and its share price has since increased by 71 per cent, proving, in his view, that short-term gains are possible.

Spain has become the third-biggest market for alternative energy (the US is the biggest) but China is steadily growing and could also provide a boost to the sector. China has some of the most polluted cities in the world and, as it tries to solve its own energy problems with a population of 1.3 billion and rising and shortages of electricity supply and raw materials expected to hinder supply, it has started to develop and import wind turbines.

A problem is that while consumers are faced with soaring energy bills they are also being told that alternative energy is uneconomic and impractical. This has done nothing to promote the growth of the alternative energy market.

Merrill Lynch new energy technology investment trust fund manager Robin Batchelor says: “The temptation for policy makers, industry and consumers is to do nothing. That would be a mistake.

“Doing nothing means relying on a finite supply of fossil fuels, accepting the inevitability of severe climate change as well as missing good business opportunities.”

He thinks that a gradual change in this attitude can only increase the profitability of companies investing in renewable energy.

Demand for solar energy is burgeoning as it becomes more usable. With help from Government grants, solar power has become a viable proposition for new-build houses, factories and offices.

But a problem is that most alternative energy investment is made on overseas stocks, increasing the currency risk. For instance, the Merrill Lynch new energy technology investment trust has 49.5 per cent invested in the US and 28.8 per cent in Canada and just 1.3 per cent in the UK. Since its launch in October 2000, the fund has fallen by 71 per cent but over the last year it is up by 40 per cent.

Batchelor says: “The Government is doing its bit with a sensible range of grants and planning guidelines, which now put the onus on people opposing plans for renewables to prove why a facility should not be built. Investors should be looking at these technologies and consider investing in an area of industry that, although still small, is unlikely to be so in the years ahead.”

Bates Investment Services senior investment adviser Paul Ilott reckons that it could be another decade before investors will see consistent and encouraging returns from funds invested in alternative energy sources.

He says: “There can be no doubt that anything invested so heavily in the US would have suffered because of the exchange rate changes. There is going to be a development in renewable energy investment but it is going to be some time before we see steady returns. The market is still very much developing.”

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