New Power Generation

Once the province of cranks, green energy has grown up. Now it's a real business opportunity. Ian Wylie reports.

by
Last Updated: 31 Aug 2010

Thirty years ago last June, Tony Benn and his wife skimmed along the Thames on a hydrofoil from Tower Pier to BP's Isle of Grain refinery in Kent. On his arrival, the then Secretary of State for Energy opened a valve and the first trickle of North Sea oil came ashore. Holding up a bottle of crude oil, Benn declared: 'I hold the future of Britain in my hand.'

Just a few miles from the Isle of Grain, government ministers, energy companies and planners are again talking excitedly about the future of Britain. This time the energy source is not oil but wind - the £1.5 billion construction of 270 turbines off the Kent coast. If planning permission is granted for the 'London Array', the world's biggest wind farm will be primed to generate 1,000 megawatts of electricity, supplying a quarter of the capital's needs.

Energy is the lifeblood of any developed economy, but alternatives to oil, gas and coal - so-called renewable energy sources such as wind and tide - have long been treated as a feeble joke, ringfenced for well-meaning but naive hairshirts and ethical investors.

Not any more. The London estuary venture is the latest sign that clean energy is coming of age as a serious business. Yes, it's an Anglo-Danish minnow, Core, that has submitted the plans, but the people stumping up the cash are energy giants Shell and E.On.

We're approaching the point of no return, says Peter Shortt, director of innovation and investment at the Carbon Trust, a quango that is busy investing £1 million-£2 million chunks of venture capital in renewable energy projects. 'Once building work begins on these massive offshore wind farms, we'll have reached the tipping point, the next step of very significant development.'

Wind energy is by far the most advanced form of renewable power in Britain.

There are more than a hundred wind farms and 1,200 wind turbines in the UK, the windiest country in Europe. Our coasts and hills are buffeted by enough wind to provide the nation's electricity needs three times over.

Opponents of onshore wind farms are increasingly vocal and it can take years to get planning permission. But, says the British Wind Energy Association (BWEA), the offshore wind power market alone will be worth £1 billion a year by 2020.

Wind is just one element. Pioneers of a range of forward-looking renewable energy technologies have propelled the recent surge in Alternative Investment Market (AIM) flotations: companies such as D1 Oils, which grows crops to make biodiesel, Ocean Power Delivery, a developer of offshore wave-powered electricity generators, fuel cell manufacturer Ceres Power, and Novera Energy, an Australian company that hopes to capture methane from rubbish tips and thermally process sewage sludge.

Never heard of them? That may be, but their executives and directors will be known to many - a new power generation of high-calibre managers with high-level experience of working for major corporates such as ICI, Shell, Ford, Alstom and DaimlerChrysler.

'We're meeting extremely professional individuals, typically with experience in related sectors,' says Bruce Jenkyn-Jones, investment director at Impax Asset Management. 'In the late 1990s, the last time this sector had a look, the quality of the management teams was weaker - idealistic people who wanted to save the planet. It's a much different scenario now.'

Only a couple of years ago, just a handful of ethical banks and funds would take calls from renewable energy start-ups. Now the City's bluest-chip banks, private equity houses and venture capitalists, such as Fidelity, Fleming, Nikko, New Star and Cazenove, have woken up to the market's promise.

Just how big is that potential? The government's target is 10% of electricity from renewable sources by 2010. The market's supporters say renewables are the next big disruption, dwarfing any other business opportunity in history. 'This is not a one-way bet,' warns the Carbon Trust's Shortt.

'There are no strong revenues or cashflows here yet. But the scale of opportunity is such that sensible investors will want some money in this sector.'

But the reality is that today only a pitiful 4% of electricity comes from renewable resources, most of it from wind farms and hydroelectric plants. The 'industry', if you can call it that, employs just 8,000 people in the UK. An electricity supplier such as United Utilities employs that number of staff in its customer management centres alone.

The yawning gap between reality and potential is uncomfortably resonant with the internet before the dot.com bubble burst. Critics also say the sector would fall flat without government subsidies. Electricity suppliers in the UK, for example, are 'encouraged' by Renewables Obligations to buy renewable power for £70 per megawatt hour, compared with a market price for non-renewable sources closer to £25 per megawatt hour. According to the National Audit Office, subsidies for renewable energy are running at £700 million a year.

To a sceptical eye, the renewables market looks built to flip - irresistible only to investors and entrepreneurs seeking a quick killing. But there are megatrends driving investment in this sector over the long term: soaring demand for electricity, rising oil prices and concerted efforts to reduce carbon dioxide emissions.

It's now clear to all but a handful of contrarian commentators that continuing to burn hydrocarbons will warm up the earth until the polar ice-caps melt, oceans rise and life as we know it becomes unbearable, if not impossible. Since the G8 summit, clean energy sources have never looked sexier. But it's economics rather than environmental arguments that will maintain the sector's momentum.

Currently, in Britain we draw 43% of our electricity from gas, 30% from coal and 23% from nuclear power. The problem is that as demand for electricity soars, some of these sources of power will dry up. Britain will move from being an energy exporter to an importer of gas next year and of oil by 2010. By 2020, we'll be importing up to 90% of what we need from countries perceived now as 'unstable'.

Coalmining has been diminished to a point where it has become unviable, while nuclear energy has for decades been considered too expensive and politically unpalatable. There are signs that the Government will attempt a resurrection of nuclear power soon. But it is a tall order to persuade a general public used to stories of Chernobyl that building more reactors is a good thing.

At the same time, the cost of hydrocarbons is rising. Apart from the occasional spike, oil prices have averaged about $20 a barrel for decades.

But crude prices hit $60 a barrel earlier this year. Centrica says wholesale gas prices are more than 50% higher than a year ago, while electricity prices have climbed 43% over the same period. The EU's new Emissions Trading Scheme, meanwhile, has added another liability to the balance sheet of industrial companies - carbon. If they pollute above their carbon allocation, they must buy 'credits' from greener companies. The price of these credits has doubled to more than EUR25 (£17) a tonne.

These factors have made alternative power sources more attractive, just as engineering advances have made clean energy technologies more efficient.

The turbines on Britain's first wind farm produced just 400 kilowatts of power each. Now that figure is more like 2 megawatts and rising. The BWEA boasts that the cost of wind power in a good location can be as low as 3p-4p per kilowatt-hour - comparable to the output of a nuclear power station.

Of course, the large energy companies can't afford to write off their existing infrastructures of pipelines, tankers, refineries and transmission lines. Some are waiting until the last moment to adopt new technology, wringing the last drop of revenue from existing assets. While they do so, smaller companies will continue to thrive: early innovators such as Vestas Wind Systems of Denmark and Iberdrola of Spain now have global reach.

But the energy business is full of big incumbents. In the UK electricity market, for example, the 'big six' - British Gas, Powergen, npower, Scottish Power, Scottish and Southern and EDF - carve up all but 0.5% of the pie.

Will there be a change in the balance of power? Unlikely, as the smarter players are already shifting their centres of gravity. General Electric plans to more than double investment in environmental technology to $1.5 billion and double revenues from cleaner products to $20 billion by 2010.

Jeroen van der Veer, Shell's chief executive, says it is pouring resources into whichever renewable energy source looks promising. 'The philosophy is pots on the fire: try everything, and by 2015 we have to make up our mind,' he told journalists in June.

Who can predict which energy source will be the future of Britain? Only the entrepreneurs and investors who are inventing it.

BIODIESEL ENTREPRENEUR

'I'm an entrepreneur,' says Karl Watkin. 'I see opportunities before anyone else does. I've spent four years and a million and a half of my own money developing this business. I make my money by building companies up, then moving on. I'm not the guy to run a big public company in the long term.'

Many will recall Watkin as the internet entrepreneur behind online business exchange J2C. Older readers will remember him as the maverick whose TV programmes and campaigning on behalf of manufacturing and exports bagged him an MBE.

Watkin's latest venture is D1 Oils, a pioneer in biodiesel. Derived from vegetable oil crops such as rape and soya, biodiesel can be used in existing diesel-engined vehicles with little or no modification. D1's crop of choice is the black seeds produced by the jatropha tree, which are fed into special refineries the size of truck containers. Jatropha is a better source of fuel than many other suitable plants because it can grow in harsh environments and doesn't need arable land. And as the seed is inedible, it can be irrigated by treated sewage or other waste water.

Engine-maker Rolls-Royce is lending the company $1 million to build a refinery in South Africa, and D1 has also formed joint ventures in Saudi Arabia, India, Madagascar and the Philippines, to manage the plantation of jatropha trees on former desert land.

'Originally, I was treated with scepticism by potential investors, but there's been a sea change in attitudes in just the last six months. In October, I had to put in £750,000 of my own money at listing price to get the float away. But during a recent round of fundraising, we were massively oversubscribed. Kyoto, G8, demand for renewals, shortage of fossil fuels - all the fundamentals are coming together.

'Everyone on the D1 team is passionate about the effect that renewables will have on the world, but are they a bunch of tree-huggers? No, they're not. Our turnover in India alone is forecast to be £3 billion in 10 years' time. We're probably only 18 months away from delivering biodiesel, but I can't wait to deliver oil to the Arabs. That will be fun.'

FUEL CELL CHAMPION

'We want to be to electricity what the silicon chip is to computing,' says Philip Holbeche, chair of Ceres Power, an Imperial College spin-out that develops fuel cells as thin as an After Eight mint.

This fuel cell, or 'power chip', will be fitted into domestic central heating boilers and, using the same fuel supply, can transform them into mini-generators that produce both heat and electricity - a holy grail for utilities, according to Holbeche. The cell would provide homes with a clean, cheap form of energy that produces significantly lower carbon dioxide emissions than conventional fossil fuels.

The chip, which Ceres has been working on for 15 years, can be powered by natural gas as well as hydrogen and, unlike other fuel cell types, doesn't need expensive platinum as a catalyst.

'Our power chip has profound implications for the environment, but what we have at heart is a commercial proposition,' says Holbeche. 'We reckon there are 1.3 million new boilers purchased in the UK each year, and we estimate 10 million in Europe and 30 million worldwide. If we can get our chip into a share of that market, it has profound implications for us as a company.'

The firm was singled out for praise by Tony Blair in a speech on climate change last September, as an example of a British firm developing world-beating technology. And last year it won an award from the Carbon Trust, which has subsequently become an investor in Ceres.

Holbeche spent much of his early career working overseas in senior financial roles, and latterly with venture capital and investment company General Atlantic. When he returned to the UK, he co-founded oil exploration company Ardmore Petroleum before taking a position as CFO of Royal Trust International.

He became a founding shareholder and chairman of Ceres Power in 2001 after a conversation in Imperial College's senior common room. 'We're the only fuel cell company with substantial institutional backing,' says Holbeche. 'Recently, we went looking to raise £15 million, but were offered £32 million. That has put us in a very strong position, with sufficient funds to finance interesting joint ventures effectively.'

WINDPOWER CAMPAIGNER

'It's time for people - and the business community in particular - to wake up to their responsibility for climate change.' Dale Vince, founder and chairman of Ecotricity, the UK's biggest independent electricity supplier and the largest independent green electricity supplier in Europe, has come a long way since his days as a vegan traveller. But his passion for the environment has not been diluted.

Vince is one of the few environmental campaigners to have made the jump from soapbox to boardroom. And he has the ear of ministers, thanks to his seat on the Renewables Advisory Board, an independent non-departmental public body sponsored by the DTI, which provides advice to the government on a wide range of renewable energy issues.

Ecotricity has developed a strong base of 5,000 customers and supplies electricity to a range of organisations, from the Body Shop to Sainsbury's.

As well as operating seven wind parks - including one that powers Ford's diesel engine plant in Dagenham - and developing an eighth for the Co-op, Ecotricity also builds renewable energy equipment and claims to be Britain's biggest exporter of wind masts.

'There's a need for companies to take environmental concern beyond window-dressing,' says Vince. 'By building wind parks - we call it merchant wind power - we give companies a very visible symbol of environmental responsibility and help them save operational costs too.

'The barrier to wind power is planning. If the government could do more to make planning more responsible and representative, the sky would be the limit. Currently, planning is in the hands of district councillors who don't understand the issues. Wind energy is of such national strategic importance, planning should be moved up to county council level.'

Ecotricity is a fully integrated utility company, handling everything in-house from studies of wind farms and planning to demand forecasting. 'For me it's about control,' says Vince. 'My shareholding in Ecotricity is 100% and I have no plans to come to market. Equity comes with strings, and we run for a different purpose than making money. It's to our advantage that we aren't driven by what shareholders want. And I'm not in a hurry to give up that advantage.'

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