With a quarter of the UK's electricity generating capacity scheduled to be taken off line in the next 10 years, finding alternative sources of power has become imperative. And this should help small, unconventional players, such as Alkane Energy.
- Growing generating capacity
- Strong power prices
- Contracts secure future revenues
- Potential for alternative revenue streams
- Limits to methane operation
- Timing of new revenues uncertain
Alkane has spent several years developing its coal mine methane-power-generation business, which uses methane trapped in the UK's abandoned coal mines to fuel electricity generators on a modest scale. Now that coal mine methane business is maturing, Alkane has a solid, predictable and profitable core, which it is still expanding while developing new revenue streams.
Steady development is being bolstered by strong prices for electricity At the mid point of this year, Alkane had 12 power plants at various sites across the UK with a combined capacity of more than 40 megawatts (MW) - just enough to power a small town. The generating equipment has been designed to be modular and transportable to allow flexibility. Output in the opening six months of the year rose by 34 per cent and revenues from coal mine methane rose by 40 per cent - reflecting rising power prices. At the end of June, Alkane already had contracts for 96 per cent of its 2011 output at an average selling price of £51 per megawatt hour (MWh) and 54 per cent of 2012 output at £57/MWh. Average selling prices for 2010 were £43/MWh.
Assured revenues are welcome and have been enhanced by Alkane's contracts with GDF Suez and National Grid to provide power response, or peak-time running, and short-term operating reserve. With these, Alkane is paid effectively a retainer to have capacity on standby in case of a surge in demand or a loss of output elsewhere.
ALKANE ENERGY (ALK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 17.5p | MARKET VALUE: | £17.4m | |
| TOUCH: | 16-17.5p | 12-MONTH HIGH: | 26p | LOW: 16p |
| DIVIDEND YIELD: | nil | PE RATIO: | 6 | |
| NET ASSET VALUE: | 20p | NET DEBT: | 17% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 5.2 | 2.0 | 2.2 | nil |
| 2009 | 6.3 | 2.1 | 2.2 | nil |
| 2010 | 6.6 | 1.3 | 1.9 | nil |
| 2011* | 10.0 | 2.6 | 2.6 | nil |
| 2012* | 11.6 | 3.1 | 3.1 | nil |
| % change | +16 | +19 | +19 | - |
Normal market size: 5,000 Market makers: 6 Beta: 0.3 *Altium Securities forecast | ||||
Alkane commissioned its 12th site in July, with its 13th site expected to be running before the year-end and another scheduled for 2012. But coal mine methane is finite in the UK and management is realistic about its limitations. It estimates that 24 sites would probably be the limit of the company's ambitions, which Alkane should reach within the next three to four years. So Alkane has expanded its horizons, moving its key technology into the growing area for biogas, where it has already installed a generator at Perth and, in conjunction with anaerobic digestion and composting specialist TEG, it has won a contract for a biogas plant in North Wales. Further tenders in biogas are in progress.
The acquisition earlier this year of Seven Stars has also given Alkane its first conventional onshore gas interests in the UK in several parts of the midlands. This acquisition also brought 600 square kilometers of licences for coal-bed methane and shale gas, which are estimated to include 385bn cubic feet of gas, although Alkane is looking for an experienced partner to help it exploit this opportunity.
