Now the argument is less clear-cut. At least it is in the UK since last week when the government announced that, from next year, consumers should subsidise electricity generated from biomass less than the vested interests had hoped.
In particular, this is bad news for Drax, the FTSE 250-listed power generator that owns and runs the UK's biggest power station. Its bosses had been hoping that changes to the subsidies for electricity generated from so-called renewable sources would give Drax's mostly coal-fired plants a full subsidy if biomass accounted for 50-60 per cent of their fuel. But the new rules, to come into force next April, are tougher. They demand that biomass must account for at least 90 per cent of the fuel of each boiler before the unit gets the full subsidy.
As a result, on the day the new subsidies were announced Drax's share price crashed 25 per cent to 426p. It has since recovered to 467p. Even so, that's miserable for the Bearbull Income Portfolio, which bought a holding in Drax last September at 530p a share.
The forthcoming levels of renewables subsidies could be a game changer for Drax. Soon it won't be economic for it to generate power using nasty, dirty coal (as the cost of polluting becomes more expensive), yet turning to biomass may not be the solution either. In which case, perhaps I should be selling the shares.
Drax's bosses are putting a brave face on the government's decision, saying that the company's plant can be adapted to burn 90 per cent biomass. Presumably, however, that implies even more capital spending than the £700m that has been earmarked to increase biomass-processing capacity and meet various emissions directives by 2016.
True, Drax goes into this phase of intense spending with over £200m net cash. Yet for some years its profits have been on a downward trend, so it's questionable whether the company can increase its capital spending further and maintain its - always rather volatile - payout around its present level (current cost: about £100m a year).
Simultaneously, it might encounter all sorts of issues. Currently, biomass accounts for just 7 per cent of the fuel that Drax burns in its six plants. Whatever management's confidence following trials, raising that proportion to over 90 per cent is a technological challenge. Then that gargantuan demand for biomass has to be satisfied. Drax's bosses acknowledge that the biomass supply chain is "immature" and most of the company's supply comes all the way from the US. Meanwhile, becoming largely a biomass processor may mean shrinking long-term revenues. That is connected to biomass having a lower calorific value than coal. The implication is that Drax's units simply may not be able to burn enough biomass to generate the amount of electricity derived from burning higher-energy coal.
Still, I knew that Drax was as high risk as utilities go when I bought its shares last September. Management has been even more eager to embrace biomass than appeared then, which was not the only way to go and maybe not the best way. But the share price can fall another 15 per cent before it hits my stop-loss level so I can crunch some numbers before I make a decision. But I suspect that Drax is not the same company whose shares I bought. The game changer will mean it's time to exit.
However, the income fund has a more immediate problem. Shares in construction services supplier Carillion have, indeed, dropped through their stop-loss. No specific event has caused the damage; just the steady erosion of the share price as investors ponder the very dull outlook for construction projects in the UK.
Not so dull, however, that - with some help from the Middle East and Canada - the dividend will be threatened. Indeed, with cover remaining above two times, the City's assumption is that 2012's payout will be nudged upwards to, say, 17.5p (16p for 2011). That means a yield of 7.0 per cent is on offer.
On the logic that the stock market is smarter than me, I rarely ignore stop-loss signals. However, Carillion's trading is acceptable, given the backdrop, and its order book is worth over four years' worth of revenues. So I'll put this one on hold for a while. Sorting out what to do with the Drax holding and the income fund's £20,000 in spare cash are higher priorities.
