Join our community of smart investors

Going green: Britain's small-caps in the renewable energy revolution

A review of the UK's smaller companies on the quest for clean energy production
June 24, 2016

May 2016 was a historic month for alternative power in the UK. For the first time since the country's first steam-driven public power station was opened at the Holborn Viaduct in 1882, Britain was powered without the use of coal - albeit for a few short hours.

The global energy market is currently undergoing some exciting changes; in 2015 worldwide carbon emissions were flat for the first time in 25 years, last month Portugal ran solely on renewable power for four days in a row and Heineken beer is now produced in the world's first carbon neutral brewery.

So are we nearing a tipping point in the global quest for clean energy production?

  

Shifts in the energy market

In BP's annual review of world energy, economist Spencer Dale said "global energy markets are in a state of flux with both energy demand and supply changing in profound ways".

On the demand side, growth slowed to just 1 per cent during 2015 - almost half the average rate seen over the past decade. According to Mr Dale, this has been largely caused by the slowdown of China's double-digit economic growth, which was historically driven by energy-hungry industrial production. Now the People's Republic is rebalancing its economy towards less energy-intensive service sectors. Meanwhile, countries across the globe have attempted to boost energy efficiency.

When it comes to supply, coal has been the main casualty, experiencing its largest annual decline on record in 2015. The utilisation of natural gas, however, is back on the rise, driven by the US shale revolution and the widespread conversion of existing coal-fired turbines. And despite a prolonged slump in crude prices and the consequent slump in the Baker Hughes rotary rig count, daily crude oil production in the US increased by a million barrels over the course of last year. But it is the renewables sector that has seen the greatest increase in production in recent times, and nowhere has this been more profound than in solar power.

 

Solar eclipses coal

Rapid technological advances have reduced the unit cost of solar power production in recent years, helping to drive growth. Although solar power's overall share of global power generation remains low at 1 per cent, that share has almost doubled in just two years. In May, the UK's solar panels generated more electricity than coal-fired sources, the first calendar month to ever pass that milestone.

One supplier that hopes to take advantage of (and enhance) this rise in solar power is Aim-traded Good Energy (GOOD). Founded by atmospheric physics graduate Juliet Davenport, Good Energy's goal is to be "a catalyst for change in the UK energy market". The group sources electricity either from its own renewable generation assets or from other UK renewable power producers (solar and wind) and provides this power to individuals and businesses.

The group regularly partners with small renewable energy producers in an attempt to promote a decentralised model of energy supply, where power is both produced and used locally rather than transported from big power plants. Good Energy believes that this decentralised provision is "important for the UK's future energy security as well as for cutting carbon emissions".

 

Harnessing the power of hydrogen

Decentralisation is also the name of the game for Ceres Power (CWR), one of a number of Aim companies that plans to harness the power of hydrogen. Ceres owns a patented hydrogen fuel cell, known as the 'steel cell' - a perforated sheet of steel with a special ceramic layer that converts hydrogen and oxygen into electrical power.

Just one steel cell has the capacity to power a lightbulb, but the use of many cells layered together forms a 'mini-power station' capable of providing the power needs of an entire building. According to recent EU studies, providing combined heat and power systems in this way can save 27 per cent of a typical home's energy consumption and 30 per cent of its carbon dioxide emissions. Ceres' long-term vision is to install such products into homes and businesses in the UK. At present, however, it is concentrating on the Japanese market - where there is a much stronger sentiment driving fuel cell technology - and is working with big commercial partners to deliver the steel cell into commercial and residential properties, data centres and vehicles.

AFC Energy (AFC) is also using hydrogen to create clean energy in its unique alkaline fuel cell system (KORE). In February 2016, AFC's KORE plant in Germany generated power for the first time. The group's focus has therefore moved to commercialising its technology. Like Ceres, AFC is looking to eastern markets where interest for fuel cell energy is currently greater than in the UK.

 

The changing tides

Another renewable power source with great potential is tidal - excellent news for Aim constituent Atlantis Resources (ARL), owner of the largest portfolio of tidal power projects in the UK. The group's primary project - known as MeyGen - is on track to deliver power through its first phase operation in Scotland's Pentland Firth by the second half of 2016. When fully built out, the 400 megawatt project is expected to generate enough electricity to power 175,000 homes north of the border.

Good Energy also owns a stake in a tidal power project - the Swansea Bay Tidal lagoon, which could become the world's first man-made lagoon to generate energy from tidal fluctuations. The project is still in the early stages, awaiting government go-ahead, but it is expected to start generating power by 2020, at which point Good Energy will be able to buy 10 per cent of the power generated for distribution to its customers.

 

Banking on biomass

Biomass is a much debated renewable power source, as it involves the burning of plant waste to create energy. That said, it is still considered renewable as the carbon in biomass is regarded as part of the natural carbon cycle and it is a significantly more efficient way of producing energy than burning coal. In Europe biomass accounts for 60 per cent of renewable energy production. Active Energy (AEM) and Aggregated Micro Power (AMP) are two constituents of London's junior market currently operating in the biomass industry.

 

The renewable energy conundrum

There is one major problem with renewable energy sources such as wind and solar - they aren't terribly reliable. Coal for all its faults can at least provide energy in all climates, whereas deriving solar energy requires a sunny day. And reliability isn't just a problem in rainy England - even the sunniest of countries can't produce solar power at night.

But there is a solution for this - effective storage. Aim's redT Energy (REDT) is a pure-play energy storage company and owner of proprietary technology linked to vanadium liquid batteries, which allow for long-term storage that mitigates volatile weather-related effects. The group has recently partnered with Eon to provide decentralised solutions for individuals who want to be able to generate and store their own electricity.

 

IC VIEW:

The alternative power market is undeniably an exciting one, with the potential for big financial gains if an exciting project does come off. However, many companies operating in this area still need substantial funds, and for this reason investments are often risky and long-term plays.

 

FAVOURITE:

One of our favourites in the sector doesn't actually produce renewable energy, but is in fact aiming to shape the energy-efficient home of the future. Flowgroup (FLOW) has recently launched its mCHP boiler which generates electricity as it heats water - effectively providing a boiler than pays for itself. The company provides a slightly less risky investment case as it currently makes money as a traditional energy provider.

OUTSIDER:

For a high-risk, potentially high-reward offering Atlantis Resources looks exciting, as it moves closer to generating its first power from the MeyGen tidal power project. On the back foot are the companies that seem to be attempting to 'go it alone'. ITM Power (ITM) owns extraordinary hydrogen-based technology, but for many years has had to repeatedly return to shareholders to keep supporting its growth plans.