On the strength of these two new stories, I'd say quite a lot !

Exhibit A: what can happen when too little rain falls?

New Zealand is facing a power crisis, because a two year long drought which has drained the reservoirs that were providing 75% of that island nation's electricity. Now their contribution has fallen to just 50% and the Kiwi government is asking its citizens to cut back on electricity use. Alas, hydropower is not 100% reliable because you can't guarantee and make long-term predictions about rainfall. So if blackouts do ensure in NZ, you wonder what's going to  happen to Trustpower, NZ's vertically integrated retailer and hydro asset owner of hydroelectricity, listed on their stock exchange (unfortunately, no yet on advfn). Any country over-exposed to hydropower runs this risk - indeed, such was the case with Norway (which has 27 GW of hydro) a few years ago. But by and large, it's still a small risk.


Exhibit B: so what about when too much rain falls?

Analysts at BMO Capital Markets and Citigroup have cut their stock ratings on ethanol makers and corn refiners in America's midwest because of massive flooding in that region which is widely thought to affect this year's crop. They are anticipating there won't be enough corn to go around (which suggests to me the price of ethanol will go up) for them to work on. This downgrade has so far affected Archer Daniels Midland and VeraSun Energy amongst others.

So there you go, investors can - like the late 80s pop group Milli Vanilli - blame it on the rain. It's just a pity that  New Zealand and America's Midwest can't swap their weather !

I've just finished going through this free report on China's renewable energy programme just released on Renewable Energy World, which is dated January 2008. Apart from the odd bit of Chinglish, it's very good. Here are what I consider to be the highlights;

1. China will have to invest a staggering $263 billion by 2020 to meet its renewable energy targets. As there is a planned 170 GW of additional hydropower capacity which costs, conservatively, approx $1.2 billion per gigawatt then that leaves about $59 billion for solar, wind and biopower.
   

2. Wind - In 2009 China will become the world’s largest producer of wind turbines. In  2009 and 2010, Chinese  wind turbine manufacturers---Jin Feng (Golden Wind) and Hua Rui---will start to export. So deflation  in the cost of  these machines is finally in sight. This is big news.
   

3. Biofuels - China has approximately 212 m hectares of wasteland which could be cultivated for biofuel producing crops. Leaving aside the questionable benefits of biofuels, modern China likes to think big so don't think they won't try.
   

4. Solar PV - China only has 15 MW of it. The solar emphasis continues to be solar thermal in China and the cheapest solar thermal unit costs just $150. When will they start exporting them?
   

All of this for me is leading to one point - the next big wave in alternative energy  (after biofuels, solar, etc. ) ought to be Chinese alternative energy companies. There's also the added bonus that Chinese stock markets were down as much as 50% until a few days ago and oil is now at $118 a barrel. Chinese alternative energy companies - i.e. the ones who are investing in China have a lot of work to do. Finally, don't discount the very good chance by the end of the year that China's currency - the Renminbi - will float and appreciate upwards. That will alleviate the buying power of China's rural poor currently faced with record food prices. Of course, such a course of action will be denied right up until after the event, but no Chinese government wants to face down a new peasant revolt.

Writing my latest newsletter yesterday (have you signed up yet? You should, it's free!) I was quite taken by how two Australian stocks, Australian Renewable Fuels and Australian Biodiesel Group have clearly not had the same upside - far from it - from a new government in Australia as most of the other alternative energy stocks down under. This is to do with unfavourable changes to Australia's biodiesel tax credit program as well as the more mundane causes like a rise in feedstock costs etc.

Today though I read with some alarm that German biodiesel subsidies are on the way out as of 1st January this year. As this very informative article said, ". . . a consequence of these setbacks is the decline in shares of German biofuel refineries like Verbio, BDI Biodiesel and Biopetrol. These were promising companies until recently, and now face million-dollar losses."

This is a big deal not least because a very large chunk of the global biodiesel market - not unlike solar - is in Germany.

Still, for all the gloom and doom about the biofuels bust, whether ethanol in the Midwest or rapeseed produced biodiesel in Germany (although not in Brazil, more later), I keep thinking about this great piece I devoured this morning in the Daily Telegraph by Tom Stevenson. One of his bullet points toward the end was;

". . . government biofuels targets mean that within 15 years 12pc of the world's agricultural land will be needed for transport against just 2pc today. Farmers, food manufacturers, fertiliser makers and anyone involved in booosting crop yields and improving  the efficiency of irrigation stand to gain"

So in the long run, biofuels are still very much destined for tremendous growth - a sixfold increase in 15 years. The point here is all that really matters is where you source them from. Germany is and will remain a high-cost country.

European and American Farmers are on a hiding to nothing if they think they can compete with Brazilian farmers like these !
Brazil and other developing nations, with vast untapped hectares of land and low cost workforces are certainly not going to have any trouble producing low-cost biofuels - unless Western governments continue to hand out huge subsidies to their own. And Germany, one suspects, quite apart from the environmental arguments, has already taken a view that this is a battle they can't win.

Not quite yet or for a good few years. . . at least that's the conclusion I've drawn from this must-read interview - as published by Ethanol Statistics today - a tour de force of the state of cellulosic bioethanol - with Emmanuel Petiot of Denmark's Novozymes, pretty much the investor's only cellulosic biofuel play available on world markets today.

For those of you who aren't familiar with the argument for cellulosic ethanol, it goes like this;

First generation ethanol is all about growing starch or sugar-based food crops like corn and sugarcane and converting a small fraction of the plant into ethanol. This is very wasteful, from an input, output perspective, but still the lowest cost method. With genetically engineered enzymes, potentially all plant biomass, not just parts of food crops but even wood residues, could be converted into bioethanol. At a stroke, second generation cellulosic bioethanol could overcome the food v. fuel crisis stoking inflation today, by massively increasing the amount of useful biomass that could be converted into fuel. That's the promise of second generation biofuel technology and Novozymes is leading the charge.

I don't think Ethanol Statistics (a very good site) will mind if I summarize some of what I think are the key points from the interview;

The falling cost of enzymes: Mr. Petiot says. “Between 2000 and 2004 we have reduced the cost of enzymes in lab scale by 30 fold, including a 6 fold reduction directly derived from the specific activity of our enzymes".

How far cost have to fall: " . . . currently, total production costs are between 3 and 4 dollar per gallon" and to match first generation ethanol, that will have to fall to about $1 per gallon

When we will see cellulosic bioethanol: " . . . I don’t think there will be a clear winner in cellulosic technology in four years time. However, I do think that, within this time line, several plants will produce ethanol from ligno-cellulosic feedstock, from agricultural residues, wood residues and probably a few from industrial waste".

So there you go. The big picture is that progress is continuing apace, but no miracle discovery will be commercially available in the coming years. But if anyone can do it, my view is that Novozymes , with a 50% market share in the enzymes currently used in ethanol production - will be first.

Let's face it; the record on conventional biofuels as a carbon-reducing, environmentally friendly, energy security-enhancing, cost-effective solution has come in for an absolute battering in recent months. And that's not altogether unfair. Food prices have risen because the feestocks are not quickly scaleable, the rainforests in Borneo are being decimated to grow palms, no one will ever be oil price independent from instability in the Middle East (especially a WMD exchange between Israel and . . . take your pick) and oil prices are still going up.

So enter the slimy, green stuff.

When I look at this, I see a failed pond. Oxygen poor, virtually lifeless. But algae likes that. Alternative energy enthusiasts are intrigued because the energy density of algae is much greater than crude. Algae can also be refined to make petrol, diesel, jet fuel, and chemical feedstocks for plastics and drugs.

There is as yet though, no listed stock - according to AEI criteria - in the business of algae. Just this OTC stock, Global Green Solutions, which is mentioned in this article here. I suspect that will change in the next few years. And the dream is to connect a coal plant's CO2 emissions to an algae pond - this project here in New Mexico believes a 1 acre algae pond can absorb between 258 - 450 tons of carbon dioxide a year. It does seem though that we need a lot more enhanced genetic engineering of the enzymes to make this a large scale commercial reality.

Certainly D1 Oils plc think so. Their plan is to exploit Europe's high demand for biofuel by producing oil from jatropha seeds. They (rightly, in my view) doubt that Europe's rapeseed and waste oil can plug the gap. And they have also managed to attract the interest of oil giant BP. As this article says, jatropha is so tough, it can " . . . grow in tropical and subtropical wastelands . . . deserts, garbage dumps and rock piles, where food crops wouldn't stand a chance. Moreover, it's a low-maintenance shrub, needing about 600 mm of water, but which can survive three years of drought by dropping its leaves".

Ok, but it's always worth examining the sceptical side of any investment story. And this piece here Jatropha: Too much hype on little known plant from the Philippines does a pretty good job. It questions, citing experts, how quickly after plantation commercialization can be achieved, the yield in kilos per hectare and oil content in percent in Philippine conditions.

Still, with D1 BP's joint venture getting set to plant one million hectares and an estimated 300,000 hectares per year thereafter, we'll find out soon enough how effective Jatropha really is.

Helius Energy, our sole biomass stock, today rose on news that has appointed McBurney Corp and Morgan Est PLC to carry out pre-engineering work on its flagship 65-megawatt biomass power plant in Stallingborough, Lincolnshire.

Pre-engineering work incidentally includes combustion trials, confirmation of the biomass fuel mixture, and front-end engineering design work and will take around 20 weeks to complete.

All biomass is ultimately powered by the Sun, so it's reasonable enough to call yourself Helius if biomass is your business. One of the company's core beliefs and drivers is ". . . that by 2050, biomass could provide as much as 50% of the world’s primary energy needs. And the next decade will see the development of improved biomass energy conversion systems – with Helius Energy destined to be at the forefront."

That would suggest an enormous growth rate from where we are now, not least for biomass-fired electricity (a secondary energy derivative). Today it is a very tiny proportion of electricity production - according to this wiki, just 44 GWH were generated in 2005, less than half the 93 GWH produced by solar pv.

I do have my doubts about biomass power for developed nations - perhaps wrongly. I can see it making sense in India, but other than a lifestyle choice for remote rural types, it's not an obviously commercial solution to the large, clean and environmentally friendly (clear air and carbon free) emissions of a modern, wealthy, urbanised society. Unless of course, they can tap into a massively cheap feedstock - like chicken manure !

Biomass feedstock anyone?

This is what the world's largest biomass plant at Thetford runs on.

A very interesting piece here which explores the ethanol stock universe and some of the surrounding issues in the industry according to analysts.

Of particular note is the current fragmentation of the ethanol market. ADM (Archer Daniels Midland), the biggest, is the only producer with double-digit market share - that's according to Merrill Lynch analyst Diane Geissler.

And Bear Stearns analyst Ann Duignan said she noticed attendees at a recent industry workshop seemed to recognize that rising corn prices and falling ethanol futures indicate tougher margins ahead.

Clean Air Power which closed today at 86.5 has the technology to combine gas with diesel. Petrol or gasoline dual fuel systems are quite common - I have one myself on my car. But with diesel it is just not done. That's what makes this company's technology unusual as well as the fact that it is geared to the US freight market, whereas LPG and dual fuel LPG tend to run off domestic cars.

Amex-listed Xethanol closed down today at 8.79.

The company is unusual in that it's philosophy is to make ethanol not out of America's corn - concentrated in the Midwest. They think the demand for ethanol is actually on the Atlantic, Gulf and Pacific coasts many thousands of miles away. iInstead, their approach is to produce ethanol as near to urban centres as possible with local biomass. Take the waste to the solution, not the solution to the waste is their marketing soundbite.

In recent months, the company has been as high as 16.18. And of interest is that they are diversifying into biodiesel.