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 !

Pacific Ethanol, for some the 2005/06 poster child of the ethanol boom, complete with a few famous investors like Bill Gates, has turned in much better than expected Q1 results and the market likes it. PE today rose by 10% and a staggering 60% yesterday.

According to Forbes, for the first quarter of 2008, PE lost $35.2 million, or 90 cents per share, compared earnings of $3 million, or 5 cents per share, a year ago. However, excluding a one-time impairment charge of 96 cents, the company posted an adjusted first-quarter profit of 6 cents per share.

What's interesting is how Verasun and Xethanol have done well too. Xethanol can point to some recently improving results and Verasun seems to have been dragged off the bottom by the groundswell of Pacific Ethanol sentiment.

The thing is though, it's hard to see this powerful US mini-rally of ethanol stocks sustaining. Nothing that much has really changed vis a vis the uncompetitiveness of corn-based ethanol to other alternatives. A very useful  and succinct post here on Motley Fool by Toby Shute - Pacific Ethanol: Not Dead Yet - is well worth a read.

The odds are that this might be more of a bounce than a comeback.

Unless you've been in space over the last couple of weeks, you will have heard a great deal of breathless reporting about Brazil's discovery of two massive oil fields - containing up to 41 billion barrels of recoverable crude. In fact one analyst, Peter Zeihan said;

"The finds they've got so far are just the tip of the iceberg . . . Brazil is going to change the balance of the global oil markets, and Petrobras will become a geopolitical supermajor.''

Heady stuff indeed !

No question, these are very large finds and it does blow a small hole in the arguments of the Peak Oilers - that all the large oil fields have been found. Still, even 41 billion barrels of oil - another 3% - is not that significant compared to proven global oil reserves of 1.3 trillion. And various forecasts of demand for oil rising from around 86m barrels per day today, to something like 120 - 130 m are going to require a great deal more oil field discoveries than this.

Now back to the title of this blog - would a really siginificant oil find undermine Brazil's ethanol industry?

Three points;

Time - it takes 10 years between geological discovery of crude until bringing that oil to market. Ethanol from sugar cane ought therefore to be fairly immune to its mineral competitor over the next decade.
Price - how cheaply can the oil be extracted? If it has only just been found, that would suggest to me that it requires some pretty pricey technology to get it out. Meanwhile, according to Goldman Sachs, ethanol from sugar cane is profitable with oil from $35 per barrel.
Volume - clearly, if Brazil were to discover even more recoverable oil, say 250 billion barrels, that would be a huge change that would call into question Brazil's ethanol production. If only because they will almost certainly be able to sell oil abroad at a higher price per barrel than they ever could with ethanol.

All in all, Brazil's drive for ethanol is at least partly motivated by the vision that this could be the first country in the history of the world to industrialize on the back of its farming industry. But that depends on exports and as and until America reduces its ethanol import tarif, that vision will still remain a dream.

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.

A very good piece here by Ambrose Evans-Pritchard, who explores some of the controversies around biofuels and food production, and then, more relevantly to us, cites Goldman Sachs as having come up with these figures for each kind of biofuel, for a barrel of oil equivalent. As he said;

Goldman Sachs says the cost of ethanol from corn is $81 a barrel (oil equivalent), with wheat at $145 and soybeans $232. It is built on subsidy. New technology may open the way for the use of non-edible grain stalks to make ethanol, but for now the only biofuel crop that genuinely pays its way is sugar cane ($35).

These are valuable new figures because earlier ones have become distorted by the decline of the dollar, and the rise in commodity prices, particularly inputs like feedstocks for biofuels. But the overall picture is very clear. With oil at over $100 a barrel, Brazilian ethanol producers - which is based on sugarcane - should be well in the money for some time to come. The American Mid West corn ethanol boom meanwhile looks to be on shaky ground (as if most of you didn't already know) without high tensions in the Middle East. The EU wheat story is what you might expect of European farmers seeking subsidies and whoever is producing soybeans for biofuels, that appears to be utterly indefensible.

Where I disagree with Ambrose is that he is mistaken to echo the idea that biofuels need replace rainforest in Brazil. The reality is that there is a great deal of land in Brazil that is not rainforest, which could go a long way to meeting the world's demand for biofuels at an affordable price and at a very low environmental cost. To be precise, currently, Brazil only devotes 5.3m hectares of land to sugarcane production but could easily expand into 320m hectares of genuinely arable land - i.e. not rainforest. 

Far, far better the world grows its biofuel in Brazil, than in the MidWest, Europe or Malaysia.

With that in mind, here are some Brazilian ethanol companies (and listed stocks) you may be interested in;

Acucar Guarani

Brasil Ecodiesel

Clean Energy Brazil

Cosan SA

Sao Martinho

I don't think anyone saw this coming. Because of tax and regulatory incentives, it has always been difficult to find a totally straightforward relationship between the price of oil and alternative energy stocks. Yet no one ever really disputed that, say, if oil prices had remained low - at $10 a barrel as they were in 1999 - there's no way we could have had the boom in alternative energy investment of recent years.

However, over the last few weeks, they have clearly been heading in the opposite direction. Oil is reaching new highs - $111 and the Wilder Hill Clean Energy Index which closed at 206.77 yesterday, is a long way off it's 2007 Boxing Day high of 297.05.

Obviously, there are a lot of investors out there who haven't read the script !

What's happening is that commodities like oil and gold, in the face of the credit crunch, have become the new defensive investments. That strikes me as pretty risky, but it seems to be working for those investors, for now.

And still there is no let up in sight to the alternative energy boom. Figures out earlier this week from Clean Edge make this clear - in 2007, a 40% increase in revenue growth for solar photovoltaics, wind, biofuels, and fuel cells to $77.3 billion. And the projections for 2017 are;

• Biofuels sales will grow to $81.1 billion by 2017 - a 319% increase
  


• Wind power (new installation capital costs) will grow to $83.4 billion in 2017 - a 277% increase
  


• Solar photovoltaics (including modules, system components, and installation) will grow to $74 billion by 2017 - a 365% increase
  


• The fuel cell and distributed hydrogen market will grow to $16 billion over the next decade - a 1066% increase
  

All projections far into the future have a habit of being wrong of course, but Clean Edge has the only annual and projected figures in town. And let's be honest, most of us would be very happy with half these growth rates. It's also worth noting that in the last few years, alt. e. growth rates have actually been faster than anticipated. If there's anything I'm overtly sceptical about in these projections, it would have to be the fuel cell industry which has been the future for a long time. I still don't see a big breakthrough in sight.

It would be interesting to start seeing some figures though on the growth in energy storage technologies, particularly those in the category of hybrid electric vehicles.

The latest Economist magazine seems to think so - as it says;

"The multi-billion dollar question is whether the skills that make somebody a successful  executive, entrepreneur or investor in digital technology also work with green technology"

I agree that there's perhaps too much focus on the numbers and the underlying technologies. What's all too often underrated, is how good or bad is the management. That's why I launched the AEI CEO Interview series, to add a qualitative, vital intangible angle to any given company and an insight into the people behind the firms and how they see their industry panning out.

Now back to the geeks, who are more often than not, the investors rather than the entrepreneurs in this scenario. And what's interesting is that they tend to be more involved in the riskier venture capital part of the alternative energy marketplace - people like Vinod Kholsa - rather than where AEI steps in, the public markets. The exception of course is Bill Gates and Pacific Ethanol - a far from successful investment .

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.

CNN Money - Long-Term Investors In Brazil Ethanol Unfazed By Dollar Crash

An interesting piece about how the fall of the dollar against the Brazilian Real has barely made an impact on the Brazilian ethanol investment boom. The long-term ethanol story for Brazil is almost entirely positive. The feedstock - sugarcane - is the cheapest and you can go long on the demand curve too. According to the chief executive of state-run oil firm Petroleo Brasileiro SA ( PBR), " . . . Brazilians will consume more ethanol than gasoline by 2020 when flex-fuel cars will dominate the country's car fleet."

We hear a lot about ethanol in Brazil but need to be reminded that although flex-fuel cars now represent 85% of Brazilian new car sales, they are still only 12.8% of the entire light-vehicle fleet. Brazilians love to see themselves as exceptional and they're not wrong. Arguably this is the first country in the history of the world to attempt an agricultural-based industrial revolution. So looking out over the next decade, Brazilian ethanol and crucially, the Brazilian Real, look like a good place to be.

But can anything stop Brazil's ethanol juggernaut?

I think there are two technological and one regulatory threat;

i) The emergence of low cost celluloscic biofuels

ii) The arrival of high mileage plug-in hybrid vehicles

iii) The Brazilian government decides at some point to no longer mandate the ethanol content in gasoline

I don't see i) happening in the next 5 years and certainly not scaleably so in the next 10. ii) is a real possibility, the technology is already available, but mass production of these vehicles will be still at least 5 years off. iii) doesn't look likely at all in the next 10 years.