Investing in the UK’s Small Cap Clean Energy Stocks

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Time to invest in the UK’s Small Cap Clean Energy Stocks?

 

“…Clean Energy will be a key driver of the world economy for decades to come, presenting opportunity after opportunity for the thoughtful investor…”

 

This transition to clean energy will take a lot of money and many many years to complete. However, this sector has the potential to make investors a lot of money.

Read on, as we highlight several companies that look very interesting with further upside to come in 2021 and beyond. Whether they’re directly responsible for producing renewable energy, or play a role in important supporting technologies, each appears to have high potential as we move into the second half of the year.

Below, we look at how to consider investing into this exciting sector.

Companies covered include : #AFC #AMTE #EQT #IES #ITM #KIBO #MAST #PNPL #SNT

During a turbulent 2020 for the markets clean energy stocks burned brightly. Shares in NASDAQ superstar Tesla surged by a spectacular 743pc while the iShares Global Clean Energy ETF (LSE:INRG) returned 136pc. Another popular index, the Global X Lithium and Battery ETF (NYSE:LIT), rose by 170pc as investors bet that the global shift towards electric vehicles and renewables will spark a supercycle in the price of metals from which batteries are made, a debate we covered in detail last month. The goldrush continued this year, Bloomberg Intelligence reporting that the leading 12 clean energy ETFs added more than $10bn in the three months to 22 February.

Like all investments of course, clean energy isn’t a one way bet. The price of many of the most exuberantly valued green stocks, subjected to a long expected market correction last month. But though investors should be prepared to weather occasional volatility the stars are aligned for a clean energy megatrend as governments around the world commit to climate change targets and roll out post-Covid stimulus programmes oriented to green technologies.

Investing in the UK

 

The prospects for the UK’s own – somewhat unheralded – clean energy sector, typically overshadowed by Tesla, Orsted, and other, green giants, look particularly good. With the promise of a sharp economic recovery as Britain’s effective vaccination programme is rolled out, and unprecedented cross-party support for state investment in green infrastructure, the industry seems set fair for the foreseeable future.

In 2019 Theresa May’s government committed the UK to reduce all greenhouse gas emissions to net zero by 2050. Boris Johnson’s ‘Green Industrial Revolution’ promises to end the sale of fossil fuel powered vehicles by 2030, quadruple the amount of offshore wind power capacity within a decade, and commit billions to emerging green technologies. 2020 was a landmark year for wind and solar power, which rose by 10pc to take a 45pc share of UK electricity generation. The costs of wind and solar have fallen by 90pc and 60pc respectively over the past decade.

The continued role of natural gas

 

But though a seachange is surging through the economy it’s important to remember that the energy transition is just that: a transition, a process of evolution rather than revolution. Renewables account for an ever greater proportion of Britain’s energy mix, with coal now contributing less than 2pc. But natural gas still provides about 40pc.

Wind and solar power by their nature are intermittent. On some days last year they supplied as much as 65pc of the National Grid’s power, but on nearly 90 days they contributed 20pc or less, and sometimes as little as 5pc. The UK remains heavily dependent on gas to ensure baseload power when renewables cannot deliver, a brutal reality that painfully asserted itself earlier this year when electricity prices soared to an all-time high due to soaring gas costs. Indeed a power shortage in the east of England briefly allowed West Burton B, a gas-fired station owned by EDF of France, to sell its output for £4,000 per megawatt hour (MWh), an extraordinary rate given that normal UK wholesale prices are closer to £45 MWh.

Our reliance on gas will become even starker when all but one of Britain’s existing fleet of nuclear reactors, which currently provides 17pc of the energy mix, is retired over the next 10 years or so. Only one new plant, the controversial Hinkley Point C in Somerset, is under construction. Forecasts that electricity demand is expected to double over the next 30 years, driven in large part by the switch to electric vehicles, means that gas is here to stay for some time to come.

During the long transition to a grid powered wholly by renewables, gas will be essential to the reserve power technologies that ensure energy can be channelled into the grid at times of peak demand. Automated reserve power systems trigger small unmanned gas-fired power plants with capacities of less than 50MW into use when a looming power shortfall is detected. Though it would be much too generous to call it a ‘low carbon’ energy source natural gas is the cleanest fossil fuel available, and – potentially – a particularly cost effective interim solution for the UK with its extensive natural gas infrastructure.

Mast Energy Developments – gas reserve power

 

Mast Energy Developments, preparing to list on the Main Market, and is seeking to take advantage with a plan to acquire and develop a 300 MW portfolio of small-scale flexible power plants across the UK. Currently a subsidiary of Kibo Energy, an international reserve power operator focused on sub-Saharan Africa, Mast raised £5m last month in advance of its IPO, and is aiming for an initial market capitalisation of around £23m.

The company plans to fast-track the development of its first gas plant at Bordersley in the midlands, which is expected to produce 100 MW by the end of the year, generating £500,000 of free cash flow per month. Last autumn Mast announced the acquisitions of a 9 MW gas project with a projected annual revenue stream over its project life of more than £7.2m, and a lease hold site with planning and permitting in place for the installation of a 6 MW synchronous gas-powered standby generation facility. The company is assessing a pipeline of prospective gas power plant sites capable of generating a further 71 MW.

Flow batteries and the promise of a renewables-powered grid

 

Small, flexible natural gas power plants offer an abundant source of reserve power to tide the UK through the transition. But an exciting emerging technology is on the horizon that offers the prospect of a grid powered wholly through renewable energy sources. New battery storage technologies allow the surplus power generated by solar and wind to be stored when the sun is shining and the wind blowing, and released when the clouds roll over and the air is still. 

The best known run on lithium-ion, used to make the light, flexible batteries familiar from their use in mobile devices and electric cars. Lithium-ion batteries can be upgraded to slot neatly into the electricity grid: indeed Elon Musk has said he expects Tesla’s storage service, which supplies solar and large lithium-ion batteries for the grid, to one day rival as its car business.

But though present generation lithium-ion batteries excel at providing concentrated bursts of high energy, their limited storage capacity means they are not particularly well suited for heavy-duty use in the grid, a function for which the large durable ‘flow batteries’ powered by the metal vanadium are ideally suited.

First developed by Nasa in the 1970s, vanadium flow batteries harvest energy in tanks of liquid electrolyte which is pumped through a stack of cells, causing an electrochemical reaction that generates electricity. Vanadium electrolyte can reliably charge and discharge for thousands of cycles without degrading, giving the batteries a very long life: they are able to perform reliably for at least 30 years, and can be recycled to last longer still. Their longevity means they can be relied on to store sufficient reserves of energy to keep power grids running through shifting patterns of demand, store renewable energy during the day and deploying it during peak demand, or overnight.

As the technology improves and the price of flow batteries fall their potential is becoming clearer, one report predicting that the value of the flow battery market, less than $200m in 2017, could touch $1bn by 2023, a compound annual growth rate of more than 30pc.

The first major vanadium projects are currently in development around the world. Flow battery specialist Invinity Energy Systems (LON:IES) has won a major tender to provide storage for the Californian grid, and an 800 megawatt-hours vanadium battery – the world’s largest – is under construction in China. And Britain’s first major battery storage programme is well underway. The Energy Superhub Oxford, running on a lithium-ion/vanadium flow battery, powers electric vehicle charging, low carbon heating, and smart energy management systems.

Pineapple Power Corporation – focused on flow batteries

 

Pineapple Power Corporation (AIM:PNPL) which listed on the Main Market in December, is one of very few UK companies focused on the flow battery space.

As we reported when we last covered the company just prior to the company’s IPO, Pineapple is currently a Special Purpose Acquisition Company (SPAC) a ‘cash shell’ equipped with funds to acquire one or more private companies. SPACs have become increasingly popular sources of funds for companies looking for capital without having to go through the lengthy and costly IPO process. Indeed a Treasury-backed review of City regulations has called for an overhaul of company listing rules so London can better compete against rivals in New York and Europe and take a share of the growing SPAC market. After making a suitable acquisition former SPACs often become takeover target for larger companies, opening the prospect of a significant increase in their share price.

Pineapple raised £1.3m through its IPO with the subsequent increase in its post-listing share price from 3.25p to just under 9p taking its market cap to £5.5m. A corporate update last month confirmed the company’s commitment to potential opportunities in the battery storage sector, ‘although not to the exclusion’ of other attractive prospects in the renewable and clean energy sectors. The company has already received several proposals which are currently under review.

Scaling up the UK’s lithium-ion capacity

 

Though lithium-ion batteries may not be optimal for heavy duty use on the grid, the portability that makes them so useful for mobile phones and electric vehicles will ensure they will remain one of the most vital of all renewable technologies.

So countries – like the UK – without access to a local supply of the batteries risk disruption when trade patterns are disturbed. The sudden and severe supply shortfall when imports from China slowed during the pandemic highlighted Britain’s urgent need to increase domestic demand. For Jaguar Land Rover CEO Dr Ralf Speth and other industry leaders, the UK needs a Tesla-sized factory to fully embrace the electric car revolution.

AMTE Power (AIM:AMTE), a developer and manufacturer of lithium-ion battery cells for specialist markets, which listed earlier this month, is well positioned to take advantage.

AMTE, whose unexpectedly high IPO fundraise of £13.7m took its market cap to £61m, produces a range of lithium-ion battery cells tailored for manufacturers of high-performance vehicles and specialist equipment. One of only five UK commercial battery cell manufacturers, the company operates a cell manufacturing facility in Scotland with the second largest cell manufacturing capacity in the UK. In May 2020 AMTE entered into an agreement with fellow manufacturer Britishvolt (LSE:VOLT) to develop two new Britiish plants as part of a £4bn investment programme.

Big hopes for hydrogen

 

Although lithium-ion batteries can be used in heavier vehicles like trucks, their widespread adoption has been resisted on commercial grounds. They simply require too much space, hauliers being unable to afford to sacrifice the payload necessary to accommodate the weight of the batteries.

One of the most exciting emerging clean technologies – hydrogen promises an elegant solution for ships and planes as well as trucks. Hydrogen fuel cells, which release water vapour rather than carbon, are compact, and have significantly shorter charging times than those of battery-powered vehicles.

Hydrogen has long been hailed as a potentially revolutionary alternative to fossil fuels – General Motors built its first hydrogen-powered vehicle in the 1960s. The historic problem has been that hydrogen can only be produced at commercial rates as a by-product of fossil fuels. So called ‘green hydrogen’ can now be produced by using clean electricity from renewable energy technologies to electrolyse water, separating the hydrogen atom within it from its molecular twin oxygen. Governments have begun to pour money into green hydrogen research in the hope that it will crack the previously insoluble problem of greening heavy transportation. Hydrogen fuel cells can also be used to power carbon intensive industries such as steel manufacture.

Green hydrogen currently only accounts for less than 2pc of global hydrogen supply, but the EU has set out ambitious plans to ramp up capacity from less than 1 GW to 40 GW by 2030. The first hydrogen trains are being rolled out in Germany and France, and Daimler has established a joint venture with arch-rival Volvo to develop hydrogen-powered trucks. The technology’s efficiency will have to improve significantly: just now the production of green hydrogen simply requires too much precious renewable power to be diverted from the grid. But the prize is great.

UK companies focused on hydrogen

 

Of the cluster of AIM-listed companies focused on hydrogen ITM Power (AIM:ITM), which manufactures electrolyser equipment that can use renewable power to produce hydrogen from water has generated the most excitement.

ITM’s shares have soared by 2000pc in the past two years to take the company’s market cap to more than £2.5bn. At times it has rivalled the value of some traditional energy companies such as Centrica, the owner of Britain’s formerly state-owned giant British Gas. Royal Dutch Shell, an early customer, has used ITM’s electrolysers to produce hydrogen for refuelling stations at the oil major’s forecourts in the UK. ITM is manufacturing what will be the world’s largest hydrogen electrolyser for installation at Shell’s new refinery in Germany. ITM has also formed partnerships with other industrial groups including Italy’s Snam and the American-German Linde, which have both taken minority stakes in the company. The company serves a range of markets encompassing transportation, power-to-gas energy storage, and renewable chemistry.

Another hydrogen specialist AFC Energy (AIM:AFC) produces alkaline fuel cells that consume hydrogen and pure oxygen, to produce water, heat, and electricity.

Alkaline fuel cells’ conversion efficiency and reliability have previously been used on mission critical applications such as those executed by NASA on the Apollo-series missions and on the Space Shuttle, as well as the Arianne and Russian space missions. Last year the company took a significant step forward by launching a strategic partnership with Swedish automation manufacturer ABB to develop cutting edge electric vehicle charging solutions for grid constrained locations across the globe.

Energy efficiency and waste-to-energy

 

With so much clean energy commentary focused on the shimmering vision of wholly renewable grids serving lithium-ion electric vehicles complemented by hydrogen powered trucks and trains, other critical transition technologies can be overlooked.

Leading tech doesn’t have to be applied to shiny new solutions, but can be used to optimise legacy energy systems. Sabien Technology (AIM:SNT) for example is using cutting-edge machine learning and artificial intelligence to analyse and improve the efficiency of existing heating, cooling and transportation systems.

Sabien’s cloud-connected carbon management service is used in the boiler rooms of hundreds of public and private sector buildings across the UK to manage carbon emissions, reduce operating spend, and achieve regulatory targets. The company also optimises air conditioning units in buildings, passenger vehicles and commercial freight, and analyses refrigerant leakage patterns. Unglamorous perhaps: but Sabien calculates energy-efficient, climate-friendly cooling could prevent as much as 460 billion tonnes of greenhouse gas emissions over the next four decades.

Another relatively unsung but critical green innovation, waste to energy technology, offers an elegant way of making use of the vast amounts of rubbish we generate, allowing a wide range of refuse to be processed for energy that can feed back into the grid.

EQTEC (AIM: EQT), last covered in TMS in November, designs and supplies an ‘Advanced Gasification Technology’ able to process more than 50 different types of feedstock to produce a high-quality synthesis gas called ‘Syngas’. The company sells its gasification reactors and engineering and design services to energy producers, local authorities and governments across the world.

The basic principles of gasification are well established: the process has been around for more than two centuries, often used, for example to make hydrogen from natural gas and methanol from coal. EQTEC’s 21st century technique employs a ‘fluidised bed reactor’ to apply heat, oxygen and pressure to feedstocks to transform them into a composite gas of sufficient purity for industrial use. It works with materials including olive stones, nut shells, straw, grape bagasse, wood chips, sawdust, pine cones, forestry clippings, lignite, sludge, rubber, demolition rubble, plastics, and plain municipal solid waste (known in the industry as refuse-derived fuel). Syngas can be turned into a synthetic natural gas through the addition of methane, and then injected directly into the electricity grid, and can also be converted into hydrogen or biofuel, making it suitable for fuel cells.

ECTEQ argues that Syngas represents a significant advance on the most prevalent form of waste-to-energy process, combustion, through which feedstocks are simply burnt. Combustion produces carbon emissions, and fly ash carrying toxins which must be removed through expensive filters. Gasification does produce some carbon – the process can’t work without it – but only a third of that created by incineration, and it generates no fly ash or other pollutants.

The company’s technology is exemplfied by its plant in Movialsa, Spain, which was originally designed to process local grape bagasse, and now takes olive pomace – a byproduct of local olive oil production. The resulting Syngas is converted into electricity that powers the plant and is sold on to Spain’s electricity grid. The plant has operated successfully for more than nine years with a capacity of 6 MW.

A world of opportunities

 

As we said at the start of this article clean energy is not a silver bullet for investors. Green tech stocks can be volatile, and it is worth noting that it is possible to back clean energy indirectly by investing in industries that support it, most obviously, perhaps, mining, which supplies the commodities on which the energy transition will depend as we covered in detail in our supercycle report.

But clean energy will be a key driver of the world economy for decades to come, presenting opportunity after opportunity for the thoughtful investor. We’ve highlighted just a few of the many prospects here.

 

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