Now it's a new game and clean energy is no longer a dream

While motorists may be alarmed at the inexorable rise in the price of oil, which is setting new records almost daily, environmentalists and alert investors see a silver lining in the cloud.

Not only should high prices for oil (and coal and gas, which have also jumped) prompt a reduction in usage, but they will encourage the use of renewable energy, the price of which is now falling relative to fossil fuels.

A decade ago greens were always told that a switch to sustainable energies was a pipe dream with oil trading at just $10-$15 a barrel. But yesterday crude set yet another all-time high of $97.07 a barrel. Few are betting against the price soon going through $100.

"The game has changed now," said Steve Mahon, chief investment officer at green fund Low Carbon Accelerator. "We have moved away from the world of cheap energy that existed 10 years ago. There is an incredible transformation going on and it will drive us towards cleaner energy as fossil fuels are finite and will be exhausted at some point."

Calculations of the relative costs of different energies are difficult because they depend on whether the energy is used for transport, heating or electricity. The comparison between any renewable energy and fossil fuel is also difficult because the fuel - for example, sun or wind - is free and inexhaustible, so the costs involve the building and running of, say, a wind farm.

Dr David Toke, of Birmingham University, has calculated that onshore wind power is viable at the equivalent oil price of $50-60 a barrel and $70-80 a barrel for offshore wind farms, assuming a guaranteed income flow for 15-20 years, but not counting any government subsidies.

Researchers at the German Aerospace Centre have run calculations for desert-based concentrated solar power, which use mirrors to concentrate the sun's power on to a fluid and drive turbines. This technology exists in California and Spain and is growing rapidly. The cost is around $50 a barrel of oil equivalent for generating heat, falling to $20 when the technology is scaled up. For electricity production, the figure could be double that, close to the current oil price. But again, that is expected to fall rapidly with scale and will be made even more attractive when fossil fuels have to pay the cost of carbon they emit, either through carbon taxes or a carbon trading scheme.

Biofuels - often a direct alternative to petrol or diesel - are now selling for about $40-70 a barrel so are clearly already competitive, says Dan Lewis, research director at the Economic Research Council and founder of website altenergyinvestor.org.

"Higher oil prices always get more publicity, but since 2003, the cost of other energy commodities like coal, uranium and gas have risen much faster. All of these are far more powerful investment signals for alternative energy than the price of carbon ever will be," he said.

Mr Mahon agrees, saying that algae-based biofuels, which are very rich in energy but take up very little land that could otherwise be used for food, are competitive at about $54-64 a barrel of oil equivalent. Their energy yield per hectare is 30 times greater than for palm oil.

Even solar photovoltaic cells which generate electricity, traditionally the most expensive of renewables, are becoming more competitive. Mr Mahon thinks that within a couple of years, PV will produce electricity at about 10 cents (4-5p) a kilowatt. "That's pretty competitive," he says.

Figures from Chris Davenport, at energy consultants McKinnon & Clarke, show that fossil fuels typically produce electricity at between 2p and 4p a kilowatt hour in Britain, whereas wind is around 5p/kwh. Solar thermal, which heats water, comes in at an average 6.2p and solar PV at 14p/kwh. Biofuels, though, are less than 4p/kwh.

Jeremy Leggett, head of PV firm Solar Century and author of the book Half Gone, which predicts that oil will soon run out, says PV prices are falling fast.

"With manufacturing costs falling 20% every two years in solar PV, and the price of oil hooked to the cost of gas, and coal transportation, we can expect the falling cost of solar electricity to cross the retail price of polluting power in most industrialised markets within just a few years now. Huge as the investment into solar now is, it is going to rise further as the opportunity dawns on ever more people."

Ian Simm, head of Impax Group, Britain's largest green investment fund, says rising oil prices boost simpler products like home insulation and energy-saving devices, particularly for those who run central heating on heating oil.

"Energy efficiency is most obviously linked to the oil price. This is what people need to do first as it is an economic win irrespective of the price of carbon. Loft insulation now has a payback time of just one year."

Mr Mahon cautioned, though, that higher oil prices also gave an incentive to oil companies to explore and produce more of the stuff as well as processing coal into liquid fuel, something which is highly polluting.

"But higher oil prices will also create enough margin to allow people to develop dirty technologies, but in a clean way using carbon capture and storage," he said.

Wind of change

Vestas, the world's biggest maker of wind turbines, yesterday reported a near quadrupling of third quarter pre-tax profits after soaring demand and higher prices triggered by a renewable energy boom in Britain, the United States and China.

The Danish group's shares rose nearly 10% to 490 crowns as it unveiled plans for new factories and predicted a higher-than-expected 25% sales rise in 2008.

But Vestas warned that it was taking up to 15 months to source equipment due to a shortage of capacity and the supply/demand imbalance could take "several years" to change.

Ditlev Engel, president and chief executive, said the prospects were good but EU governments needed actions as well as words to realise the true potential of renewables.

"It is very encouraging that the EU has found for 20% [of electricity coming from renewables] by 2020, but we must make sure that we are making all the necessary investment in infrastructure, planning permits and so on which are huge issues and yet people keep debating them.

"It is good to set targets but it is much better to realise them."

Vestas reported quarterly pre-tax profits of €98m - compared with €25m during the same period last year- while sales came in at €1.2bn, up from €842m last time. Vestas delivered 93 megawatts of equipment to the UK - up from 43 last time - while deliveries to the US and China in the latest quarter were respectively 484MW and 144MW.

The improvement was achieved on the back of the higher level of activity, higher prices and efficiency-improving measures since May 2005, said Mr Ditlev.

For 2008, the company forecast a 25% rise in sales to about €5.7bn and improved profit margins of 10% to 12% - compared with less than 9% currently. Vestas would achieve the target through better interaction with suppliers and unspecified in-house initiatives.

Vestas also said it would invest €620m to expand production in China as well as build a tower production plant in the US.

"One of the few things that is surprising in this report is that they are gearing up for huge investments," said Jacob Pedersen, an analyst at Sydbank. "I didn't expect it would rise so markedly, but it is positive."

Terry Macalister

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