Risks of sowing the seeds of change

BIOFUELS:Using oil derived from plants as a replacement for conventional motor fuels initially seemed like a good idea. It appeared set to solve several problems at once.

First, it had the potential to cut the developed world's dependence on oil. Second, because you had to grow the crops from which biofuels are harvested, you were helping to reduce or at least neutralise the greenhouse effect produced by burning oil.

In common with other alternative energy producers, the industry won early support from some governments, particularly in the US and Europe.

The EU remains adamant that it wants 10 per cent of all transport fuel to be derived from plants by 2020, though even the industry itself is warning that this could be damaging.

Figures from the British biofuels lobby, including Merlin Hyman of the UK's Environmental Industries Commission, warned this week that setting ambitious targets without adequate safeguards could have a negative effect. Hyman argued that only those biofuels which save at least half of the greenhouse gases emitted by the fuels they replace should be used.

The debate on biofuels hinges on the need for land to produce the crops that are distilled into ethanol, from which the oil is processed. However, clearing the acres needed for the crops can itself result in greenhouse gas emissions.

In addition, the crops are competing with land used to grow food. This problem has the World Economic Forum worried. In its Global Risk Report for 2008, it warned that the boom in biofuel demand directly contributed to food inflation last year and was a key factor in the doubling of the price of wheat.

The Economist recently pointed out that 40 per cent of the US maize crop was used for biofuel production, cutting the amount available for animal feed. This put pressure on the cost of keeping farm animals and boosted food prices.

This scenario has the potential to backfire on the biofuels industry, as it will face higher raw material costs. According to research by Davy analysts Jack Gorman and Mark Healy, this has already had an impact on smaller listed players in the sector.

Investors are becoming wary of the fact that it is hard to forecast the rate at which these costs are going to increase in the future.

However, people are continuing to invest in the business. Next week, Minister for Agriculture and Food Mary Coughlan will launch a large-scale biorefinery project being developed by Sustainable Industries Ireland.

Another Irish player, NTR subsidiary Bioverda, is involved in projects in the US, Germany and the Republic.

The sector is smaller than wind and solar power,accounting for about 18 per cent of the value of the listed alternative energy players identified by Davy.