Energy Series: Wind

Wind energy producing electricity for the national grid has been targeted by government as the major alternative to the carbon burning alternatives. This would help the UK to meet its obligations for reducing our greenhouse gas emissions and help us to contribute to the, generally agreed, need to reduce the march of global warming and the devastating impact that would have on the way we live.

Wind turbines are used to create the electricity and these can be various sizes from small ones to generate power for an individual house through large single or small groups to supply small complexes to large wind farms for feeding the national grid and for replacing coal and gas fired generators. They can be placed, subject to planning permission, anywhere that the wind blows sufficiently to produce electricity in economic amounts. They are large complex structures with a fan or veins that are rotated by the force of the wind. The veins can usually be adjusted so that maximum advantage can be taken of the wind’s power allowing for its direction. The rotors are connected to a shaft which, in turn, is connected to a gear box. The gear box is connected via a system of cogs to the generator and it is this that produces the electricity which is then fed by high powered cables to where it will be utilised. Technologies are being advanced all the time which is making these structures more efficient.

To produce enough electricity for commercial use wind farms have been erected in places where the wind is plentiful all year round so that they will often be found in remote areas such as on mountain sides or on flat plains that are exposed to the weather and at sea. It costs around two million pounds to erect each one and will need regular maintenance however after that, they become cheap to run as the wind is free. According to your point of view the wind turbines are either very beautiful or an ugly eye sore. They are also very noisy and the noise of a wind turbine in operation has been likened to that of a small jet engine. This noise multiplied several times over would be very hard to bear for anyone in close proximity to them but to those viewing them from a distance this may not be a concern.

These concerns have led to many wind farms being constructed at sea where the wind is more regular, is unaffected by obstructions and the noise only affects those that sail nearby. They are, however, regarded as a shipping hazard and they are much more expensive to erect and to maintain because of the harsh and difficult environment. They will be damaged by the force of the sea and by the salt and the high powered cables will need to be longer and run under the sea. They are, therefore, much more expensive to run and have needed to be subsidised more heavily to encourage operators to construct them there. They do avoid the objections often put up by those that will have them ‘in their backyard’ which will include the noise and the blot on a landscape. Many of the better sites will be beauty spots. The objections will delay planning permission and could extend the time before they are up and running to several years which also adds to the cost of building them.

The wind is variable and this makes for an unreliable source of power. Without wind, there is no generation of electricity possible. It is also possible for the wind to be too strong so that the generators have to be shut down. This is a big disadvantage of wind power as a smooth and reliable supply is required for the national grid. New technologies are being developed to overcome this disadvantage with the objective of storing the power at time of plenty so that it can be released when there is not enough electricity. It is clear that the national grid requires reliable and plentiful power and until this problem is overcome wind will remain second to fossil fuels and nuclear energy for supplying the nation’s electricity. In the meantime, subsidies and regulations will be the main reason why wind farms are developed but the certainties of the need for alternatives has also spawned the industries which will develop the existing technologies and find new ones to make this a viable long term alternative to fossil fuel.

Wind appears to have a clear long term future and as such can be invested in and there are a growing number of opportunities in which to do so. There are companies such as Green Energy which run their own wind farms and which provide the electricity produced for it’s growing customer base. Customers close to the wind farms they own are given a discount to compensate them for the disruption of living nearby. The company has been successful and appears to have a future of growth. Another is Greencoat UK Wind Trust which operates offshore wind farms that were sold to it by the existing operators who have retained a stake in the company. This is a good way of funding further growth as the companies have developed the farms to be profitable and they get the funds to allow them to continue developing new fields which, once successful can be sold on. Greencoat UK Wind is able to run the fields and produce enough cash to pay an attractive dividend and to enable them to buy new fields as they become available. There are also environmental unit and investment trusts that will invest in wind projects among other alternative energy and eco sensitive businesses. There are also ETFs that can be used such as First Trust ISE Global Wind Energy Index Fund.

There are clearly risks involved investing in new technologies but wind energy has become a part of our energy production programme and will find a growing place in the global energy sector.

Energy Series: Nuclear Power

Nuclear energy began its history in Germany where a scientist named Roentgen started experimenting with cathode rays in a test tube from which he had removed all the air. He noticed that when the device was energised the photographic plates beside it lit up.  Following further experimentation with the rays over the next 2 weeks he took the first x-ray photo of his wife’s hand. In 1896 a scientist in France named Becquerel noticed that energy was coming from inside uranium salts sitting on photographic plates causing them to expose even though no cathode ray tube was energized. From there Marie Curie and her husband Pierre discovered 2 new elements that also exhibited spontaneous energy production, Polonium and Radium, which they named “radioactivity”.

In 1899 Ernest Rutherford began studying radioactivity and discovered 2 different types of rays and named them alpha and beta radiation. He also discovered the atomic nucleus and gamma radiation. For his research he is widely regarded as the father of nuclear physics.

In 1932 the neutron was discovered and in 1938 fission was discovered once it was established that it was possible to split uranium atoms using neutrons.  In 1939 following research into neutron multiplication it was concluded that a nuclear chain reaction was possible and a warning letter was sent to President Roosevelt in America warning him of the possibility of the production of nuclear weapons.  Despite this warning the possibilities of a weapon based on this reaction was too tempting and the news that Germany was developing such a weapon lead President Roosevelt to commit the US to the Manhattan Project designed to produce a viable atomic bomb. More than two billion dollars was spent on a project lead by Robert Oppenheimer and, in the July of 1945, the first nuclear weapon test occurred and this was closely followed in August by their use in the Second World War when the United States dropped 2 atomic bombs on Hiroshima and Nagasaki in Japan, causing the Japanese to unconditionally surrender. This lead to the end of the Second World War and changed global politics for ever.

In 2011 nuclear energy provided 10% of the world’s electricity. Commercial nuclear energy began in the middle of the 1950s and at least one nuclear power plant became connected to the grid every year since until 2008. The country producing the most nuclear power is the United States where 19% of the electricity consumed is nuclear power. France produces 80% of its electrical energy from nuclear power having implemented a huge nuclear power programme in response to the oil crisis in 1974. There are more than 430 commercial nuclear power reactors in over 30 countries providing 13.5% of the world’s electricity.

In order to generate nuclear energy uranium needs to be mined and then enriched before being manufactured into rods which are then placed inside nuclear reactors where they will be used, usually for 6 years. Uranium is a common element found in the earth’s core.  It is a very heavy metal with a melting point of 1132 degrees Celsius.

Nuclear power involves the use of exothermic nuclear processes to generate useful heat and electricity. Nuclear energy is derived from the burning of nuclear fuel by a process known as nuclear fusion.  There is a large volume of waste produced in the production process and although this has a relatively low radiation level it is one of the major concerns for opponents of this form of energy production. Most of this waste is stored at the reactor sites and will remain hazardous for many years. Much thought has gone into safe ways of storing the waste.

It is estimated that there will be a huge increase in demand for cleanly generated electricity over the next 20 years. Nuclear energy is considered to be a low carbon method of producing power and is seen as a sustainable energy source and potential answer to reducing carbon emissions in the future.  It produces virtually no air pollution.  Opponents to the use of nuclear fuel cite problems regarding the processing, transport and storage of nuclear waste, the proliferation of nuclear weapons and the environmental damage and health risks associated with uranium mining.  There is also the massive cost associated with de-commissioning old reactors at the end of their life.

Nuclear fuel is also used to power around 150 ships (both military and icebreakers) and submarines, enabling the vessels to stay at sea for long periods without having to make refuelling stops. The first submarine to be powered by nuclear energy, the USS Nautilus, was launched in 1954.  In the same year the first commercial nuclear power plant was established in the Soviet Union.  Some space vehicles also utilise nuclear reactors.

Nuclear power plant accidents thankfully are rare but when they do occur they have a devastating and long lasting impact.  The most recent accident happened in Japan at Fukushima in 2011 following an earthquake and resulting tsunami. Prior to that there was a disaster at Chernobyl in Russia in 1986 and Three Mile Island in The United States in 1979. In Fukushima the reactor which suffered damage had been designed and built in the 1960s and this prompted other countries with nuclear facilities to re-examine the safety of their reactors and their nuclear policies in general.  As a result Germany made the decision to close all their reactors by 2022 and Italy banned nuclear power completely.

Despite these accidents nuclear power has caused fewer fatalities per unit of energy generated than any of the other major energy sources, however the economic costs associated with nuclear power accidents are high and will probably take many decades to recover. Not to mention the tragic impact on lives and livelihoods.

Nuclear energy can be traded through Exchange Traded Funds such as the Market Vectors Uranium and Nuclear Energy ETF and the I-Shares S&P Global Nuclear Index Fund, or through investing in the shares of general miners that also produce uranium such as Anglo American, BHP Biliton and Rio Tinto. A specialist uranium miner such as Ur-Energy in North America would be a more direct form of investment in nuclear energy.

Energy Series: Coal

Coal, as we all know, is formed from the decomposition of vegetation. Most coal was formed in the carboniferous period in tropical swamps in the land masses that were close to the equator. They are initially turned into peat by bacteria which eat everything and consume all the oxygen. The bacteria die from the lack of oxygen caused by their own activity and the peat that is left remains so unless it is covered by sediment in an anaerobic environment. As continents drifted and climates changed the peat was driven ever deeper and covered by sediment. With rock crushing it and geothermal heat cooking it the peat turned into coal. The quality of coal is determined by the type of vegetation growing from where it originates, the depth it is buried at, and the pressure and temperature where it is buried as well as the time period that the coal has been forming.

Coal is mined from open pits where the coal strata reaches the surface and from deep mines with shafts driven deep into the earth’s crust. Britain developed the mining techniques that were used in the 18th century and these were further developed in the 19th and 20th centuries with new techniques increasing the production of coal from more previously inaccessible seams. Coal gradually became replaced by oil from the 1860s and natural gas and electricity. To get at coal seams miners have been known to blast away entire mountains. This permanently alters the landscape and can choke up streams with sediment.

Coal is black or brownish and is basically carbon plus some other elements such as sulphur, hydrogen, oxygen and nitrogen. It has always been used as an energy source and was the most important fuel from which electricity was produced. It was developed as a primary source of energy in the industrial revolution and was used for domestic fuel and in industry for smelting and other things.

Coal is the largest source of energy for the production of electricity worldwide and is also the largest producer of carbon dioxide releases. The level of emissions of carbon dioxide in 1999 was 8,666 million tonnes and in 2011 was 14,416 million tonnes. As natural gas has replaced coal for the generation of electricity so the emission levels have reduced and in the first quarter of 2012 the US recorded the lowest carbon dioxide emissions for the first quarter of any year since 1992. The UN climate agency has declared that most of the world’s coal resources should remain underground to avoid catastrophic global warming.

Coal is a global industry and is mined in 50 countries, the biggest being USA, Russia, China and India, and it is used in more than 70. There is an estimated 861 billion tonnes of proven worldwide coal reserves which it is believed is sufficient to last around 112 years at current production rates. Coal is used for the generation of electricity, steel production, manufacturing of cement and also as a liquid fuel. It is also used in the manufacture of paper, alumina refineries and in the pharmaceutical and chemical industries. By products of coal are tar and ammonia gas and among the products made from these are aspirin, dyes, fibres, plastic, soap and solvents.

Approximately 30% of primary energy is supplied through coal and 41% of global electricity generation. Demand for coal is particularly high in countries such as India and China whereas in the US there is a surplus of coal and relatively low demand.

It is possible to transport coal quickly and easily and safely by road, sea and rail. Although most coal is used in the country in which it is mined. It is the transportation that makes up a large proportion of its price. Australia has always been one of the world’s largest producers of coal although Indonesia has recently become the largest exporter.

Coal, however, has a number of health issues such as the waste materials generated in the form of ash and sludge, the acidic rain caused by sulphur released when the coal is burned, the issue of particulates and interference with water tables. Miners can also suffer from the dust generated getting into their lungs and causing pneumoconiosis and early death.

Man has found ways to reduce the environmental impact of coal by cleaning coal by mixing crushed coal with a liquid. Some power generators use flue gas desulpherisation equipment known as scrubbers to reduce the amount of sulphur emitted from their smoke stacks. The smogs in Britain during the fifties and sixties were largely eradicated with the use of cleaner fuel, as was acid rain which had been killing forests not just in the country burning the coal but in those that were downwind of it. Coal is cheap and is used by many of the developing countries to produce the electricity that they require. The smogs in China are a repeat of those in the West in the middle of the last century

Coal can be traded through the use of ETFs (Exchange Traded Funds), coal contracts or directly through purchasing the shares of coal producing companies. Coal futures are designed for consumers and producers of coal in order to manage the risk of price fluctuations. Speculators will also attempt to take advantage of any supply and demand imbalances.

Currently, coal is an essential fuel for the world and many argue that it is needed to back up the use of renewable energy which is a less reliable generation.

Coal futures are traded on the New York Mercantile Exchange (NYMEX) under the symbol QL. Each contract is 1550 tons of coal on a minimum incremental price fluctuation of 1 US cent per ton ($15.50 per contract).

The price of coal is a lot more stable than many other commodities such as oil and gas and has been historically the cheaper priced fuel, hence why it is favoured in countries with high energy intensive industries where they have access to either their own or affordable imported supplies.

Choosing a Market to Trade

Trading the markets is, potentially, a great way to grow your capital, as long as you learn how to invest properly and have a good system to manage your risk whilst maximising your profits.  An individual setting out to do so needs to :-

1.    Know the market that they wish to trade.

2.    Understand how to determine the opportunities available through technical analysis.

3.    Have the funds with which to do so and know that this could be lost without any danger to their current or future lifestyle

4.    Know how to control risk.

5.    Have a plan.

Considering these five points will help to determine the market to trade so let us take each one in turn.

If the individual has been a successful investor in a particular market then, on the face of it, they are in a strong position to be able to trade it.  However if their investing was long term, as measured in years, they will need to have a different approach when trading as the information needed and the psyche involved are quite different.  It may be better to choose a market that they are not familiar with as they are less likely to be influenced by long term thinking getting in the way. If they choose to go with the market they understand then ready access to information about the market will be essential as will be the time to read and analyse it.  If the market chosen is equities then company announcements and economic statistics relating to the wider economy as well as the specific company must be readily accessed. Shorter term traders will need the information to be in a timely fashion because markets react very quickly to anything that influences the perception of value.

Choosing a market that they are not familiar with, however, then requires a good knowledge of technical analysis.  True technical analysts can trade any market that they have the data of price and volume for. It is also entirely possible to trade markets without a deep understanding of technical analysis. Indeed too much knowledge by way of indicators that seek to further analyse the raw data can get in the way and make a simple decision very complicated, confused and wrong. By with the right training technical analysis can be a very powerful way to trade.

Some markets are more volatile than others but all represent a high level of risk so that the market chosen may be determined by the level of risk and funds available to the potential trader.  Commodities and Foreign exchange markets tend to be very volatile and may represent the higher risk markets.  Sometimes the trader will need high minimum stakes which makes it impossible to manage risk efficiently without having large initial levels of funds.

Managing risk is absolutely essential for anyone to be a successful trader.  This involves two elements in the managing of the trader’s funds.  First of all they must limit the amount that they risk on any one trade so that they cannot be wiped out by one rogue trade.  Trading involves many lost trades and, usually, fewer winning trades for most traders.  So the approach is to ensure that the expected gain exceeds the potential loss on each trade by a significant margin. Losses should be limited by the use of a stop loss on every trade.  The margin or deposit required will be based on the risk that the trade represents and the amount that is to be traded per unit.  All of these are considerations in choosing the market to trade as they may be beyond the sensible use of the funds available. They do, however, allow the trader to ‘fall asleep’.

So what markets are available to be traded? The equity market in the UK and overseas, foreign exchange, commodities are all available and are widely used. 

In the equity market there is a choice of individual companies and indices.  It is possible to gain exposure to specialist areas with the use of ETFs (exchange traded funds) which can offer exposure to global areas such as Asia, Emerging Markets, Europe, America and others. 

ETFs can also be used to gain exposure to commodities such as particular metals eg nickel or copper or the precious metals of gold and silver.  Exposure to soft commodities such as wheat, coffee and soya etc. can also be gained in this way.  Commodities whether they be soft or hard are the subject of many influences that are often hard to predict and can be very volatile as a result.

The foreign exchange market is the largest market in the world with some $4trillion dollars traded every day.  It is the market that is most closely associated with the pure form of technical analysis because of the large amount traded each day.  Even so, as the trade is in currency pairs it is the major currencies that best fit as smaller currencies are less widely traded and be more likely to be ‘surprisingly’ volatile.  Individuals that are new to trading will often pick this market as it usually offers opportunities every day and the choice from a list of major currencies is considerably smaller than the choice within the equity market.  The spreads (difference between the buying and selling price) are generally smaller than they are in other markets and prices are volatile enough to be able to make a profit (or loss) each day in each currency pair.

ETF's - Exchange Traded Funds - Are They Right For You?

What is an ETF?:- An ETF is similar to a mutual fund in as much as it represents an investment in a collection of stocks, bonds, commodities etc, but with one significant difference - it can be traded on the stock exchange. 

To illustrate this difference more clearly, it helps to understand what happens when you buy units in a mutual fund. The price of these is based on the net asset value of the fund, which is calculated once a day. No matter what time of day you buy, you're getting a fixed price for that day. ETF's also have a daily net asset value, but the shares can differ in price throughout the day, which provides an opportunity to buy and sell at a profit. If the shares are trading below net asset value they are said to be at a discount, and if they're above NAV, they're trading at a premium.

Most ETF's are index trackers - they hold securities that mirror those that make up the index itself, the objective being to replicate the performance of that index. The advantage of this from a trading perspective is that it gives the trader an opportunity to benefit from intraday index moves by buying or selling ETF shares accordingly. Or he/she can take a longer term position if that's the preferred strategy.

ETF's have been around in America since 1993, with the introduction of the SPDR (Spider), which tracks the S&P 500 index. Since then the number of ETF's in the U.S. has grown to over 1500. ETF's came to Europe in 1999.

Types of ETF's: - the most popular ETFs are those that track indexes, like the SPDR mentioned above. In the UK they include the iShares plc FTSE 250 and the FTSE 100 UCITS. There are also Bond ETF's, which are seen as attractive investments in times of recession when the stock market is not so popular, and commodity ETF's, which hold investments in precious metals like gold, silver, and palladium. Agricultural and energy ETF's also fall into this category. Finally there are currency ETF's, which track the performance of all major currencies and some of the minor ones too.

Cost advantages: - Most ETF's are passively managed, which means the manager simply tries to replicate the relevant index by investing in a representative sample of the assets that make up that index. The passive manager is not trying to outperform the market, but is just attempting to replicate the performance of the index. A lot of this is done using computer modelling. This needs less hands on management, which results in lower fees. Active management on the other hand, which some ETF's are subject to, is an attempt to outperform the market. In this respect there is a similarity with mutual funds, and the charges are subsequently higher for ETF's managed this way. If you're contemplating an ETF investment, find out which style of management is in operation.

Generally however, ETF's have cheaper charges, averaging less than 1%, whereas mutual funds can range from 1% to 3%. Over time this becomes a significant difference.

In terms of taxation, the UK investor needs to be aware of the taxation status of any gains accrued from ETF investment. If the tax status is either 'reporting' or 'distributor' you'll pay capital gains tax. Otherwise it will be income tax, which can be much higher. Also bear in mind that any dividends received are seen by HMRC as income, and are treated as such. And remember that if your ETF was issued in another country you may be subject to the tax laws applicable there.

ETF's vs Mutual funds: - Some of the differences between these two have already been mentioned above, so the question here is, which one is right for you?

It depends on what kind of investor you are. If you like to be active in the market the ETF's offer you the opportunity to trade all day every day. You can go long or short as you wish. Management costs are usually lower, though if you trade a lot you need to take into account the costs of buying and selling.

If on the other hand you're more passive then mutual funds might be the better option. You buy at that day's price and hopefully watch your units increase in value, a process assisted by the ostensibly superior expertise of the fund manager. You might pay a bit more for the privilege of course.

In performance terms ETF's and mutual funds seem to be close. In researching the year to date returns for the top performing funds I can find figures for both mutuals and ETF's ranging from 16% to 100% for ETF's, and from 14% through 1,290% for mutuals! Would seem to give the lie to the often quoted opinion that professional fund managers tend to underperform. I would only add the also often quoted caveat that past performance is no guarantee of future performance either....

The ETF market has come a long way since its inception in the U.S. in 1993. There are ETF's to track just about every index around. With China and other emerging markets making their mark on the world economy, we are seeing ETF's coming through that are targeting this sector. At the moment, with the Chinese economy in a slower growth period, the year to date returns don't look impressive. But if you are a prospective investor in ETF's this could be an interesting and potentially profitable way to go longer term. The same principle applies to Brazil, Russia and India, the so called BRICs countries.

To conclude: - ETF's offer similar attributes to mutual funds, but give the more active investor the option to trade shares, with lower management fees and easy liquidity. You are free to hold onto your ETF shares long term if that is your preference, and it would seem that if you do you'll make returns comparable to mutual fund returns, without the higher charges. So in a sense it's the best of both worlds.