Investing in Waste to Energy

Tons of Cash from Tons of Trash

Written by Brian Hicks
Posted September 23, 2008

In the fight for energy independence all options are on the table.

Nowhere is that more evident than in San Antonio, Texas, where officials have unveiled a plan that will make it the first U.S. city to harvest methane gas from human waste on a commercial scale and turn it into clean-burning fuel.

According to Steve Clouse, COO of the city's water system, "More than 90 percent of materials flushed down the toilets and sinks of San Antonio will be recycled."

Talk about investing in waste to energy!

But even with all the novelty that comes with turning human waste into energy, San Antonio is only the first city to do it on a commercial scale. Other cities are already using solid waste to power smaller facilities like sewage treatment plants.

And while stories like this have become instant news fodder for their exotic choice of feedstock, in reality waste to energy has been around for some time, and a few companies have already perfected the process.

Waste-to-Energy: A Market Overview

In 2000, about 2,305 MW of power was derived from biogas sources. This could mean anything from table scraps converted in an anaerobic digester to large landfill gas extraction projects.

By 2007, with the advent of the green movement, use of biogas climbed to 5,621 MW, a growth of 144% in seven short years, which works out to a compounded annual growth rate of 13.6%

But with constantly improving technology, and a growing interest for using domestic energy, the use of waste to energy facilities is slated to grow another 173% in the next five years as the industry adds another 9,699 MW worth of capacity.

Take a look:

waste to energy growth

During this period of rapid growth for the sector, the following countries are expected to experience the highest annual growth rates regarding the use of waste-to-energy:

  • Italy, 36%

  • Spain, 35.8%

  • Germany, 29.4%

  • France, 24.9%

  • Poland, 21.8%

Waste to Energy Companies

Waste to energy projects are done in one of two main ways. The first is incineration, in which organic material is burned to operate a generator, producing electricity. The second is gasification, in which a process converts organic waste into synthesis gas to be used as a fuel.

Since most of you don't go around gobbling up shares of companies in Italy, Spain, and Germany (If you do, check out Green Chip International), it's probably prudent to take a look at the companies operating in the waste to energy sector here in the U.S.

The domestic leader in this category, for both incineration and gasification, is Waste Management (NYSE: WMI), which has been involved in waste to energy since the early 1970s. To date, Waste Management has "converted more than 145 million tons of municipal solid waste into more than 75 billion kilowatt-hours of clean, reliable electric power."

Each day the company generates enough electricity to power 700,000 homes.

Regarding gasification, Waste Management supplies landfill gas to over 100 beneficial-use gas projects in North America, "providing the equivalent of more than 470 megawatts of energy-enough to power approximately 400,000 homes-and replacing nearly two million tons of coal per year."

This company certainly isn't a pure play on waste to energy, but it is one of the best ways to gain exposure to this growing industry. Plus, in these shaky market times, Waste Management offers the security of a blue chip and the benefit of a $0.27 per share dividend.

Other waste companies to look at in this sector include Covanta Holding Corporation (NYSE: CVA) and Allied Waste Industries (NYSE: AW).

To gain exposure to the entire sector, take a look at the Market Vectors Environmental Services ETF (AMEX: EVX), which holds all three of those companies and more.

Waste to Energy Service Companies

If waste management companies are the figureheads of the waste to energy industry, then surely there must be someone pulling the strings.

Indeed, many waste to energy projects would not be capable without the engineering know-how of some of the most savvy companies in the world.

These are companies that earned their reputations by providing top notch engineering and building services to the natural gas industry, but that are now helping to bridge the gap to biogas-generated power.

The big ones here include Stantec (NYSE: STN), a major Canadian consulting firm and Telvent Git (NASDAQA: TLVT), a Spanish information technology company.

Other companies involved in, but less connected to, waste to energy include Integrys Energy Group (NYSE: TEG), Alliant Energy Corp. (NYSE: LNT), and CMS Energy (NYSE: CMS)—though it should be noted that waste to energy accounts for a small portion of their business and bottom line.

The Only Pure Play

While there may be a handful of companies operating in this sector, only one does so as its main business: Environmental Power Corp. (NASDAQ: EPG). Though still nascent, this company will be one of the major players in waste to energy, especially as carbon regulations are increasingly developed.

Through its subsidiary, Microgy, EPG develops biogas facilities which can cost-effectively and reliably produce clean, renewable gas from agriculture and food industry wastes while simultaneously creating significant quantities of marketable carbon offset credits.

The company has at least ten large biogas projects under its belt, mostly built on dairy farms in the breadbasket.

One of their projects, dubbed Huckabay Ridge, will be the largest biogas facility in the world when running at full capacity, with an annual output of approximately 650,000 mmbtus of biogas per year—the equivalent of over 4.6 million gallons of heating oil.

That facility is also expected to generate approximately 200,000 tons of carbon offset credits annually. Using the average price of 20 for a Certified Emission Reduction (CER) most major exchanges, that comes out to an additional $5.8 million in revenue per year—just for this one project.

And that's recurring revenue, meaning EPG can collect that revenue every year. The same holds true for all their projects. So as developed carbon markets make their way to the U.S., this company is sure to reap windfall profits.

Other companies in the alternative energy sector stand to glean similar lucrative payouts. I'll be covering those investment opportunities—including this one championed by billionaire T. Boone Pickens—for the savvy investors of the Alternative Energy Speculator.

Call it like you see it,

nick hodge