Alternative Power Producer Alkane Energy Announces New Ventures Utilising Core Gas-To-Energy Skills.
oilbarrel.com
Preliminary results from Alkane Energy, the London listed AIM the alternative energy company that owns and operates power generation plants using coal mine methane (CMM) as fuel, were broadly in line with expectations. Nevertheless, they made pretty pleasing reading even though they were more or less predicted.
Revenue and adjusted profits before tax were 21 per cent and 68 per cent respectively ahead of the previous year, aided by higher average power prices under contract and increased capacity (which was funded partly by the disposal of the minority owned German subsidiary Pro2.)
Alkane is now the leading, profitable, exponent in the UK of using CMM from abandoned coal mines for electricity generation and dedicated gas sales. CMM, if allowed to seep into the atmosphere can be a damaging pollutant, which it is estimated is 23 times more potent than Carbon dioxide as a greenhouse gas. If trapped underground however, methane can be a cheap and “green” source of energy.
In the mid 2000s Alkane intended to roll out a large number of sites in the UK for power generation. It had to put the plan on hold, however, because of poor gas prices and technical problems. A diversification into Germany with the Pro2 acquisition enabled the company to generate considerable revenue (if not great profits). As UK energy prices picked up in the 2006 to 2007 period Alkane was able to revisit the original UK programme. Having cracked the technical problems the company was able to revive some old plants and build new ones at a reasonable cost. The sale of Pro2, the German engine provider, helped accelerate this process without running up excessive debts.
Net debt ended 2009 lower that expected at £1.8 million, which reflected a combination partly of stronger EBITDA at £3.7 (2008:£2.6 million) but mainly because of the disposal of Pro2 which generated funds of £6.1 million (of which £3.2 million came from the sale and £2.9 from the repayment of working capital loans).
The proceeds of the disposal of Pro2 helped fund capex during 2009 of £10.7 million as Alkane invested in five new sites (comprising drilling and gas proving) during the year.
Alkane started the year with 17 MW of installed CMM capacity at 6 sites and finished the year with 30 MW of installed capacity at 9 sites covering both CMM and conventional gas tolling contracts. This has meant in total the company generated 95 GWh (2008:90GWh) of power and in addition sold 3.4 million therms to direct gas customers (2008:3.7 therms). It has been one of the busiest years ever in terms of operational changes for the company.
Whilst the greater output undeniably helped turnover, it has been firm prices, however which have really been the driver behind the increase in revenue. Electricity prices in the UK have been volatile in recent years. They peaked at £90/MWh early in 2008 but then started to trail off. Alkane did manage, by forward contracts, to achieve £56 /MWh for most of its out put for most of 2009 (£48.4/MWh in 2008). What this meant was that revenue climbed 21.2 per cent to £6.3 million and adjusted profits before tax were 69.5 per cent to the good at £2.4 million. As a result of the higher average pricing, gross margins increased to 67.8 per cent (2008: 59.7 per cent) and to 39.2 per cent at the Ebit level.
The cloud always hanging over Alkane is the volatility of electricity prices. For 2010 the company has booked around 75 per cent of its 2010 output at an average selling price of £40/MWh. The company is profitable at this level, of course, but margins will be affected.
Because of this volatilty Alkane is now talking about becoming a multi-platform business around its core gas-to-power skills. The company wants to continue to grow its core CMM business and plans three new plants a year which will grow its capacity to 50 MW within five years.
But it has already begun developing new possible income streams. First the group has 7 MW of conventional gas fired capacity on tolling contracts with GDF. The surplus engines are effectively being “rented” to GDF who operate them at peak loads and when the grid calls for balancing capacity. It is straightforward route for the company to extend the economic life of a site as the CMM gas reserves’ begin to decline.
Also CMM is not the only way to produce methane gas. There is also landfill and a third option is available in the form of anaerobic digesters. In addition to the tolling deal Alkane has signed a contract with fellow AIM group TEG jointly to fund and operate anaerobic digestion sites. These sites will use waste material from commercial and municipal sources to generate methane that can be used as a renewable source for the company’s existing engine fleet.
Details are a bit scant at the moment but there is talk of three plants within the foreseeable future. The idea is that TEG will buy the waste and build the digester through its partnership with the German AD technology company UTS Gas. The AD will produce two forms of fertiliser and also methane gas from the waste. Alkane is to provide the gas to power facilities. That is to say it will take on the methane gas for markets. Each party is to fund their share of capital investment, with profits shared on the basis of investment.
In time this could become a good money earner. The key point is that while Alkane has never managed to convince any British government that it should be eligible for the Renewable Obligation Certificate (ROC) scheme, methane from landfill and from the TEG AD process does qualify. Under the highly contentious ROC system, utilities and energy suppliers have to buy a certain proportion of their energy from a renewable source. This means a market has developed in ROCs and this amounts to a surcharge or tax on the consumer but a subsidy for the producer.
It offers a nice revenue stream if you can get in on the scheme as a supplier. Significantly methane from ADs qualify for two ROCs. A ROC currently trades at £45.52 per MWh. This suggests that Akane could, if a plant is built quickly and the ROC scheme is not altered receive over £100/ MWh for its gas gross as opposed to the £40/MWh which it is likely to receive this year.
Looking longer term the group continues to monitor industry progress on coal bed methane (CBM) in the UK. In contrast to CMM which simply exists in abandoned mines CBM has to be mined and de-watered. Although it has become big business in the US and Australia, it is in its infancy in the UK. Alkane has a portfolio of CBM assets covering 500 sq km and the mid case resource estimate is calculated at over 350 billion cubic feet (BCF). The company is seeking ways to exploit these resources and the most likely route forward would be a joint venture with a partner who is able to bring CBM operational experience and access to funding.
Further out management will investigate consolidating the UK CMM sector and following recent government incentives investing in combined heat & power and ground source heat pumps. |
