Clean machines may provide sweet-smelling returns

By Nigel Thomas

By Nigel Thomas

9 August 2000

Much has been written about the massive productivity gains from investment in information technology in the 1990s. Some believe that with the US economy growing at more than 4 per cent per annum for the fifth year, we are experiencing the "third industrial revolution".

The digital economy is demanding power of increasing quality, with steady voltages and frequencies and minimal interruptions. Even Silicon Valley in California, the world's largest concentration of new economy businesses, has suffered from lack of power. Last month Pacific Gas and Electric Corp, the region's largest utility, was forced to cut power at short notice to 97,000 customers to avoid overloading the network.

Improvements in energy efficiency, cost and concerns about environment are enabling new technologies to be adopted with greater speed. All the leading automotive manufacturers and major utility and energy companies have active fuel cell development programmes. But which ones look most promising for an investor?

A fuel cell is an electrochemical engine that combines hydrogen and oxygen to produce heat, steam and water and, hence, electricity. There are no moving parts. Unlike conventional engines they emit very little carbon into the atmosphere. They are also quiet and energy-efficient.

Johnson Matthey has been involved in this technology for many years. Its fuel cell catalysts were at the core of the Nasa space programme, providing electrical power and drinking water for the Apollo missions and the Shuttle.

Ballard, a Canadian company, is developing a fuel cell which replaces a conventional car petrol engine. With Johnson Matthey and Plug Power in the US, it will manufacture a residential fuel cell system. There is no infrastructure to distribute hydrogen to our homes and cars so fuel cell cars will initially use catalytic reformers to generate hydrogen from a liquid hydrocarbon fuel such as methanol. Residential fuel cell systems will be marketed in 2002 by Plug Power, but automotive applications will not appear until the middle of the decade.

Johnson Matthey will be a leading supplier of platinum-coated membranes for fuel cell stacks, and on a price/earnings ratio of 17 times for the financial year ending March 2001, is an attractive investment. Our ABN AMRO Growth Fund has bought shares in Johnson Matthey.

And Turbo Genset, recently listed on the London Stock Exchange and started in the laboratories of Imperial College, London, has a unique technology with significant advantages over traditional generators. They can make trains up to 8 per cent more efficient. It is low-maintenance, significantly lighter in weight and reliable.

Pratt & Whitney and Detroit Edison are partners with Turbo Genset in distributed generation, General Electric in locomotive electronic turbo-chargers and BP Amoco in oil industry applications. Turbo Genset is loss-making, and analysts forecast profits in 2003. But given the advantages of this technology, it is included in my UK Growth portfolio and I have bought the share personally.

Turbo Genset and Johnson Matthey look winners-to-be as the energy industries change swiftly and environmental issues come to the fore. The digital economy - and its population - demand cleaner and more efficient energy.

The writer is manager ofthe ABN AMRO UK GrowthUnit Trust. Derek Pain is away.