“When the yields of biofuels per hectare are known, one can easily calculate how much of the energy of the sunlight is stored in the biofuels.”
Hartmut Michel, Scientist
What Are Biofuel Investments?
Biofuel investments are investments in companies operating in the bioenergy sector.
This includes installers, component manufacturers and also the actual biofuel producers.
Biofuels are currently the largest alternative energy source and will therefore play a big role in the energy transition process.
However, investments in biofuel companies also imply certain risks.
In this article, I give you information on all you need to know before investing in financial instruments related to biofuels.
Contents
Types of Biofuel Companies you could invest in
- Biofuel installers
- Component manufacturers
- Biofuel production companies
Biofuel installers
Biofuel installers are usually responsible for the proper installation of biofuel power generators.
They can also be consulted by power production companies if there are any issues that have to be repaired.
Moreover, installers are also sometimes involved when it comes to political decisions regarding the expansion of alternative energies.
Component manufacturers
Biofuel component manufacturers produce devices that are necessary to build a biofuel system that can produce biofuels.
Depending on the size of the manufacturing company, this can include only few specialized parts or also a whole range of products.
Biofuel production companies
These companies actually produce biofuels from organic materials and supply industries as well as public institutions with biofuels of many sorts.
Biofuel producers rely on component manufacturers and installers since without these other company types, the whole industry would not be able to function in a proper manner.
Types of Financial Instruments related to Biofuels
- Biofuel stocks
- Derivatives
- ETFs
- Biofuel bonds
Biofuel stocks
Stocks are the most common form to invest in biofuel companies.
Stocks are equity instruments and stockholders are eligible to get a certain dividend payment each year in case of significant profits of a company.
Therefore, shareholders directly benefit from the economic development of the respective biofuel company through dividend payments or also through increases in stock prices.
Derivatives
Biofuel derivatives are rather complex financial instruments that usually imply large swings and higher risks compared to investments in conventional stocks.
Therefore, they are actually more suitable for experienced investors and investment beginners should rather avoid investing in those kinds of instruments in order to protect themselves against huge losses.
ETFs
Biofuel exchange-traded funds (ETFs) are a popular investment opportunity since these funds are usually composed of many different individual stocks.
Thus, if one biofuel company fails, it has only a small impact on the ETF since the ETF is only composed out of a small fraction of this failing stock.
Therefore, buy investing in ETFs, you can lower your overall risk compared to buying individual stock but you can still profit from the overall development in the biofuel industry.
Biofuel bonds
Contrary to conventional stocks, biofuel bonds are not equity, but are debt instruments.
This means that you do not actually own a share of the company but rather grant a credit line for this company and get an interest payment in return.
Therefore, you will not be eligible for dividend payments if you invest in bonds and you will not profit from returns in the same way as with stocks.
However, in case of failure of a biofuel company, you have better chances to get some of your invested money back than with stocks since debt is generally preferred over equity when it comes to the resolution of companies.
Top Biofuel Investment Opportunities
In the following, some of the most popular biofuel investment opportunities are shown.
Please note that this is not an investment advice but should rather give you a rough overview regarding the financial instruments in this alternative energy niche.
| Name | Company Type | Investment Type |
|---|---|---|
| Aemetis | Biofuel producer | Stock |
| Gevo | Biofuel producer | Stock |
| Green Plains | Biofuel producer | Stock |
| Pacific Ethanol | Biofuel producer | Stock |
| MLCX Biofuels ETN | Mixed | ETF |
Chances of Biofuel Investments
- Greener compared to conventional energies
- Renewable energy source
- Established technology
- Currently largest energy source in the renewable energy sector
- Individual contribution to a greener energy mix
Greener compared to conventional energies
Biofuels can be regarded to be greener compared to conventional fossil fuels.
Therefore, biofuels may be considered more favorable by the general public.
This broad acceptance may give biofuel a good standing in political discussions regarding the expansion of certain green fuel sources.
Therefore, biofuel companies could profit from the good image of biofuels, and so could investors since they often directly profit from the gains of companies.
Renewable energy source
Biofuels can be regarded to be a renewable energy source since biofuel is made out of plant material which will grow until the end of time.
Therefore, it could be an important energy source in the transition from fossil to renewable energies.
Thus, investments in this renewable technology in this rather early stage could lead to huge profits once biofuels may become a main energy source in the future.
Established technology
Biofuels can be considered to be an established technology, at least compared to other renewable energies like fuel cells.
Therefore, biofuels may have a head start compared to other energies when it comes to expansion and acceptance in our society, which may benefit biofuel companies as well as investors.
Currently largest energy source in the renewable energy sector
In fact, biofuels currently are the largest alternative energy source in our global energy mix.
Thus, right now, it is one of the most important energies for the transition from fossil to renewable energies.
Biofuel may also be able to sustain its importance in the future, which may benefit many bioenergy firms as well as the respective investors.
Individual contribution to a greener energy mix
Biofuel investments are not only important when it comes to profit maximization, but also to make a contribution to a greener future energy mix and to accelerate the expansion of renewable energies in order to fight global warming and the implied horrible consequences.
Thus, even if you find other investment opportunities that may be a little bit more profitable, you should still consider investing in green energies in order to ensure a livable future for the next generations.
Risks of Investments in the Bioenergy Sector
- Biomass energy may be ethically difficult
- Less room for improvements in efficiency
- No or insufficient subsidies for biofuels
- Increasing regulatory pressure may pose problems
- Political instability may lead to additional problems
Biomass energy may be ethically difficult
Even though bioenergy has many advantages, it also has serious downsides.
For instance, biomass energy is often produced out of large amounts of plant material.
The fields that are used for the production of biofuels may be used for planting crops instead in order to supply food for the local population.
Thus, the production of biofuels often implies a reduction in food supply for the local population, which may translate into severe levels of poverty, especially in poor developing countries.
Less room for improvements in efficiency
Since biofuels have been used for many years, the technology behind biofuels is already quite advanced.
Even though this might be regarded as advantages, it could also be seen as downside since the room for improvements in efficiency might be quite confined.
Therefore, will other renewable technologies may vastly improve in efficiency, biofuels may not and may become less important in the future energy mix due to that.
No or insufficient subsidies for biofuels
Compared to other technologies like solar or wind energy, the subsidies for biofuels are rather low in many countries worldwide.
This implies that other renewable energies may have an advantage since they get more money through subsidies and may be able to expand faster than biofuels, which may lead to a competitive advantage for those other alternative energies.
Increasing regulatory pressure may pose problems
Politicians are often quite eager to introduce additional regulatory measures in order to increase their popularity in the general public.
However, increasing regulatory pressure also often implies serious difficulties for the affected firms.
For instance, if there are higher requirements for the production process of biofuels, the production of biofuels may become more expensive and biofuel may lose its competitive edge against other alternative energy sources, which may in turn hurt companies as well as investors.
Political instability may lead to additional problems
In many countries on our planet, political systems are still quite unstable due to corruption and other issues.
If biofuel companies invest in those kinds of regions, chances are that those companies are at risk of expropriation.
Moreover, due to corruption, the biofuel production process may be slowed down or even stopped for a certain period of time.
Thus, investors should take great care when it comes to investing in those kinds of companies that operate in politically unstable areas in order to avoid serious financial losses.
Conclusion
Biofuels can be a great way to accelerate the energy transition from fossil to alternative energy sources.
They are currently the most important alternative energy when it comes to the overall volume of energy produced on a global scale.
However, even though biofuels play an important role in global energy supply, there are still significant risks related to investments in this industry.
You have to decide for yourself if biofuels are the way to go or if you want to invest in other green energies that better match your preferences as well as your risk-return profile.
Sources
https://en.wikipedia.org/wiki/Biofuel
https://worldbioenergy.org/uploads/191129%20WBA%20GBS%202019_LQ.pdf
About the author
My name is Andreas and my mission is to educate people of all ages about our environmental problems and how everyone can make a contribution to mitigate these issues.
As I went to university and got my Master’s degree in Economics, I did plenty of research in the field of Development Economics.
After finishing university, I traveled around the world. From this time on, I wanted to make a contribution to ensure a livable future for the next generations in every part of our beautiful planet.
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