Although solar and wind power get the big headlines, the use of wood at power plants is on the rise. And that makes this so-called biofuel an interesting area to watch. Don't believe me? Big name European backers include Drax Group (NASDAQOTH:DRXGY) and E.ON (NASDAQOTH:EONGY).
Who is backing wood?
If you haven't heard of Drax Group and E.ON don't feel too bad, they're largely foreign energy companies. But they are huge. For example, DRAX Group has a market cap of $4.5 billion and E.ON is just a little larger at nearly $40 billion. These aren't small players.
DRAX Group operates largely out of the United Kingdom, providing roughly 7% of that nation's power. Larger E.ON, meanwhile, has operations throughout Europe, Russia, and North America. It serves 35 million customers and has roughly 60 gigawatts of electric capacity.
The takeaway here is that DRAX Group and E.ON are not fly by night start ups or pump and dump penny stocks. They are real companies making a big commitment to wood. Or, as they might prefer to call it, biofuel.
E.ON, for example, just opened its third biomass plant in the United Kingdom. The facility is relatively small at about 30 megawatts, but that's enough to power 40,000 homes. It will use locally sourced wood scrap. Its two other UK wood pellet plants are much larger, at 370 megawatts a piece, and have been running off of wood for over a year. It also has biomass plants in France and Belgium.
U.K. focused Drax Group, meanwhile, is converting three coal plants to burn wood pellets. And it has a division, Drax Biomass, dedicated to supplying biomass. So Drax Group is looking to be both a biomass user and supplier. That, increasingly, means building wood pellet plants in the United States, by the way. So don't think that this is just a European phenomena.
Drax Group CEO Dorothy Thompson recently explained the value of using wood when she commented on first quarter results: "the increasing cost of carbon drove earnings down year on year. Recognizing this, we have been investing significant capital to transform Drax into one of the world's largest renewable generators, burning sustainable biomass."
E.ON, meanwhile, has seen its operating margin fall from well over 10% in 2009 and 2010 to around 4% last year. A changing environmental landscape has a lot to do with that drop. Although the United States is only just starting to seriously look at carbon and carbon costs, Europe is in the thick of it. And it's changing their power industry in interesting ways—some good and some bad. That said, the increasing use of wood is one area that you should be watching.
Carbon isn't going away
This is so important because carbon based fuels aren't going away, even though environmentalists might like that outcome. E.ON explains why, "Compared with intermittent renewables like wind and solar, biomass has the advantage of being available 24/7 to meet demand." So using it either alone or in conjunction with a dirtier alternative is a valuable tool for utility operators.
If you are looking for environmentally friendly options, the utility sector would seem like an odd choice. However, that's increasingly changing domestically and abroad. And if you doubt the growth potential of wood as a fuel, the U.S. Energy Information Administration recently highlighted that U.S. wood pellet exports nearly doubled last year.
It may sound far fetched that the fuel of the caveman is back in vogue, but numbers like that don't lie. With Europe taking a lead on the carbon front, you might want to examine broadly diversified E.ON as it expands its use of biofuels. Or, for a larger piece of the pellet business, consider Drax Group, which wants to be both a consumer and supplier of wood pellets.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.