Seeking fuel for the future

THIS has been a chastening year for bulls of cheap oil. With the world economy booming and supply tight as Iraq struggles to resume exports, crude has held above $40 a barrel.

This is intensifying the search for alternative energy. The European Union has set a target of having 12% of energy needs from renewable sources such as wind farms, solar and biomass by 2010.

Britain wants 15%. This looks over-optimistic - relying on so many small energy sources requires a huge revamp of the UK electricity grid for a start.

But the quest must continue.

Global power and transport markets are worth some £120bn. Alternative energy revenues are less than £4bn. Clearly there is scope for significant growth.

This brings us to Impax Environmental Markets, an investment trust set up in 2002.

It invests in new energy sources and - because this market is still narrow - in better delivery of the three basic services of energy, water and waste treatment. That allows it to invest in companies with a proven track record as well as those that are only starting.

Its biggest holding is Vestas Wind Systems, the Danish wind farm equipment group that is now in profit. Others range from Trojan Technologies in Canada, which disinfects drinking water, to Shanks waste treatment in Britain.

Impax is jointly managed by Ian Simm, a Cambridge physics graduate and McKinsey consultant, and Bruce Jenkyn- Jones, an Oxford chemistry man and former analyst. Their fund management company, Impax Group, is quoted separately. It manages £70m, about half being Impax Environmental.

IE had a rough ride initially. February 2002 was a bad time to start, catching the last leg of the bear market. The shares, launched at £1, fell to 40p early last year.

The last 15 months have been much better. The shares are back to 58 1/2p, valuing the fund at £34m.

Assets per share are 64.8p. Running costs last year were £600,000, or 1.8% of assets. Impax is growth focused and does not pay dividends. Involvement in a growing market is no guarantee of success - RPS, the environmental consultancy where Impax has a £1m stake, has had a tough time in recent months. Fuel cell energy is a great white hope, but many of its pioneers, such as Ballard in the US, have shown an impressive ability to burn up cash.

Simm is encouraged at the steady flow of trade takeovers, which have delivered a useful premium on several Impax stakes.

US giant General Electric bought pollution control group BHA last month, its fifth environmental acquisition in two years.

Sensors group First Technology bought BW, a Canadian sensor company in the Impax portfolio. There is always the prospect that the portfolio will produce a big winner.

The world's need for new energy sources is growing all the time. Impax is well placed to take advantage.