Energy Newsletter

May 2011
Global Fund Exchange is a global asset management business which invests across all areas of the New Energy Revolution.
In this issue: China Doubles Solar Targets European Shale Gas Resources Rising Oil Demand in Middle East Investing in Next-Gen Biofuels Water Strain in U.S. Southwest Clean Development Mechanism Our investment focus: Clean Energy Water Agriculture Traditional Energy Natural Resources Carbon & Emissions Systematic Trading Hedge Strategies Learn more: Downloads Section Request call with Portfolio Manager

SPOTLIGHT ON: FOOD PRICES & INFLATION

Rising Food Prices Spur Inflation in Emerging Markets, Even as New Study Reports 1/3 of All Food is Wasted
The rapid rise in food prices is a global concern with wide-spread consequences for both developed and developing economies. High food prices have sparked protests around the world, laying the groundwork for popular uprisings that have resulted in revolutions in Egypt and Tunisia. Global food prices have hit record highs, moving past previous records set during summer 2008. Fears of inflation are increasing along with these prices, especially in the developing world where food costs comprise a much higher share of overall cost of living than they do in wealthier countries. In the United States, for example, food accounts for 15% of the U.S. consumer price index (CPI) basket, but in a nation like the Philippines, food is 50% of the CPI basket. High food prices often carry over into non-food costs in many emerging markets, resulting in overall high prices for consumers. Changing population, urbanization and income patterns in the developing world are leading towards true structural shifts in markets, according to analysts at the Federal Reserve Bank of St. Louis. If high food prices are sustained due to new global demand structures, rather than merely the short-term influence of seasonal weather patterns or temporary supply shocks, the inflationary pressure and price pinches being felt now in developing nations may only get worse. A new report from the United Nations Food and Agriculture Organization (FAO) brings an interesting perspective to this problem. According to its recent publication, a startling 1.3 billion tons, or one-third of all food produced around the world, is lost or wasted every year. The amount of food lost or wasted is equivalent to more than half of the globes annual cereals crop. The report points out that consumers in the developed world are primarily guilty of just throwing edible food away, but in the developing world this food loss is often the result of poor agricultural infrastructure and technology. Increasing efficiencies in harvesting, processing and distribution could go a long way towards reducing the amount of food wasted in these nations and increasing global food security.

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CLEAN ENERGY NEWS

U.N. Predicts Explosive Growth in Renewables in New Industry Analysis

India Electricity Demand Expected to Double by 2017; Country Sets Ambitious Renewable Energy Goals

Rapid population growth and increased industrialization have Renewable energy technologies could expand 20 times over considerably impacted Indias energy supply and demand by mid-century, reports the United Nations in its most dynamic. By 2017, estimates say Indias electricity demand is comprehensive sector overview to date. likely to double, thereby requiring the addition of nearly 100GW Technology advances combined with falling costs have set the of new power generating capacity. stage for a substantial increase in the deployment of India, like many other fast-growing Asian nations, is discovering renewable energy by 2030, 2050 and beyond, says the that its electricity grid is ill-equipped to handle this increased report, which looked at 164 potential development scenarios. demand load. Poor infrastructure has kept electricity costs in Under the highest estimates, the U.N. says renewable energy India very high, with prices on average five times higher than in could supply up to 77% of total energy supply by 2050. the United Kingdom. However, even under more conservative scenarios, power The limited range of Indias power grid has left the majority of supply from renewable energy may increase to between 200the countrys largely rural population without any access to 400 exajoules (EJ) by 2050, increasing from 64 EJ in 2008. [An electricity. No country in the world has more people without exajoule (EJ) is a measure of global power usage.] access to electricity than India, where nearly 400 million people Increasing the use of renewable energy around the world live without electric power. could translate into cumulative carbon dioxide emissions savings of 220-560 billion tons over the time period 20102050. Predicted industry investment may range from $1.36 $5.1 trillion through 2020 and between $1.49 $7.18 trillion through 2030.

China Leads 2010 Global Clean Energy Investment & Doubles Solar Energy Targets
China, the worlds leading investor in clean energy, announced it will double its solar energy targets as the nation moves forward aggressively with renewable energy deployment. According to Chinas National Development and Reform Commission (NDRC), China will double its installed solar PV India has increased its renewable energy targets target to 10GW of capacity by 2015. It will increase its overall solar energy target to 50GW by 2020, up from a previous aim Faced with these energy challenges, the Indian government has of 20GW. begun to focus seriously on developing its domestic renewable Chinas dramatic investments in the renewable energy sector energy resources. Earlier this year, India quadrupled its longreflect strong policy commitments to industry development. It term renewable energy goals; now targeting 72.4GW of has made notable strides in both solar and wind power installed capacity by 2022. Over one quarter of this new development. Last year, China installed 18GW of wind power capacity will come from solar energy. The government is targeting 20GW of both on- and off-grid distributed solar PV and by 2020, it aims for a total of 200GW installed capacity. projects; the latter which would bring electricity to the many A report by the Pew Charitable Trusts lists China as the worlds villagers living beyond the reach of the grid. In addition, India largest clean energy investor with a whopping $54.4 billion will install 20 million square meters of solar thermal projects. invested in 2010, with Germany following in second place with $41.2 billion invested and the United States in third with $33 Over the short-term, India is aiming to install 17GW of billion. China first surpassed the United States as the worlds renewable energy capacity over the next six years, which would nearly double the amount currently installed in the country. To clean energy investment leader in 2009. meet this goal, Indias Renewable Energy Secretary Uma Chinas investments in clean energy have been staggering over Shankar says up to $33.8 billion in new investments will be the past decade, but particularly since the announcement of required. its 12th Five Year Plan, which has made clean energy a priority. Chinas 2010 investments in clean energy increased by 39% Indian utilities are entering the playing field as well. Tata, from the previous year. The investment made by China alone Indias largest power utility, is reportedly seeking an additional in 2010 is equal to the total amount investment worldwide in 150MW of wind power for its portfolio, and plans to increase production of solar energy tenfold from current levels. the year 2004.

TRADITIONAL ENERGY NEWS

Triple-Digit Oil Prices Begin to Dampen Europe Sees New Opportunities in Shale Gas Global Demand: IEA
The rapid ramp up in oil prices has had an effect on global Unconventional gas resources, such as shale gas, may prove demand levels, reports the International Energy Agency (IEA). crucial to Europe as it strives to become self-sufficient and reduce dependence on gas imports from Russia and the Middle High prices combined with lowered growth prospects for the developed world has spurred the IEA to cut its global oil East. demand forecast. A recent report from the U.S. Energy Information Administration (EIA) estimates that Europe possesses greater IEA data indicates global oil demand was essentially flat in than expected shale gas reserves which if developed have the March 2011 for the first time since the summer of 2009. potential to re-shape the continents energy dynamic. The EIA Although March data may be skewed as a result of holiday estimates nearly 624 trillion cubic feet (tcf) of technically timing, weather trends and the earthquake and resulting recoverable shale gas reserves exist in Europe. nuclear disaster in Japan, the IEA nevertheless says $4/gallon The map of Europe below shows potential shale gas basins in gasoline is likely to yield an anemic US driving season. This is the main change to our demand forecast a weaker 2011 yellow and active exploration sites in green. profile in North America as high oil prices may have finally begun to dent demand. Based on these predictions, the IEA is expecting 89.2 million barrels per day (mbpd) in global demand; a growth rate of +1.5% compared with a growth rate +3.3% in 2010. IEA analysis of the supply side notes a 1.3 million barrel per day decrease in OPEC oil production since the beginning of the Libyan crisis in February. The IEA does not expect Libyan oil production to come online at all during the 2011 year.

Middle East Regions New Challenges; Rising Oil Consumption

Source: Energy Policy Information Center

In Saudi Arabia, a liter of petroleum is cheaper than a liter of bottled water. Generous government subsidies have kept energy and water prices in Saudi Arabia artificially low, which has lead to runaway consumption for entertainment, cooling and water desalination processes. The Saudi government spends $20 billion a year to keep prices of drinking water low, and nearly $13 billion to subsidize the price of electricity.

However, domestic oil consumption is creeping upwards in The European Centre for Energy and Resource Security Saudi Arabia, as well as other nations in the Middle East which (EUCERS) says, In theory Europes unconventional gas have similar subsidy programs, leaving many to wonder about resources might be able to cover European gas demand for at the future sustainability of such policy arrangements. least another 60 years. Hashim Yamani, president of the King Abdullah Atomic and The highly effective, yet controversial, drilling practice known as Renewable Energy City, predicts Saudi Arabia will soon use hydraulic fracturing or fracking presents both an opportunity most of the 8.8 million barrels of oil it produces daily for its and an obstacle for the fledgling industry. own domestic needs, leaving less oil for export. Currently, Fracking has revolutionized the natural gas industry in the Saudi Arabia uses 3.2mbpd domestically, but based on current United States, helping to shift the U.S. from a net importer to a trends, that number could rise to 8mbpd by 2028, roughly net exporter of gas, but has been criticized as unsafe. Indeed, equal to current oil production. fears of water contamination from fracking has led France to They need to be watching for future trends, they are using a recently ban the practice. huge amount of oil at home, according to a Riyadh-based Greater population density in Europe than the U.S. means that analyst. They are aware of the problem and are trying to environmental concerns must be addressed first and foremost accelerate plans for nuclear and solar energy. as the industry develops, says EUCERS.

Shale gas resources have peaked the interest of many investors eager to begin drilling operations in Europe. Some of the worlds largest oil and gas majors have already acquired land and leasing rights, such as Chevron, which will initiate its first drilling well in Poland, and ExxonMobil, which has already completed six shale wells in north-west Germany.

TRANSPORTATION NEWS

WATER NEWS

Military & Police May Account for 15% of Global Electric Vehicles Sales by 2021
A new report on the use of electric vehicles from global military, police and security forces sees strong growth ahead. According to the report, published by research and analysis firm IDTechEx, military, security and police forces could account for 15% of all global electric vehicle sales by 2021. The majority of electric vehicle demand will be for landbased applications, but IDTechEx predicts that water and airborne electric vehicle application businesses will grow over $1 billion in the decade to come. Electric vehicles present numerous advantages and are already being deployed, particularly for unmanned missions. The report did not include figures for hybrid and other modified vehicles, which are also gaining traction in military and security settings. The potential for next-generation, non-fossil fuel transportation vehicles in military and security applications is quite substantial and presents many opportunities for technology development and investment.

Reduced Water Flows up to 20% May Impact American Southwest

Over recent decades, the American Southwest has seen its population grow, its urban centers spread and its water demand increase. However, severe and frequent droughts have turned water into a major problem in the region. The United States Interior Department has issued a new warning that these water woes are likely to worsen due to the influence of climate change. A new report warns wet areas could grow wetter and dry areas drier, with potential temperature increases of 5-7 degrees F. Perhaps most troubling, average annual stream flow in major river basins, including the Colorado, Rio Grande and San Joaquin rivers, may decrease by 8 20% over the next century. This would severely impact large population centers in Las Vegas, NV, Los Angeles, CA and Phoenix, AZ, all of which depend on these rivers for water supplies.

USDA Invests in Next-Gen Biofuels as New Transportation Fuel Source

Next-generation biofuels are becoming increasingly attractive as a non-fossil source of transportation fuel in the United States. By 2013, the Obama administration aims to produce 1 billion gallons of biofuels. To achieve this goal, the United States Department of Agriculture (USDA) has lifted some bureaucratic restrictions that have hindered the building of new cellulosic biofuel refineries. To drive investment in the industry, the USDA will streamline or reduce many complex ownership requirements and get rid of fees associated with joining the USDA research program in an initiative to be finalized this summer. Unlike first generation corn-based fuels, cellulosic biofuels are made from various agricultural waste products, wood chips and other materials that are not in competition with food crops. Scientists say next-gen biofuels have an overall lower carbon and water footprint compared with corn-based ethanol. The Department of Energys Pacific Northwest National Lab (PNNL) also recently released a study highlighting the potential of another second generation biofuel source to help meet future transportation fuel in the United States algae. PNNL estimates 17% of our imported oil could be replaced with domestic-grown algal oil for transportation purposes. According to the PNNL study, the U.S. could produce 21 billion gallons of algal oil by targeting sunny, humid regions such as the Gulf Coast, the Southeast and Great Lakes.
Water shortages threaten the Colorado River Basin region

Californias agricultural centers are an important food production area for the entire country. As river flows dwindle, farmers may have fewer and less reliable water supplies to meet their irrigation needs.

Water is on the leading edge of climate change, says Anne Castele, the Interior Departments assistant secretary for science and water. Many of these basins have already experienced significant decreases to water supply. Castle notes that some of the fastest population growth over recent years has occurred in the regions driest parts.
Water managers in the Western U.S. must focus on the energywater nexus, and heed the alarm bells that are sounding across the U.S. political spectrum as this issue worsens, says Secretary of the Interior Ken Salazar.

CARBON NEWS U.N. Clean Development Mechanism Reaches 3,000th Carbon Reduction Project Milestone
The United Nations Clean Development Mechanism (CDM) has been growing at a rapid rate. Last week, the CDM registered its milestone 3,000th project a wind farm in Mongolia. So far in 2011, the program has experienced a 17% increase in project initiations from Q1 2010.
The U.N.s CDM program has celebrated its milestone 3,000 th project.

Established in 2005, the CDM is active in 71 countries and reports an additional 2,600 clean energy and carbon reduction projects in the pipeline.

To date, these projects have resulted in the issuance of more than 600 million certified emissions reductions credits (CERs) worldwide. Through the CDM, global firms can invest in carbon emission reducing projects all over the developing world in exchange for CERs. Delegates at the Cancun climate talks have concurred that the CDM is a valuable mechanism to help fight climate change.

The Clean Development Mechanism is still evolving and will continue to do so, remarked United Nations Framework Convention on Climate Change (UNFCCC) Christina Figueres. But from the original concept to now, it has been a success way beyond the initial expectations, not only in the number of projects but also in its ability to attract private sector investment into bettering livelihoods and environments of people in the developing world.

SOURCES
We regularly gather information from the following reputable sources, including but not limited to: Bloomberg New Energy Finance Financial Times Forbes.com: Energy News Green. The New York Times New Energy World Network Scientific American SustainableBusiness.com U.S. Energy Information Administration (EIA) RenewableEnergyWorld.com EnergyandCapital.com The Wall Street Journal Streetwise Reports: The Energy Report Thomson Reuters REChargeNews.com Climate Change Business Journal Commodity Futures Trading Commission

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