Editor’s Note: Our Portfolio includes exposure to natural gas, and both our recommended energy picks do trade at favorable valuations right now. For an expert’s take on natural gas, we turn to Elliott Gue, editor of The Energy Strategist.

2010: The Year for Natural Gas

By Elliott H. Gue

The world faces major energy challenges, rooted in two basic issues: the rising cost of energy and concerns about the environmental impact of our energy consumption. Depending on political and economic views, one might argue that one of these concerns is more important than the other. However, I suspect few investors would argue that these issues aren’t central to the energy debate.

In December, world leaders tried to address the latter concern at the United Nations Climate Change Conference in Copenhagen. But, many observers regarded the summit as a failure after developed countries and their emerging-market counterparts failed to agree on a mechanism for ensuring reductions. Emerging economies such as China are growing rapidly–along with their demand for energy. These countries are reluctant to commit to hard reduction targets, a move that could impede their growth potential significantly. Instead, China and other nations have committed to targets for increasing their carbon and energy efficiency.

Developing countries are also demanding money and technology. The idea is that developed countries would help pay for the clean technologies the developing world would need to reduce emissions. Although developed countries agreed to allocate some funds to developing countries, sentiment varied widely as to what constitutes a reasonable amount.

This is likely to remain a thorny issue for years to come. Imagine pitching a plan to the US public that involves handing China, India and other fast-growing nations billions of dollars in annual subsidies for green technologies. Such a proposal is a tough sell in the best of times and nearly impossible in the current economic environment.

Meanwhile, developed countries are pushing hard for absolute emissions reduction targets. In most cases, developed world countries have sought to meet these targets by imposing some variation on a cap-and-trade scheme. A classic example is The American Clean Energy and Security Act, passed by Congress over the summer.

But it’s highly unlikely any US cap and trade bill will become law in 2010. In light of the Republican Scott Brown’s recent election to the US Senate, such a bill is fast becoming an even more remote possibility. But the bill illustrates a key fallacy among policymakers that CO2 reduction requires a strict focus on renewable energy sources.

Renewable energy sources require massive investments and subsidies, with the payoff appearing rather modest. The International Energy Agency (IEA)’s so-called BLUE Map scenario for wind forecasts that wind power will account for 12 percent of global energy generation in 2050. In that scenario wind power’s contribution to the global energy mix would be less than that of nuclear, natural gas or coal. Meeting that goal would require $3.2 trillion in total global investments, a roughly 75 percent jump in annual investment compared to 2008 levels. Much of that investment would have to be made in developing countries; the IEA envisages nearly one-third of that $3.2 trillion would be spent in China.

Renewable energy could account for around 17 percent of the US electricity in 2035, roughly double its current 9.1 percent share. But much of that is hydroelectric power; solar and wind combined are expected to account for less than 5 percent of total power generation in 2030. And coal, natural gas and nuclear are still projected to dominate the grid. Non-hydroelectric renewables are hardly a game-changing technology in the near term.

Despite all the hype surrounding these technologies, wind energy accounted for less than 1.9 percent of US power generation in October 2009 and solar accounted for 0.0193 percent.

That being said, 2010 could be the year when the consensus on renewable energy begins to break down in favor of simpler and cheaper interim solutions. Specifically, I expect natural gas and nuclear power to garner much more attention this year as so-called bridge fuels. Both address environmental concerns, cost and independence issues. Although renewable energies have a certain cachet as high-tech solutions to the world’s energy problems, they’re also impractical in the near term. On the other hand, gas and nuclear are proven, economical technologies.

Use of natural gas as a transportation fuel may also increase. A bill currently making its way through the US Congress would offer significant tax credits and incentives for natural gas powered vehicles in the US. If approved, the Alternative Transportation to Give Americans Solutions Act of 2009 (HR1835) would also mandate that 50 percent of vehicles purchased or placed into service by the US government by the end of 2014 be capable of burning natural gas fuels. And the act also authorized the Dept of Energy to invest in research and development for gas-fueled vehicles.

It appears increasingly unlikely cap-and-trade bill will pass in 2010. However, that doesn’t mean that Congress won’t try to pass some energy-related legislation. I suspect that could come in the form of a bill that offers subsidies for clean energy and might include provisions such as those in HR1835. Such a bill would garner more bipartisan support than carbon cap and trade. Although the bullish story for natural gas doesn’t depend solely on legislation, such an outcome certainly would accelerate this process.

Act Now

Are you serious about investing in energy? Join Yiannis Mostrous in sunny San Diego, California, April 23-24 for the 2010 Wealth Society Member Summit. You’ll have a chance to sit down with Roger one-on-one to talk about where to find the best ideas to generate total returns as Canadian income trusts convert to high-yielding corporations and how to position your portfolio for the year ahead.

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Call 1-800-832-2330 (between 9:00 a.m. and 5:00 p.m. EST Monday through Friday) or go online now to reserve your seat at the table. Space is limited.