The similarities between the Gulf states and the isles of Orkney (population: 20,000) aren’t immediately obvious, but the Scottish archipelago has been branded the Saudi Arabia of the renewable energy world.

The 70 islands in the far northeast of Scotland, only 17 of which are inhabited, have the potential to provide up to 40% of Scotland’s energy demand – or 1m homes – through wind and marine power, according to Scottish Renewables, an industry forum. In turn, Scotland’s wave and tidal energy could eventually provide 10% of Europe’s total consumption.

The authorities in Orkney recently gave the go-ahead for one of the world’s biggest wave-energy projects, consisting of four 160-metre “sea snakes” across the Pentland Firth to harness its powerful tides. The project could provide about 3MW of electricity – enough to power 2,000 average homes by 2009-10.

As the oil price has marched towards a record $116 a barrel, the nascent wave-energy sector has been quietly approaching the stage where it becomes commercially viable and investors really start to make big money.

This summer the world’s first large-scale commercial tidal turbine, SeaGen in Northern Ireland’s Strangford lough, will be connected to the grid and will supply 1,000 homes.

Wave power is still a decade behind wind energy, but a look back at the returns you would have made over the past 10 years shows the huge benefits of being first in on a growing trend.

Vestas Wind Systems, the Danish market leader in wind turbines, floated almost exactly 10 years ago. Its shares have soared by an astonishing 1,838%.

Even 10 years ago, Vestas was more developed than today’s wave companies, but the figures nevertheless show the benefits of finding renewable energy’s eBay or Google early.

Britain is the world leader in offshore wind energy, generating 404MW or enough energy for about 300,000 houses. This is still just 0.4% of last year’s total, though, compared with government plans for 20% from renewable sources by 2020.

Some cities are already on the way to achieving that goal. More than one in 20 homes in Lancaster are supplied by the Caton Moor wind farm, owned by investment bank Triodos.

Don’t expect an easy ride, though. The biofuels backlash shows the dangers of investing in emerging alternative energies as they grow to commercial scale. From last week, at least 2.5% of the fuel you get at the pump must be from biofuels – ethanol, from grains, or diesel, from plants such as soya.

The problem for environmentalists is that as agricultural land has been switched to biofuels, food prices have soared – wheat and corn have doubled over the past year – provoking riots in Egypt, Haiti and the Philippines.

According to the World Bank, 33 countries are in danger of political destabilisation and conflict over food price inflation.

The farming industry points out that in fact only 2% to 3% of land is accounted for by biofuels, but for investors that matters less than the fact that the soaring cost of food is making the whole bio-fuel sector uneconomic. Why bother with biofuels when you can simply sell your crop at record prices?

Investors are therefore casting round for the next big investment story. One potential area is the so-called “second generation” of biofuels – cellulosic ethanol, where the whole plant is used and not just the ear of the corn – or biofuels that do not use land that would otherwise be used for food.

This is where the humble jatropha bush takes centre stage. The vegetable-oil shrub, found in the tropics, is grown mostly on nonarable land and can be used to provide biodiesel, although it is still very early days.

D1 Oils, which until recently refined food-grade vegetable oils into biodiesel at factories in Middlesbrough and Bromborough, recently closed those operations to concentrate on jatropha. However, Ed Guinness, of the Guinness Alternative Energy Fund, said it was still several years away from making a profit.That leaves renewable electricity generation such as wind, wave, solar and even geothermal.

So how can investors get into the story? The company behind the Orkneys project is Edinburgh-based Pelamis Wave Power, which is also backing West Wave, an offshore wind farm off the north coast of Cornwall expected to be installed and commissioned in 2009.

Pelamis is, unfortunately, private but individual investors can get access through its institutional backers, which include listed private-equity firm 3i and Blackrock (formerly Merrill Lynch) Investment Management.

The Merrill Lynch New Energy Technology trust has just 0.1% of its portfolio in Pelamis and less than 1% in wave power in general, although the managers say they fully expect to increase that allocation as the technology develops.

The Merrill Lynch trust is therefore one to be in for the long term but it has pedigree: it has delivered an astonishing 480% over the past five years.

Better still, it has even ridden out the credit crunch, gaining 12% over the past 12 months and 18% over six months, compared with a fall of 10% and 7% in the FTSE 100 index.

Private investors can also get into Triodos, the listed company behind Caton Moor and several other projects.

Until smaller private companies come to play a bigger part in such portfolios, these climate-change companies are in essence a play on bigger global firms such as Vestas, which has 28% of the global market share, and Gamesa, a supplier of wind and solar energy.

With so many investors chasing so few opportunities, Vestas is looking expensive at 43 times earnings, although analysts insist it has consistently beaten expectations and deserves a higher rating. However, to me this looks priced for disappointment and you really should be in for the long term.

— Kathryn Cooper is editor of The Sunday Times Money section

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