As the price of oil, seems to be moving up again, alternative energy is also beginning to make a comeback. The two sectors almost move in lock step with each other, and as the fossil fuels segment of the market increases, so does the awareness of various alternatives. As interesting as Ocean Power Technologies' (Nasdaq:OPTT) Aqua Buoy wave system is, one of mankind's oldest fuel sources has recently been getting all the attention. Across the United States, power plants are turning to the forests to make electricity in some unconventional ways.

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In 2008, wood-burning power plants were capable of generating 6,700 megawatts of electricity. This is enough to provide power to about 6 million homes, according to the Energy Department. Nearly 310 additional megawatts of new capacity have been added in 2009 through new wood-based power plants. The spur of growth stems from the $500 million in stimulus package grants devoted to thinning federal forests with the goal to make forests more resistant to wildfires and disease. A side bet on this thinning includes the grants for sustainable energy. Analysts predict that U.S. forests could sustainably produce at least 368 million dry tons of wood for energy annually.

Not Your Grandfathers Pot Belly Stove
Iberdrola Renewable's (OTCBB:IBDRY) new Tacoma, Washington facility could be an example of what's in store for the industry. The plant, which opened next to a paper mill, burns the leftover scraps and wood waste to provide energy to homes in Sacramento. In the Southern regions of the country, wood energy is seen as renaissance, as the section is plentiful in forests, but lacks ample sun or wind (Florida aside) to use those sources.

The benefit from wood energy could be in a co-fired plant. Such operations burn both traditional sources of energy, such as coal, alongside wood waste or pellets. These plants are considered "greenhouse gas neutral" as it is assumed that forest re-growth will sequester the carbon dioxide emitted through photosynthesis. Sulfur oxide emissions are reduced on a one-to-one basis in a wood co-fire plant. A 20% pellet and 80% coal mix will reduce sulfur emissions by 20%. These wood pellet plants can also achieve a nearly 90% thermal efficiency rating, which is on par with straight coal or fossil fuel fired facilities.

Adding Some Wood to Your Portfolio
Investors wanting exposure to the sector have a few choices. There are several alternatives in both individual companies and exchange traded funds. The exchange traded funds provide poor correlation to straight timberland, as they contain paper and packaging companies. Raw land and timber have been great places to position long-term money over the years, as they have historically outpaced inflation. Timber has a low correlation to other asset classes, and has served as a great diversification tool. Both timber REITs Plum Creek Timber (NYSE:PCL) and Potlatch (NYSE:PCH) offer a chance to participate in raw timber.

However, wood energy may be the one area in which the two timbers ETFs shine. The paper and package companies could potentially find selling scrap product to be a profitable business. In this instance, the two ETFs may make sense.

The first to market was Claymore/Beacon Global Timber Index (NYSE:CUT), with 30 international holdings including Plum Creek and Potlatch. The fund charges 0.65% in expenses. While the volume is heavier for the Claymore fund, the iShares S&P Global Timber & Forestry Index (Nasdaq:WOOD) maybe a better choice as the fund has higher concentrations in raw log producers. Expenses for the iShares fund run 0.49%. Both funds have rallied alongside the broad market with WOOD returning 26% and CUT returning 43% year to date.

The Bottom Line
It seems as if an old fuel source is having a bit of a renaissance. As traditional fossil fuels are once again creeping up the price ladder, several alternatives are being explored. Wood energy is gaining momentum as a renewable source of fuel. The two timber ETFs are an easy way to gain exposure to this coming trend. (Learn more about energy ETFs in ETFs Provide Easy Access To Energy Commodities.)

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