At first blush, alternative energy certainly might seem like the perfect answer to spiking energy prices and surging global electricity demand. Wind power, for example, is non-polluting and windmills have seen huge efficiency gains over the past two decades. And, of course, wind is free and doesn’t need to be imported from abroad. In fact, wind, solar and even wave power will find their applications in the developed world and there are some interesting plays on alternative power.

But the fact is that when it comes to meeting global energy demands, there are no perfect solutions, nor is there a single emerging technology that can meet all demands. All of the alternative energies have notable drawbacks that make them at best imperfect solutions.

Consider that in the US in 2004 a total of roughly 100 quadrillion Btu (British thermal units) of energy were consumed; this figure includes both energy for transportation (gasoline and diesel) as well as electricity generation. Conventional fossil fuels--coal, natural gas and oil--accounted for just over 86 percent of that total with nuclear power chipping in another 8.25 percent. Despite all the hype that surrounds alternative fuels, such fuels accounted for only 6.2 percent of the energy consumed in the US.

Even more interesting is the breakdown of renewable technologies used in the US.

Source: Energy Information Administration

I’m using California as an example because it’s a large state that is relatively reliant on renewable energy. As you can see, the most important renewable fuel by a large margin is hydroelectric power. Hydro plants account for nearly half of the total renewable energy consumed in the US.

Unfortunately, there’s not much scope to expand hydropower capacity in the US. Damming up rivers creates its own set of environmental problems and capacity is limited by droughts and other weather phenomenon. Finally, there are only a limited number of rivers nationwide that are suitable for such a purpose.

Wind energy is often touted as the most successful alternative fuel. But, as the chart indicates, wind energy chipped in only 6.4 percent of California’s renewable energy consumption. And consider that for the entire US wind energy produced 0.143 Quadrillion Btu in 2004--that’s barely one-tenth of one percent of US demand.

One might argue that with more investment wind energy could take a larger market share. There’s likely some truth to that argument. However, Germany’s experience over the past few years suggests wind energy can’t be expected to be more than a marginal contributor to the nation’s grid.

The German government has been perhaps the most aggressive in the world in encouraging renewable energies. It began researching a wider role for wind energy as far back as the 1980s, and in 1991 passed a law requiring utilities to hook up to local renewable energy generators.

By far the boldest move was Germany’s Renewable Energy Act of 2000, which offered significant subsidies and generation targets for renewable energy generation. Not surprisingly, as the chart “Germany's Windmills” shows, wind power generation capacity has ballooned in recent years and projections call for continued expansion in the coming years.

Source: E.On

Germany led the world in wind power capacity construction for years and by 2003 was the world’s largest generator of wind power. Germany accounted for half of Europe’s installed wind generation capacity and about one-third of total world capacity. Unfortunately, Germany’s massive wind effort has not been the panacea some envisioned, nor has it significantly reduced the country’s dependence on fossil fuels.

The main problem is that wind power isn’t suitable for base load generation, the minimum, continuous electric supply that must be available at all times on the grid. Electricity is always being consumed, but not at a constant rate--more electricity is consumed, for example, in the middle of a hot summer day than at 3 am when the temperature is in the 60s. The minimum required supply in a given day is base load. Base load power supply needs to be available at all times and be easily predictable.

Wind power is unpredictable for the simple reason that the wind does not always blow at a constant rate. According to German electric and transmission utility E.On (NYSE: EON), Germany’s installed wind capacity topped 14,000 megawatts (MW) in 2003, about 6,000 MW of which was in E.On’s area of operations. But E.ON reports that, on average, less than one-sixth of that capacity--1,000 MW--was available to the grid. In other words, for a vast majority of the time, Germany’s wind power plants were generating nothing close to their rated capacity.

Wind power isn’t particularly effective at meeting demand during peak times, either. The problem here is, once again, the weather. Consider the times when electric power is in most demand, during summer heat waves or winter cold snaps.

A heat wave hit Europe back in the summer of 2003. The weather phenomenon was created by a huge high-pressure system over Europe. Such systems are characterized by extremely stable air and low winds. This is exactly why E.ON reports that wind power’s contribution to the grid was near the lows for the year in the middle of that 2003 heat wave.

To remedy this problem, generators can employ what’s known as shadow capacity, traditional coal or gas-fired plants that are held in reserve and can be activated quickly to meet demand when wind power drops unexpectedly. Shadow capacity requirements for wind power can be as high as a whopping 80 percent of the installed capacity. That means for every 1,000 MW of installed wind capacity, about 800 MW of traditional power needs to be held in reserve. Ironically, far from reducing Germany’s dependence on fossil fuels, the nation’s construction of wind capacity is pushing demand for new conventional plant construction.

Two additional major problems spring from wind’s unpredictability. The first is grid management. The problem is that energy on an electric grid cannot be stored--power consumed must always equal power generated at a given time. If there’s a loss of balance it can cause a dramatic failure of the grid (the 2003 blackout in the northeastern part of the US springs to mind).

With traditional power plants, that’s not so much of a problem. Demand can be forecasted with some degree of accuracy and it’s relatively easy to control electric output from coal or gas-fired plants. Wind is a different story. Predicting power output entails predicting the speed at which the wind will blow at any given moment.

While companies like E.On have spent millions developing sophisticated wind-speed forecast models, modeling power output from wind farms is a highly complex and unpredictable business. Additional and expensive safeguards have been required to ensure that sudden spikes or drop-offs in generation don’t destabilize the grid.

Finally, there’s a basic infrastructure problem. In Germany, wind farms are located along the coastal regions and offshore because that’s where the strongest, most predictable winds blow. These are not highly populated parts of the country. In contrast, traditional facilities are normally located adjacent to major population centers. The problem is that the grid near the nation’s centers of wind power production is not set up to handle such a high load of electricity. Germany’s grid needs investment to handle all this new wind power, and installing the needed lines is an expensive process that requires a lengthy regulatory process.

I don’t offer this example to disparage or discredit wind power. In fact, from time to time there are some solid ways to make money from alternative energy companies. However, all too often alternatives are sold as THE answer to our energy problems; this is totally incorrect and irresponsible.

A far more important contributor to the US energy supply will be nuclear power. Like wind, nuclear power is environmentally friendly, releasing essentially no pollutants into the atmosphere. And advanced nuclear reactors can put out less toxic waste; remember that France gets more than 80 percent of its power from nuclear energy and has managed to store and/or dispose of its waste successfully for decades.

Stocks involved in mining for uranium (the basic fuel for nuclear power) have been among the best performers in The Energy Strategist portfolios this year and I expect that to continue well into the New Year. I’ll cover nuclear power in more depth in an upcoming issue.