Two ways to profit from America's 'smart grid'
Sep 23, 2009
Print this article
America's present infrastructure is maxed out.
What is the smart grid? How will it work? And why is it important to America's future energy security?
Flip a switch and the lights go on. Hit the 'power' button and the microwave nukes our food. Switch on the oven and you can cook your food the 'old-fashioned' way. The fridge... washer and dryer... dishwasher... the water heater. The list goes on.
All essential everyday facilities that demand electricity, which we use without even thinking about it. No wonder that when the power goes out, we freak out.
But there's a big problem: The nearly 200,000 miles of transmission lines, millions of miles of distribution lines and myriad of control systems (collectively referred to as 'the grid') are maxed out. The grid is rapidly running up against capacity limits in the United States.
These capacity limits and security risks are real... and they're growing more formidable every day. And the recognition of these concerns among power companies, business leaders and federal and state agencies has led to the concept of a wholesale modernisation of the grid.
But as if upgrading the grid wasn't daunting enough, it all has to be done 'hot' (i.e. while the system is still running). And at full tilt, no less. Here's the plan...
So what is the "smart grid" anyway?
The smart grid is essentially the end result of what will be a decades-long project. The undertaking has been compared to the construction of the interstate highway system in the 1950s - and it's just getting underway.
When it's complete, it will work far more efficiently. For example:
• Reliability will increase orders of magnitudes from what it is today.
• Expansion will be much simpler and continue to be affordable.
• Our ability to compete globally will be greatly enhanced.
• Both renewable and traditional energy sources will be easily accommodated.
• Our carbon footprint will be reduced significantly.
To head up this nationwide effort, the Department of Energy created the Office of Electricity Delivery and Energy Reliability. Its function is to apply its cutting-edge research to develop new smart grid standards and to marry the agendas of numerous interested parties.
This grid may be smart... but it isn't cheap
During the presidential election last year, both Obama and McCain touted the virtues of the Smart Grid. And now, President Obama has put his money where his mouth is through the American Recovery and Reinvestment Act.
It makes $4.5 billion available to the nation's power companies in the form of grants and loans in order to implement improvements and upgrades to the grid. But as you can see below, this is just the tip of the smart grid investment iceberg in terms of what's needed...
• $60 billion in Department of Energy (DOE) loan guarantees for renewable energy projects.
• $16.8 billion to the DOE focused on renewable energy and energy efficiency. This includes grants for conservation and energy efficiency, state energy programs, the Weatherization Assistance program, alternative-fuel vehicle programs, and more.
• $6 billion to the DOE to cover the cost of guaranteeing loans through the new Innovative Technology Guarantee Program for supporting renewable energy and transmission technologies and to the existing Advanced Technology Vehicles Manufacturing Loan programme.
• $3.4 billion earmarked for Carbon Capture, Fossil Fuel Energy R&D, Clean Coal Power Initiative, Energy Efficiency Competitive Grants and others.
• $1.6 billion to DOE Office of Science.
• $400 million to the Advanced Energy Projects Agency earmarked for energy.
• $3.25 billion in borrowing authority to both the Western Area Power Administration (WAPA) and the Bonneville Power Administration, and $10 million to the WAPA allocated for smart grid upgrades facilitating the integration of renewable energy sources.
• $6.1 billion to the DOE for uranium enrichment decontamination and decommissioning, environmental cleanup projects and money for the Office of the Inspector General.
• $300 million for the Department of Defense geared to the development and deployment of energy efficiency technology.
Another big incentive is the three-year extension of the income tax credit for renewable electricity production for qualified generation facilities.
So that's the problem - and the solutions and money necessary to solve it. Question is, how do investors profit from it?
Two smart ways to play the smart grid project
The first company is 'Old Faithful' - General Electric (NYSE: GE), which has its hands in a huge array of sectors and industries.
The second is ABB (NYSE: ABB).
Together, these two industry giants stand to sell many tens of billions of dollars worth of equipment to the global power industry for Smart Grid upgrades and enhancements. They're the "Apple Computers" of the Smart Grid world.
Owning them presents very little risk to the downside, and the huge upside potential represented by the many billions of dollars needed for investment (detailed above) is just too good to ignore.
•
This article
was written by Dave Fessler and was originally published in the free daily investment newsletter
the Investment U e-letter
on 21 September 2009.
Related articles
-
By Jody Clarke, Nov 20, 2009
-
By John Stepek, Nov 20, 2009
-
By Paul Hill, Nov 20, 2009
-
By Paul Hill, Nov 20, 2009
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.
