A few weeks ago, I stumbled upon a presentation that was given by FERC officials on the phenomenon of rapidly rising costs in US power generation (presentation link at the end of this post). The FERC, or Federal Energy Regulatory Commission, is America's energy watchdog.

The presentation begins by noting that across America's major electricity hubs, power prices are up significantly on last year (between 62% in the Midwest and 123% in NYC) and that, unfortunately, this probably isn't an anomaly. In fact, the presentation argues, there may be something secular at play. Two main trends are noted.

Energy Costs

Because of gas' prevalence in US power generation, the cost of generating a unit of electricity through gas often sets the unit price in the marketplace across fuels - gas is said to be the marginal fuel. Commodity market watchers and anyone who needs to buy gas on spot or futures markets will have noticed a sharp increase in the price of gas over the past five years. This increase is what is responsible for the vast majority of power price increases currently being experienced by US electricity customers.

Of course, it hasn't helped that the price of coal has been rising as well on the back of a weak US currency and an explosion in demand from India and China. In some parts of the US, such as in the Midwest, coal is the marginal fuel. Tom wrote an interesting piece last year on how to play coal shortages.

Capital Costs

The second factor impacting the cost of power generation is a rapid rise in the cost of many key inputs needed to build a power generation facility. Increases in the price of steel and cement, for instance, have appreciably outpaced inflation as whole over the past few years, as have those for other commodities and even labor (albeit to a much lesser extent).

The result is the chart below, which shows the capital costs of building generation capacity in 2008 as compared to 2003-2004. The caveat with this graph is that accurate data on power plant capital costs is hard to come by given the sensitivity of this information. Nevertheless, the results from these estimates show that while the inflationary environment in power generation capital costs has impacted all fuel sources, wind has been impacted to a lesser extent than competing fuels like coal. While combined cycle and combustion turbine gas remains cheaper than wind, wind has made up some ground on the 2003-2004 period.

The effects of this phenomenon on power prices, however, may not be fully felt for a few more years.

Connecting The Dots

Throw these two factors together (rising capital and fuel costs), and the weighted-average levelized cost of electricity across the system - the levelized cost is the present value of the costs of building and operating a power plant and are used to set prices over the plant's economic life - looks like it could favor wind a few short years down the road.

There are two forces at play improving the economics of wind relative to conventional power generation: (a) growing wind manufacturing capacity currently under construction (this is not apparent at the moment because of the inflationary environment discussed above, but once new manufacturing capacity comes on line and the supply chain loosens up wind costs will decrease) and (b) worsening economics for fossil-fired generation due to increases in capital costs but mostly fuel costs.

Add to this regulation to force fossil generators to internalize the cost of carbon and a growing number state mandates for renewable power, and the picture looks even more positive.

But The Real Winner Is...

Unsurprisingly, the FERC expects there to be a response to rising electricity prices - in other words, demand for power is elastic.

What's the main response likely to be initially? An increase in demand-response (technologies that adjust power consumption based on prices). The FERC estimates that the first round of demand-response (the low-hanging fruit) could come in at about $165/kW, which compares rather favorably to the capital costs of the cheapest option on to the graph above, combustion turbine gas, at between $500 and $1,000/kW. And, like renewable energy, there are no fuel costs.

Somewhat paradoxically, one of the main impediments to demand-response growth could be energy efficiency measures more broadly, or reducing power use at any time instead of only at peak times, which is what demand-response does. Available energy efficiency measures would cost in the order of $0.03/kWh, compared to $0.09/kWh for the fuel alone for a combined cycle gas plant.

Demand-response is likely to be more popular in states where most customers have some exposure to fluctuating daily power prices, whereas energy efficiency measures may gain more ground in states where the pricing is more static for most customers.

It's The Economics, Stupid!

One of the biggest beefs alt energy detractors have with the industry is that "the economics don't make sense without state support." (Of course such detractors generally like to avoid conversing about the mammoth tax breaks the fossil industry receives) This could very well change in the years ahead as the burden of fuel costs on the levelized cost of fossil electricity boosts wind and solar's competitiveness.

However, as shown above, the cheapest kW is the kW saved, and regulators are aware of this. Unlike cars, where the entire vehicle has to be changed to gain access to more efficient technologies, energy efficiency measures in commercial, industrial and residential buildings can be implemented fairly painlessly. Now that the "economics make sense", expect such installations to grow in popularity

Access the FERC presentation here (PDF document).

Posted by Charles Morand at 09:51 PM | Permalink | Comments (3)

Like Quanta Services, (#8 in this series), National Grid PLC (NYSE:NGG) allows investors to participate in the massive build out of electricity transmission and distribution infrastructure necessitated by years of neglect and the growing need to decarbonize our electric infrastructure.  See the article linked above for more detail on these two forces driving the sector.

Having its origins in British electricity deregulation in the 1990s, Nation Grid is a regulated utility in Britain and the United States, and operates high pressure gas pipelines and high voltage transmission in Britain, and electricity transmission and natural gas distribution in the Northeastern US.  The US operations were acquired with the purchase of Keyspan and the gas distribution network of Southern Company in 2007, as well as some smaller previous aquisitions.  They also own some electricity generation assets (mainly acquired as part of Keyspan)

Comparables

The only pure play publicly owned electricity transmission and distribution utility I'm aware of is ITC Holdings (NYSE:ITC), a company I recommended in my article on transmission stocks last April.   Since then, the stock has risen almost 30%, and I now think that it looks expensive, compared to NGG and Quanta Services, which is why it did not make it into this series.  In contrast, NGG trades at a forward P/E of around 13.3, below the utility industry average, with a dividend of 3.2%.

Environment

As a European company based in Britain, management understands dealing with regulators and customers who are far more concerned with Climate Change and renewable energy than those of it's recently acquired US operations.  I expect that the British experience will be a valuable asset to the US based operation as we see carbon regulations in the US (something I expect early in the next Presidential administration, considering that Congress and all the leading Presidential candidates support it), and as the United States begins to catch up with the Europeans in our level of environmental awareness and demand for lean energy sources.

National Grid's leadership can be seen in their initiatives, such as their inclusion the Dow Jones Sustainability indexes, and their award winning energy efficiency programs.

Valuation

As a regulated utility (with 95% of revenues from regulated businesses,) large price appreciation is unlikely, but given National Grid's position and expertise in transmission and distribution, a P/E below industry averages makes the stock seem a solid, safe bet, especially in uncertain economic times.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in NGG, ITC, PWR.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 11:44 PM | Permalink | Comments (0) | TrackBacks (0)

Most alternative energy investors are aware of North American wind power's very bright growth prospects. In past articles, we discussed encouraging projections for the US and Canadian (PDF document) wind markets between now and 2015. While onshore European capacity is fast being exhausted, North America is only beginning its foray into wind and some major capex can be expected in this space over the coming years.

Besides solid expected growth, another phenomenon is currently impacting the wind industry; consolidation. This is a global movement that is affecting all of the power gen sector, and that has no-doubt been aided by easy credit in the past few years. Examples of recent deals in the North American wind industry include EDP's July, 2007 acquisition of Horizon Wind for $2.7 billion, and Suez' July, 2007 acquisition of Ventus Energy (PDF document) for C$124 million.

Playing Growth & Consolidation

Two of the most interesting ways to play growth and consolidation in the North American wind sector lay on the Canadian side of the border. They are two Independent Power Producers (IPPs) with attractive pipelines of projects, good forward-looking revenue visibility because of their exposures to Power Purchase Agreements (PPAs) with credit-worthy customers, and attractive take-over targets due to their size and the location of their generation assets. These two companies are: Boralex [TSX:BLX or BRLXF.PK] and Canadian Hydro Developers [TSX:KHD or CHDVF.PK].

Boralex

Boralex currently runs a generation portfolio totaling around 350 MW, with 103 MW of wind. Over the next five years, however, Boralex is expected to add another 690 MW of wind to its portfolio. Besides having access to PPAs, Boralex is also active in the US Renewable Energy Credits (RECs) market - in 2005 and 2006, respectively, one of the company's facilities in the US recorded C$8.1 million and C$6.2 million in RECs revenue alone. With 2007E EV/EBITDA of around 12x and 2007E PE of around 21x, Boralex is trading roughly in line with its comps. The company is geographically well-diversified, with operations in Quebec (one of Canada's hottest wind markets), Ontario, the Northeastern US and France.

Canadian Hydro Developers

At upwards of 60x 2007E PE and around 24x 2007E EV/EBITDA, KHD does not come cheap, either as a stand-alone stock or relative to industry peers. However, the company has a very attractive pipeline of wind projects across Canada, and valuations are expected to converge with industry averages over the next three years. Canadian Hydro currently has around 265 MW of generating assets with around 154 MW of wind. The company has a further 384 MW of wind currently under construction and a total project pipeline of about 1,400 MW - one of the most interesting such pipelines of any mid-size North American IPP. While KHD is an expensive buy at the moment, a lot of that has to do with all of the growth the firm is projected to undergo between now and 2010, as well as with a high amount of revenue visibility associated with high exposure to PPAs.

Two Of a Kind...

Both firms belong to a very rare breed - publicly-listed alternative energy generation pure-plays. While there are a number of similar companies listed on the Toronto Stock Exchange, most of them are income trusts with limited growth pipelines or small players with next to no track records. Both companies are increasingly on the radar of public market investors due their projected growth and to the fact that they are potential acquisition targets. Fundamentally-speaking, both look very attractive in the medium term (3 to 5 years) due to their extensive exposure to various schemes by Canadian provincial governments to boost wind generation capacity. These two companies really are, for all intents and purposes, two of a kind.

DISCLOSURE: The author is long Canadian Hydro Developers.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Charles Morand at 11:17 PM | Permalink | Comments (0)

Net metering describes the requirement that an electric utility buy electricity from any of its customers that generate their own electricity (usually with some sort of renewable energy, such as solar or wind) at the same price that they sell it to the customer.  That seems fair, doesn't it?

The Utility Perspective

It doesn't seem fair to the utility.  Utilities do more than just generate and sell electricity to customers.  They also are responsible for transmission (delivering the electricity) and reliability (making sure that the lights work when you flip the switch.)

Taking just the reliability requirement, suppose that a homeowner, call him Sol, wants to install a solar photovoltaic (PV) system on his roof and sell the electricity back to the grid when he was not using it himself.  But suppose Sol had a reliability requirement.  For instance, suppose that whenever Ted, one of his neighbors,  turned on the TV, Sol had to make sure the PV system was working, or the TV would not turn on.  Also suppose Ted knows where Sol lives, and that Ted likes to watch TV at night. 

Ted would probably grow quite unhappy with Sol quite rapidly, and would definitely complain, and might even start pay Sol an unfriendly visit at uncomfortable hours.  Sol would probably think twice about signing up for net metering under those rules.  

Utilities aren't enthusiastic about net metering, either.

The Benefits of Grid-Tied Solar

The example above is something of a straw man.  Unlike Sol in my example, with net metering, utilities are not being asked to do something which they are incapable of doing.  In fact, utilities balance load and demand all the time, and so long as net metered systems only account for a small fraction of a utility's total demand, they are un likely to be a strain on the grid.

In fact, because PV panels usually produce power on hot, sunny afternoons when peak load is driven by air conditioning, solar homes often provide a net benefit to the grid [.pdf] for which the customers are not paid, because most utility customers are charged a flat rate per kWh, which does not take into account the higher value of electricity at times of peak demand.

Peak reduction from near Zero Energy Homes with West-facing PV (blue) for Sacramento Municipal Utility District. Slide 19

The ideal orientation for PV depends on the utility's load profile.  West-facing PV will be better for some, while south facing will be better for others.  

What about Small Wind?

Not all distributed generation is south- or west-facing PV, however, and other forms of generation such as small wind often produce power at times unrelated to peak.  If the distributed generation customer is charged a flat rate for electricity, the costs of servicing the customer may come to exceed what he pays for service.  This is especially likely for a customer with a small wind turbine which may produce very little of its power at high priced peak load times, and a lot at times of low load.  This requires the utility to transmit the power a long distance to where it may be needed, as well as run its least expensive generation at less than full capacity in order to accommodate the extra power generated by distributed wind.  

Many environmentalists will read "least expensive generation" in the line above and think "that's exactly what we want... least expensive generation means coal plants, and it would be wonderful if a utility had to shut those down."  

While coal is the least expensive form of generation for most utilities today, but it may not be for long, and not only because of the cost of pricing un carbon emissions.  In terms of marginal cost of generation (the cost of producing an extra kWh of power) wind is already cheaper than coal because there is no fuel cost.  I no longer recall where I heard this anecdote, but I believe that last winter (2005-6), on an extremely windy weekend in Europe, electricity was trading for free on the wholesale market, and many utilities were shutting their coal plants down.  North America still lags Europe in terms of wind penetration, yet utilities in windy areas are likely to get to high wind penetrations first, and these are precisely the areas to which small wind is also most suited.  In the not so distant future, I can easily see a scenario where a rural utility with a high degree of wind generation of its own might have to shut down some of its wind turbines in the middle of a windy night because of net-metered small wind, forcing the utility to pay retail rates for electricity it would otherwise have gotten for free, and then having to pay to transmit that power somewhere it might actually be used.

The Bigger Picture

This is not to say that small wind is bad and west-facing PV is good, just that each impose different costs or benefits on the system as a whole.  Wind can also be good for a system.  In February of 2006, an unseasonable cold snap caused power outages in Denver in part due to unexpectedly large demand for natural gas for heating.  Cold winter nights also happen to be when the wind blows hardest and most consistently on the northeastern Colorado plains, so a small wind turbine on net metering would have actually helped to reduce the severity of the controlled rolling blackouts Xcel ordered.  If the 400 MW Peetz wind farm (now in phase II of construction) had been operational in February 2006, I think it is unlikely that the blackout would have happened at all.

Graph from Trans-Elect, LLC using data from NREL Wind Performance Projections.  Note that the capacity factor for Peetz in NE Colorado is over 60% in the month of February, when the blackouts occurred, and capacity factor is also highest at night.  The other lines are wind regimes from SE Wyoming and Lamar in SE Colorado.

Having Customers Pay for Costs and Benefits

Net metering is an implicit subsidy for distributed generation, because the net metered customer gains the benefits of the utility's grid (reliability and transmission of electricity) without having to pay for it.  In addition, some forms of net metered generation are given greater benefits than others when electricity is metered at a flat rate.  If the price of electricity varied depending upon the load on the system (Time of Use pricing), then properly oriented PV would often be paid more than it under a flat rate system, and people would be encouraged to orient their solar panels for maximum system benefit, rather than maximum electrical output.   

As for the implicit subsidy of unpaid-for transmission, I believe it should be abolished, and replaced by an explicit subsidy large enough to reflect the social benefits of distributed generation other than increased grid stability, which is accounted for with time of use pricing.  

California Solar Initiative: A Note of Caution

When California mandated that solar customers had to sign up for time of use metering in order to earn solar rebates, solar installers felt that they were not given enough support to understand the new rules (which included a lot more than the switch to TOU.)  Non-specialist customer confusion was understandably greater, and TOU pricing became the focus of a minority of solar customers who were actually charged more than they would have been under flat rates (because their solar system too small to offset enough of their air-conditioning driven usage during the peak period).  The California Public Utilities Commission (CPUC) removed the TOU pricing requirement because of the outcry.

The fact that the CPUC backed down is a tragedy.  In a very real sense, the solar customers who were hurt by the switch to the TOU tariff were the ones who had been receiving an unfair subsidy in the flat-rate system: they used a disproportionate amount of power during peak times, so much so that the benefits of solar systems were too small to replace the lost implicit subsidy.  Customers who suddenly had to pay something closer to the true cost of their electricity usage found that they were paying more than they had been, despite their new solar panels.  They unsurprisingly clamored to get back onto the flat rate where they were able to take advantage of the market inefficiencies which subsidize their air-conditioning chilled lifestyles.

Such homeowners would do a lot more for the environment if, instead of splashing out money on a PV system, they had made their homes tighter and switched to more efficient air conditioning.  For instance, the hyper-efficient Coolerado Cooler (The commercial version of which is sold as the Delphi HMX) works best in the hot, dry climates which were worst hurt by the time of use rates.  As I have said many times, PV holds an unhealthy fascination for people, to the point that money which would do far more good spend on energy efficiency improvements is effectively wasted on solar.  If we are truly more interested in solving the world's climate problems, we will spend limited government rebate money subsidizing energy efficiency improvements with large net benefit for the grid that also reduce carbon emissions, rather than subsidizing expensive solar systems for a fraction of the benefit.

Conclusions

Net metering is definitely advancing.  On August 21, I attended a Colorado Public Utilities Commission (PUC) hearing on distributed generation, and it seemed clear to me that some form of statewide net metering would likely become law in the Colorado in the next legislative session.  See my notes from that meeting for more detail.  I did bring up the possibility of combining net metering with TOU pricing in the meeting.  However, that and other good ideas from participants (including inverted tiered block pricing) or using solar rebates to subsidized increased energy efficiency will probably require considerably more advocacy if they are to make it into law.  

On the bright side, the Colorado Governor's Energy Office did suggest that the PUC investigate west-facing PV as part of a net metering program.  They are likely to be listened to, although inclusion in the final package from the state legislature is chancier. 

The California experience shows that the complexity of such schemes means that care will have to be taken with design, and educational outreach is important.  If the California consumers were helped with efficiency improvements before they installed solar, there would likely have been much less of a backlash, and the efficiency improvements would have done a lot more good than the solar PV systems which would have served as the carrot to induce the efficiency improvements.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 04:50 PM | Permalink | Comments (2) | TrackBacks (0)

Last week, Charles told us to expect wind power industry suppliers to benefit from shortages in wind turbine components. Owens Corning (NYSE:OC) which I mentioned in my Blue Chip Alternative Energy Portfolio fits nicely into this category with their composites for turbine blades, as do the power converter stocks I mentioned two weeks ago.

As essential to wind power as any of these is improved power transmission. The National Wind Coordinating Collaborative states,

Electrical transmission facilities connecting windy areas and load centers are sometimes non-existent or minimal. Even in cases where a good wind resource has nearby transmission, that transmission often has limited capacity to transport additional energy. In fact, transmission facilities throughout much of the country are strained, and this problem is acute at specific points of congestion. The expansion of wind power is hampered by this situation, but the associated problem is not confined to wind. Instead, it is a general problem of concern to many in the electric power sector.

While the need for long distance transmission often holds up the construction of wind farms for logistical reasons (there is no incentive to erect wind turbines if you cannot get the power to market), it is unlikely to prevent investment in renewables for financial reasons. The ERCOT Competitive Renewable Energy Zones Study found that the necessary investment in transmission for the high resource zones they identified in Texas ranged from a low of 1.5% to about 12% of the cost of the generation, which will only change the overall economics of any project in marginal cases. Some of these transmission improvements will also be likely to improve system reliability, and so the full cost is unlikely to be considered totally attributable to the wind projects.

As a less expensive but unavoidable investment for new renewable energy projects, transmission improvements are well positioned to be profitable investments in our energy infrastructure as the US shifts to more sustainable electrical supplies.

The FERC opens up Transmission

Politicians and regulators are beginning recognize the necessity of new transmission. This started with the Energy Policy Act of 1992 (EPAct), which opened access to the transmission grid to allow power to be delivered from one generator to another utility.  The Federal Energy Regulatory Commission (FERC) Order 888 laid out laid out the terms under which this was implemented. Order 888 fell short of providing the necessary incentives for investment in transmission and access for renewables, and in December of 2000, the FERC issued order 2000 and 2000-A which require transmission-owning companies under FERC's jurisdiction to file either proposals to form Regional Transmission Organizations (RTOs) or progress reports on the development of RTO proposals. RTOs will have sole responsibility for operation and expansion of the transmission system, maintaining short-term reliability, establishing and managing tariffs, and responding to requests for service.

The credible threat of RTOs in competitive bidding for projects acts as an incentive for utilities to stop delaying necessary investment in transmission, and make such investments quickly at the lowest possible costs.  This should benefit investors in the companies best able to build transmission efficiently and quickly.

Action at the State Level

My own Governor, Bill Ritter recently signed Colorado Senate Bill 100, which requires electric utilities subject to rate regulation to identify high-potential wind-energy locations by undertaking biennial reviews to designate “Energy Resource Zones��? where transmission constraints hinder the delivery of electricity. Texas passed a similar law in 2005, and, as a result, there are several competing proposals for transmission to bring wind power from Texas' remote, windy areas to where it is needed, such as the proposed "Panhandle Loop".

Transmission is not only necessary for large scale wind installation, it also goes a long way (pun intended) towards dealing with wind power's most oft-cited drawback: the wind seldom blows when you need it. Typically, the wind blows at night, and the overall capacity factor for most wind turbines is around 30%. But long distance transmission allows wind from different areas to be combined, allowing benefits similar to the diversification that we investment advisors are always pushing for our client's portfolios. The more wind farms that are built over a wider geographical location, the more reliable wind energy is, and it is transmission that ties it all together.

In the Great Plains, wind typically blows at night in the winter... but winter peak load in California is typically in the evening: due to the time difference, midwest winter wind is on-peak; a more robust transmission system will bring the power from where and when it is cheap to where and when it is needed. Minnesota has also passed enabling legislation to study and develop plans for transmission network enhancement to support Renewable Energy Standards.

In the United States, the grid is characterized by decades of under-investment, with the established operators having insufficient incentives to invest, and as a consequence, having until recently rested on their laurels, treating their existing transmission assets as a sinecure. Therefore, I expect the best investments to be those transmission owners who have shown the ability to upgrade their networks quickly and effectively, with the rest likely to lose out to upstart RTOs which will increasingly be able to win projects from incumbent utilities. There will also be a political aspect to these potential returns: states still have fairly broad authority to implement FERC rules, and the actions of state legislators in utilities commissions will undoubtedly have significant impacts on the decisions and profitability of building new transmission.

States which seem particularly supportive of new transmission include the perennial leader, California, along with New Mexico, and the states mentioned above. Ohio, Virginia and Washington are have long been leaders.

The Best Companies

I see three distinct ways to invest in the coming transmission building boom. We can invest in owners who have shown a willingness and ability to invest effectively in transmission; we can invest in the contractors who do the actual building of new transmission, or we can invest in suppliers of pieces of the transmission puzzle.

Among owners, the undisputed US leader is ITC Holdings Corp. (NYSE: ITC). ITC was created three years ago when DTE Energy decided to spin off their transmission assets (2600 miles of lines.) ITC CEO Joseph Welch has run the company since, and has since acquired the transmission properties of Michigan Electric (6800 miles), and is expected to close a deal for 6800 miles of lines from Intrastate Power and Light late this year. Welch recognizes that ITC's assets have suffered from over two decades of neglect, and expects to spend in excess of $1 billion in upgrades over the next 5 to six years. Given that transmission qualifies for a regulated rate of return, a high rate of investment is a good thing in a transmission organization.  ITC seems committed to acquiring more assets and upgrading what it has, which I believe will be good for investors.  It's current territory (in Michigan, Iowa, and Minnesota) also has lots of potential for wind development, which creates the need for even more transmission development. I'd love to see the acquire or develop assets in northern Illinois and Indiana to tie the system together and connect windy Iowa with power-hungry Chicago. The downside: ITC is up 50% since the Michigan Electric deal last summer. In situations like this, I usually sell put options to generate income if the stock does not pull back, or to pick the company up on the cheap if it does.

The company known for their ability to build new transmission rapidly and inexpensively is InfraSource Services (NYSE: IFS). It has recently agreed to be acquired by Quanta Services Inc. (NYSE: PWR) in an all-stock transaction. Given that both companies are up over 80% since last summer, and acquiring companies often have earnings hiccups as they struggle to integrate the acquisition, most investors would probably do well to wait for a pullback, and buy stock in the merged company after a disappointing earnings report or two.

Among suppliers, I like bulletin board traded Composite Technology Corp (OTC BB: CPTC), which is also up about 90% since last summer, but that is less worrying to me in a microcap company... that sort of volatility comes with the territory. CTC makes an Aluminum Conductor Composite Core cable which they claim can double the current carrying capacity of existing lines, or significantly lower costs for new lines. As a bonus for renewable energy investors, their DeWind subsidiary also manufactures support structures for wind turbines. They recently announced their first contract to supply turbines to XRG in Minnesota. A larger cable supplier is General Cable Corp (NYSE:BGC) which sells not only high voltage cable for electricity transmission as well as telecommunication applications. It has had a similar run-up in the stock price and trades at a rather high multiple for an industrial business.
[UPDATE: I said that DeWind "manufactures support structures for wind turbines." This is not strictly true, and it's a lot more complex than that... see comments.]

Conclusion

All in all, an investor looking to get into transmission today is confronted by rather high multiples for industrial businesses.  Given the good potential growth in the industry, these companies may not turn out to be overvalued, even at current prices, but I prefer to wait for a pull-back on most of them. For those concerned about missing a continued rise, I would advise putting in only a fraction of the amount you hope to invest now, and slowly buying more whenever one of the stock pulls back to a level you are more comfortable with (or using my naked puts strategy, if you understand the risks involved with options and can get sufficient options trading approval from your broker.)

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: CPTC.OB.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Thanks to Lynn Greene for her help with the research for this article.

Posted by Tom Konrad at 07:35 PM | Permalink | Comments (4) | TrackBacks (0)

Last weekend, TXU Corporation (NYSE: TXU) made the stunning announcement that it would be acquired by two private equity giants -- Kohlberg Kravis Roberts (KKR) and Texas Pacific Group (TPG) -- in a transaction valued at $45 billion.

Press release

Two things leap out at me from the announced deal.

First, the investors are willing to pay a 25% premium over the recent share price, while at the same time committing to a 10% rate reduction for TXU's residential electricity customers in Texas. KKR and TPG are no dummies: it must mean that they truly think they can run TXU much more efficiently than it has been run -- even though TXU has been widely viewed as a glowing success story since the meltdown of the merchant power markets in 2002. If a "good" utility TXU can be taken over by a private equity group at a premium price and earn the required rates of return on invested capital while cutting prices to customers, pretty much any electric utility should be in the same boat. Conclusion: there must be a lot of fat in the utility industry that can be cut with more aggressive management. If I were a large institutional investor in an underperforming utility, I'd be pressing the executives to dress the company up for sale. If I were a senior manager in the utility sector, I'd be expecting to be pushed to a much higher degree of performance for shareholders. If I were a mid-manager or lower level employee at a utility, I'd become increasingly worried about my job.

Second, the investors are the prime movers in axing 8 of 11 announced coal fired powerplants from TXU's growth ambitions, in lieu of increasing expenditures on customer efficiency by $400 million. This will be a major reversal for John Wilder, TXU's CEO, who has been loudly touting a vision for massive coal expansion. I'm certain that Wilder's rich payday from this lucrative deal will help soften the blow to his ego, but it will be interesting to see how Wilder copes under his new owners. These are smart investors, and they seem to be saying that energy efficiency (along with renewables) is a much better investment than new coal fired powerplants -- especially in a world with likely future carbon restrictions. This deal no doubt sends a signal that the capital markets are increasingly unwilling to make big bets on continued status quo in the utility industry. Wall Street is saying that the utility industry must change, and that it isn't just going to keep dumping money into utilities that want to perpetuate the 20th Century.

Based on initial reports, it appears that there are few hurdles to the deal being closed, but I remain curious as to how KKR and TPG expect to monetize their $45 billion investment. It seems like there are three possibilities: simply holding the company and recouping returns via dividends from improved operations, flipping the company to another owner (or re-taking the company public) at a higher price, or breaking the company apart and selling the pieces to more natural owners. I'm sure they have thought through these possibilities in great detail, though it's not obvious to me.

The examples of private equity attempting to earn attractive returns through investments in the U.S. electric utility sector have, to date, been not very successful. Let's hope this deal works out for the investors. I'd love to see many more utilities bought by private equity firms and shaken up. I bet that many utility CEO's and management teams wouldn't last long under the reins of more aggressive owners. And, I'd bet we'd see better environmental performance from these historically lethargic companies. I hope the TXU deal is the beginning of a trend.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Richard is a Contributor to Clean Tech Blog where this story was first published.

Posted by Richard T. Stuebi at 08:07 PM | Permalink | Comments (0)

Calpine Corp. (CPNLQ.PK) said it plans to sell about one-fifth of its power plants in a bid to emerge as a leaner company focused on its profitable geothermal and gas-fired operations. The company also said it plans to close three offices and cut about 775 jobs. Without identifying the plants, Calpine said the sale of about 20 facilities would allow it to focus on core assets and key markets. The company's largest power markets are California and Texas. [ more ]

The plans drafted by CEO Robert May should allow the company to save over $150 million a year and also allow the company to focus on profitable segments of the existing business.

Posted by Mark Anderson at 08:26 AM | Permalink | Comments (0)

German utility E.On AG launched a 29.1 billion euro ($34.72 billion) all-cash bid for ENDESA (ELE) on Tuesday, topping a previous offer from Gas Natural by more than 30 percent and threatening to disrupt carefully laid plans for Spanish power-market consolidation.

Endesa said in a statement that the E.On offer was "clearly" the better of the two, but added that it still did not adequately reflect Endesa's true value. [ more ]

Shares of Endesa were up 15% in yesterday's trading.

Posted by Mark Anderson at 08:06 AM | Permalink | Comments (0)

FPL Group Inc (FPL) reported 2005 fourth quarter net income on a GAAP basis of $206 million, or $0.53 per share, compared with $173 million, or $0.47 per share, in the fourth quarter of 2004. FPL Group's net income for the fourth quarter 2005 included a net unrealized after-tax gain of $27 million associated with the mark-to-market effect of non-qualifying hedges. The results of last year's fourth quarter included a net unrealized after-tax loss of $2 million associated with the mark-to-market effect of non-qualifying hedges.

Excluding the mark-to-market effect of non-qualifying hedges, FPL Group's earnings would have been $179 million, or $0.46 per share for the fourth quarter of 2005, compared with $175 million, or $0.47 per share, in the fourth quarter of 2004. [ more ]

FPL fourth-quarter profit rose on gains related to hedges, though earnings were reduced by damages from Hurricane Wilma. Excluding the hedging gains they earned 46 cents a share. The average forecast of analysts was 40 cents. The stock should open up strongly this morning.

Posted by Mark Anderson at 09:10 AM | Permalink | Comments (0)

FPL Group Inc (FPL) is currently in the advanced stages of negotiations to acquire Constellation Energy Group (CEG). An FPL-Constellation merger would create a giant East Coast-based utility with a market capitalization, based on Tuesday's closing stock prices, of $26.97 billion - $16.93 billion for FPL and $10.04 billion for Constellation.

Constellation Energy Group is based out of Baltimore Maryland and is the holding company for Baltimore Gas and Electric. They also have an extensive presence in the wholesale power supply and generation business. The Power Generation Division currently uses 4.6% alternative sources for power generation.

FPL has a strong commitment to alternative energy generation and is one of the largest utilities in the US utilizing extensive wind farms. CEG has a large footprint in Nuclear power generation and the combination of these two companies would make a top-tier producer of power generation for the East coast markets and a potential of 30,000 megawatts of power generation. CEG also gives FPL the ability to enter the wholesale supply side of the power generation business.

Typically you would see shares of the acquiring company down and shares of the acquired company up with this type of announcement. The market is liking this potential merger and CEG is up over 7% and FPL is also trading up 0.6% this morning.

Posted by Mark Anderson at 10:01 AM | Permalink | Comments (0)