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If the thought of electricity transmission has never before jolted you with investment passion, things may be about to change. Power transmission is a critical component of the smart grid of the future, and investors would do well to take a closer look.
I've been running a series of articles related to the investment opportunities in smart-grid development. If you're not fully up to speed on the basics, start with our smart-grid primer. Then c'mon back here.
How does transmission work right now?
Electricity's lifecycle falls into three basic categories: generation, transmission, and distribution. Transmission is the bulk transfer of electrical power from source to destination.
Most utilities operated along the entire lifecycle for decades, before deregulation in the 1990s. Today, many producers sell power all across the country over transmission lines they don't own. Massive transfers are flowing over lines that were built decades ago for local use, and this creates congestion and bottlenecks.
The existing grid actually prevents broader adoption of renewables: The lines simply don't go where the energy is generated. For instance, according to the American Wind Energy Association (AWEA), a backlog of 197 Gigawatts (GW) of wind projects is currently waiting in line for connection to the grid because of inadequate transmission capacity! To put this in context, 1 GW can power anywhere from 750,000 to 1 million homes. This is an improvement from the 310 GW backlog that existed at the end of 2009, but there is still much further to go.
Tighter regulation has played a role in reducing the backlog, particularly in a process called queue reform. If that sounds like wrangling a line of drunks at the late-night Taco Bell, you're not far off. Queue reform evaluates the merits of wind projects based on such factors as viability, financing, and siting, and assures that the strongest projects get priority connection to the grid.
Resistance is futile
In addition to inadequate infrastructure, the modern grid features another problem in the course of transmission: energy loss. Because of a principle called electrical resistance, the further energy has to travel, the more of it is lost. Various technologies exist to minimize this effect, but they have yet to be optimally deployed. Some solutions are relatively straightforward. For instance, a sagging power line loses more energy than a taut one. Have you ever seen a power line that wasn't sagging? Me neither. More high-tech approaches remain experimental, given their higher cost. We'll look at examples as we turn our attention to companies with investment potential.
Power to the people
ITC Holdings (NYSE: ITC ) transmits electricity. The company leads an effort called the Green Power Express, a transmission expansion concept intended to move energy generated from Midwestern wind onto the grids of major population centers. ITC is also working to reduce energy losses during transmission, largely by upgrading and replacing aging infrastructure. The company is profitable and financially sound, and it meets the gold-rush test: Don't invest in gold; invest in mining equipment. If electricity is gold, then power lines are pickaxes. I think ITC is going to be a steady winner, and I've made a CAPScall to this effect.
Brookfield Infrastructure Partners (NYSE: BIP ) owns and operates electricity transmission systems, in addition to several other lines of business. Brookfield is a well respected, globally diversified dividend payer that has seen impressive revenue growth in recent years. While its share price is currently near its 52-week high and its P/E ratio is a painful 36.07 compared with the industry's 16.20, this is a company worth keeping on your radar. See why my colleague Jim Royal thinks it should be part of a dividend portfolio.
American Electric Power (NYSE: AEP ) is a public utility with heavy engagement in the future of the smart grid. The company's gridSMART initiative promotes advancement of smart grid technologies and educates its customers about the potential benefits. AEP owns the United States' largest electricity transmission system and is steadily converting its network to extra-high-voltage power lines that reduce energy loss. This dividend payer would make a good pick for income investors.
After offering a couple of conservative ideas, I can't resist mentioning the risky but fascinating American Superconductor (Nasdaq: AMSC ) . This small company bases its offerings on exactly two proprietary energy technologies, one of which is high-temperature superconductor wire. I asked some analysts at the AWEA what they thought could be a game changer in the transmission space, and they pointed me in AMSC's direction. The company is working to develop underground superconduction for electricity, using liquid nitrogen to maintain a constant temperature. Burial alone adds 10% to the overall cost of transmission infrastructure, so this is a gamble. Investing in this company would be a lot like investing in a small pharma startup: Your entire bet is on the success of a single drug. But if you have the risk appetite, this one could just take off.
The beauty of investing in transmission is that it doesn't require the success of the smart-grid concept to be a good play. We have to keep stringing the lines, irrespective of other developments, which seems to make this a solid bet in all scenarios. Investors would do well to get in now and be patient. In a three-to-five-year time horizon, my bet is that this play will pay.
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