Will Hurricane Sandy Change the Way We Distribute Power?

Hurricane Sandy plowed through the Mid-Atlantic region, imposing a severe physical, emotional, and financial toll on everyone in its path. As we start to pick up the debris from the storm, we need to analyze ways to make our infrastructure more resilient to extreme conditions -- starting with the antiquated electricity grid.

Stealing words from a fellow Fool, our electric grid was invented in the age of Edison, designed in the age of Eisenhower, and installed in the age of Nixon. While it is no secret that the current system is not efficient, Hurricane Sandy showed how delicate our electricity distribution system really is. So much of our modern economy relies on electricity to be productive. In order to both meet expanding electricity demand and protect our infrastructure from extreme conditions, we need to develop a new system, not just repair an old and flawed one.

Repairs will not cut it anymore
There are several stopgap options to beef up our electric grid, like burying electric lines rather than hanging them overhead. Frankly, the costs are not worth the effort. A study by the Edison Electric Institute estimated that burying lines could cost up to $725,000 per mile, more than 10 times the cost for overhead lines. Also, while underground systems are more reliable, they also are not immune to weather damage. Look no further than the outages in Manhattan, which has underground power lines, to see that these systems are susceptible as well.

The option of burying lines also doesn't address the problem of large areas going without power because of a problem with generation. During the large blackout in Manhattan, high flood waters set off an explosion at one of Consolidated Edison's (NYSE: ED  ) power plants. While it is almost impossible to make generation facilities impervious to extreme weather, there certainly are ways to reduce the impact of a large system shutting down.

One bright light in the darkness
While much of NYC was without power, the campus at New York University kept the lights on -- and the technology it uses could be a possible solution to revamp our electric grid.

In January 2011, NYU converted its oil-fired power plant to a natural gas co-generation facility. Also known as combined heat and power, this new system doubles the power output of the previous system, achieving 90% efficiency. More importantly, the system maintained full operation throughout the storm. Instead of relying on delicate electrical wires and exposed transformers (like the old system in the infographic below), the campus' energy input comes from natural gas pipelines, which feed turbines to produce electricity at a secure location on-site. These pipelines are a much more durable system that is less susceptible to disruptions from Mother Nature.

Current system: Produce electricity centrally then distribute through a network of wires and transformers. New system: Supply a gaseous fuel to a localized generator to produce heat and power for nearby facilities

The other added benefit of co-generation facilities is that their efficiency levels make it viable to produce electricity in a localized fashion, rather than relying on big centralized power plants. If a local system were to shut down, its impact may only have an effect on a smaller entity like a single residential building, rather than several city blocks.

What a Fool believes
Estimates to rebuild after Hurricane Sandy hover around the $50 billion range, but this number does not include the loss of productivity or the impact on critical infrastructure like hospitals. For each day a business is out of power or cannot link to the Internet, it suffers lost income. With so much of our modern economy relying on electricity and access, we cannot afford to depend on these delicate one-inch-diameter wires.

Right now, three major American companies provide co-generation power plants and could accommodate a large ramp up: GE (NYSE: GE  ) , United Technologies' (NYSE: UTX  ) Pratt & Whitney division, and Caterpillar (NYSE: CAT  ) . Each company has an array of options to supply larger institutions like college campuses, factories, and hospitals. If larger institutions were to look for a more reliable power source or an emergency backup option, these companies could easily fill the need.

A more intriguing player in co-generation turbines is Capstone Turbine (Nasdaq: CPST  ) . It's still struggling to find its feet as a profitable business, but Capstone has developed the technology to make turbines more appealing to smaller operations like residences and remote oil and gas operations. These options could be very appealing to individual consumers who want both energy security through localized generation, and improved efficiency through combined heat and power.

As investors, we need to keep an eye out for the possibility of fundamental changes in society. If a shift toward localized generation takes hold, Capstone Turbine could be poised to soar. The bigger industrial conglomerates, like GE, could see a change in stock price from this shift as well, but they are so large the effects would not be as amplified.

But, not only will GE be a leader in localized power generation, it also has a big stake in health care and several other important sectors. To help investors make sense of this industrial giant, we have compiled an in-depth analysis on General Electric and the opportunities and challenges it faces in the years ahead. To get a copy of this premium report, click here.


Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 21, 2012, at 11:29 AM, crankyolfart wrote:

    Capstone is still oversized for residential at this point but perfect for business's, hotels, hospitals, and offices. GE, Cat, and UT are over kill in most applications.

    Capstone just has to team with Architects!

  • Report this Comment On November 21, 2012, at 12:00 PM, puffn1x wrote:

    I have said many times. We have little use for a smart grid. We need a smart system. With a smart system we would not lose millions of consumers if one part fails.

    Smarten up folks!

  • Report this Comment On November 21, 2012, at 1:17 PM, TMFDirtyBird wrote:

    @crankyoldfart

    To clarify, when I said residential I was referring to apartment complexes and suburban developments, not individual homes.

  • Report this Comment On November 22, 2012, at 10:23 PM, canadacomments wrote:

    What happens to the natural gas supply if the severe condition is an earthquake? What is being done to "harden" this part of our infrastructure and is there an apparent investing opportunity?

  • Report this Comment On November 22, 2012, at 11:32 PM, lowmaple wrote:

    Did the underground lines fail or was it the flooding of devices where the lines came back out of ground to feed them?

  • Report this Comment On November 23, 2012, at 3:16 PM, snafflekid wrote:

    Tyler,

    This idea seems so simple and obvious and yet I have never heard it suggested anywhere. Sending the natural gas directly to the source removes the efficiency loss in the high power transmission lines. Today, the gas turbine generator is the most practical source of meeting peak energy demands in a system, day or night. Solar and wind cannot do that alone.

    I do not see a growth in localized gas turbine generators eliminating the need for a smart grid. The purpose of a smart grid is to create an elastic and two-way power transmitting grid out of the one-way power lines that exist today.

    What I like about gas turbine co-generation is it appears to be an investable innovation (unlike most smart grid innovations, IMO). For it to work, there needs to be abundant natural gas, available underutilized gas lines and cheap, reliable, efficient gas turbine generators. I would say the first two requirements are met.

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