How Can Smart-Grid Storage Grow Your AES Investment?

AES Storage assets run into the $100 million level this year. Improvements in battery and other storage technologies, along with regulatory mandates, make it possible to get positive returns from integrating storage directly into electric grids. The result may be positive storage returns for investors and a more resilient and reliable electric infrastructure.

Feb 4, 2014 at 10:13PM

AES (NYSE:AES) deploys smart-grid technologies alongside its regulated utility and power plant asset base. Its latest innovation automates grid scale battery storage at Dayton Power and Light in western Pennsylvania. This innovation is the latest in securing reliable electricity from a diversity of renewable and non-renewable sources.

With 150 Megawatts, or MW, online, AES Storage helps utilities free up expensive reserve capacity, better meet peak power demand, and make more effective use of intermittent generation from resources like wind and solar.

AES independently develops and operates electric power plants and infrastructure, now in 20 countries. It typically receives fixed revenue contracts for power off-take and services, much like a utility tariff. It also operates two U.S. utilities: Indiana Power and Dayton Power and Light. Battery profits from AES Storage can drive new market interest, operational efficiencies, and revenue growth. AES owns and operates over $100 million of storage assets globally.

An old and new, tried-and-true technology
Batteries have provided the equivalent of 160 MW of pumped hydro storage in Japan for over 20 years. Grid experiments seem to have determined the efficacy of batteries, pumped storage, and capacitor banks alongside them, for use with solar and other generation assets. In addition, non-toxic, no-lead, rechargeable battery technologies are being manufactured in West Harlem New York City and are just beginning to be deployed for industrial and grid-scale applications.

Storage has clearly been demonstrated as a critical method for making transmission and distribution of electricity more reliable and resilient to disruption. Typical battery storage grid services include frequency response, black start, voltage support, and rapid demand support. All very technical, but industrial rate payers will definitely notice something is wrong when power ebbs ever so slightly. The result for a generic drug manufacturer is that a tank full of biologics dies and halts a vaccine supply chain in its tracks. A recent study estimates that an industrial outage of eight hour duration could cost over $200,000 on average.

Grid reliability
The AES Storage 40 MW project at Dayton Power and Light's Tait generating station in Moraine, Ohio provides fast-response frequency regulation and grid stabilization services to the Pennsylvania-Jersey-Maryland, or PJM, Interconnection. DPL is one of two AES utlities. The other is Indiana Power and Light in Indianapolis.

The Tait storage project benefits financially from PJM's new tariff for fast-response regulation designed to comply with FERC Order 755. Enacted in 2011, Order 755 increased the tariff rate for "fast" responding sources like batteries or flywheels that are bidding into frequency regulation service markets. AES Storage has now installed 100 MW of storage in PJM.

California is next
The other investor story for AES Storage on the horizon is the California Public Utilities Commission, or CPUC, proposal asking the state's big three investor-owned utilities to procure 1.325 Gigawatts, or GW, of energy storage by 2020. Devoted to bulk transmission is the procurement of 700 MW of storage alone. The remainder assigned to distribution and customer applications. 200 MW are to be procured in 2014.

In this market, AES Storage would operate as a systems integrator and program manager of a complex set of storage projects. At one end it would engineer, procure, and construct battery-based and other storage option site projects. At the other end it would manage offtake capacity contracts, manage regulatory relationships, and arrange project financing.

AES, through its Silver Ridge Power joint venture with Riverstone Holdings, is teaming with Google to develop the 265 MW Mount Signal photovoltaic project in California. This project will deliver power to San Diego Gas and Electric under a long-term power contract. Grid stabilization using electric storage will be a significant component of integrating solar power on the California grid.

Returns for investors?
AES Corporation's business exposure to 20 countries around the globe helps to mitigate any region-specific risk like poor water levels for hydro-power in Brazil, or nationalization risk in Cameroon.

Earnings are tied to long-term fixed power purchase contracts through a base in power plants. These arrangements are designed to pay down project debt and provide standards of service to local utilities. They do not allow for any near-term growth.

The company is investing in over 2,000 MW of capacity expansion in the power-hungry Latin American and Asian markets. AES has exited eight countries and received $286 million on associated asset sales this past year. Along with this the company is growing new capacity markets with AES Storage and new generation markets through Silver Ridge Power.

AES's current trailing 12-month earnings multiple is over 22x, a discounted valuation compared with the 71x average for its industry and stronger than the 18x average for the S&P 500. AES's earnings retention rate is 75%, which along with a return on average equity of 22% implies a potential long-term book equity and earnings growth of 16%.

A quick thought experiment: The current price to book ratio, or p/b, is 2.19. With 16% book equity growth p/b would rise to 2.54. If we were to apply this p/b to the 6.48 book equity per share, obtained by taking the current stock price of $14.19 and dividing by the p/b of 2.19, we get a potential stock price of over $16.40. Management has its work cut out for it this year.

More ways to profit from America's energy revolution
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 


Fool contributor Bill Foote has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information