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
Brookfield Infrastructure Partners
American Electric Power
After offering a couple of conservative ideas, I can't resist mentioning the risky but fascinating American Superconductor
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.
Of course, you could choose to throw all caution to the wind and invest in just one stock. Our analysts have found an energy stock that is highly profitable in good times and bad. Have a look at our special free report to learn about "The Only Energy Stock You'll Ever Need."
Fool contributor Sara E. Wright owns none of the stocks in this article but does get a certain frisson when writing about electricity. The Motley Fool owns shares of Brookfield Infrastructure Partners. Motley Fool newsletter services have recommended buying shares of Brookfield Infrastructure Partners and ITC Holdings. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.