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.
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.