Investing in the Repair and Upgrade of America’s Power Grid

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Market Trends

Unlike sound and data that travel over radio waves, electricity moves through copper and aluminum wires. But we have a big problem…

The American Society of Civil Engineers gave America’s energy infrastructure a grade of D+.

That was evident last Friday when the grid failed in multiple places in San Francisco, Los Angeles and New York. At first, officials suspected cyberattacks.

But it wasn’t that. It was just old equipment failing. America’s grid is in dire need of repairs, upgrades and expansions. Smart investors are already cashing in on this growing trend. I’ll show you one way to join them in a moment.

First, let’s look at the value of our power grid.

Designed to Last Decades… But Needs an Upgrade

Most folks never give our power grid a second thought. They would be surprised to know that the entire system is designed to balance supply and demand within fractions of a second.

Right now, we use electricity as soon as utilities generate it. That’s because there has never been a practical or inexpensive way to store electricity.

When the demand increases, utilities must add more supply. They do this by turning on another generator.

But the process involves more than flipping a switch. Here’s how it goes:

  1. Power plants generate electricity.
  2. Low- and high-voltage transmission lines transmit power over long distances.
  3. Substations switch power among different transmission lines.
  4. Substations and transformers drop transmission voltages to lower distribution voltages.
  5. Distribution lines bring power to neighborhoods and industrial parks.
  6. Substations switch power onto the distribution grid.
  7. Transformers change distribution voltages for end users.

But this was the model for the 20th century, when our power came from large, central generating plants. How and where we get our electricity is rapidly changing.

Now more and more of America’s electricity is coming from solar and wind farms. On very windy days, up to 45% of Texas’ electricity comes from wind.

Rooftop solar systems are popular with homeowners and businesses. These smaller generation sources on the distribution side of the grid are fast becoming the new norm.

This is the grid in transition. It’s quickly moving to a distributed generation model.

The 20th-century grid wasn’t designed to handle small, distributed sources. It’s even less ready to handle electric vehicle (EV) charging and battery storage.

It’s a problem begging for a solution. But as Fessler’s First Law of Technology states, “Technology marches on.” And so it is with America’s power grid.

America’s $5 Trillion Power Problem

The National Academy of Engineering refers to the U.S. power grid as one of the “greatest engineering achievements” of the last century. Unfortunately, it’s aging and it requires a significant and constant capital investment in order to meet the demands of 21st-century Americans.

The U.S. grid has more than 200,000 miles of high-voltage transmission lines. Through substations, they link to more than 5.5 million miles of local distribution lines.

Power plants built after World War II are now 60 years old. Many of them burn dirty coal, adding to pollution and greenhouse gases.

But aging power plants are just one part of the problem. There are also old, undersized transmission lines in need of upgrading and replacement.

Thousands of miles of new transmission lines are already under construction to bring renewable wind and solar power from the Midwest to western and eastern load centers. Aging transformers, switchgear and other equipment are also in need of replacing.

And finally, the entire grid needs to be “cyber-hardened” against hackers who want to shut it down. It’s all going to cost a lot of money, and there’s no question that it’s the most critical part of America’s infrastructure.

In total, it’s estimated that the power grid would cost $5 trillion to replace.

And without power, America’s economy would quickly grind to a halt.

So what lies ahead?

The Best Path Forward

We can’t afford to replace everything and start over. The path that makes the most sense is the one that leverages the grid already in place.

Some new money will flow to wind, solar and natural gas-fired power plants. They can use the existing infrastructure.

In the case of solar and wind farms in the Midwest, thousands of miles of new transmission lines have been and are being constructed to move electricity to load centers.

One challenge is that solar and wind are intermittent sources of power. America’s 21st-century grid has to be able to balance that fluctuating power flow utilizing EVs and other battery banks.

The new grid has to be interactive. Customers must be able to manage their electrical loads.

It’s all beginning to happen… and I think it represents a great opportunity for investors. I have several ideas on how to play the 21st-century grid.

Income Investors, Take Note

As I get older, I’ve become more interested in income-producing investments. Many of our readers have too.

I’ve come across a company that focuses on owning clean power generation assets. For those of you who hate filling out MLP K-1 forms at tax time, this one’s for you, since it isn’t an MLP.

The company is Pattern Energy Group (Nasdaq: PEGI). Pattern Energy is a holding company that owns renewable power generation sources.

Its customers are utilities in the U.S., Canada and Chile that purchase the power under long-term power purchase agreements. Currently, there are 18 wind power projects in the U.S.

These 18 projects have a nameplate generating capacity of 2,644 megawatts. Stable, long-term cash flows enable Pattern Energy to pay a handsome dividend yield of 7.52%.

As Pattern Energy adds more capacity to its base, its cash flow will increase. So too will its dividend, and that’s why I like the stock.

Income-oriented investors who want to ride the 21st-century grid upgrade should consider a few shares of Pattern Energy Group for their energy portfolios.

Good investing,

Dave