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In recent days, it has felt like hell in Los Angeles, where I live. A heat wave is suffocating the city, as it is much of the entire state. Given this, California has been seeing rolling blackouts. There are many factors behind these blackouts — the surging power needs from air conditioners due to this heatwave, controls on power generation, a shortage of power due to the shut-down of three major gas-fired power plants, and an outdated grid system (among other reasons). In the middle of this, we have a handful of “green” energy companies at the forefront of the ESG movement (environmental, social, and governance). Today, let’s turn to expert income investor, Neil George, editor of Profitable Investing, for more on these companies. In Neil’s update from earlier this week, he dives into what California really needs in order to help address our current problem. And in his usual generous way, Neil gives away the names of some of his top investment recommendations. I’ll let him take it from here. Have a good weekend, Jeff Remsburg |
Lessons from Sacramento for Clean Power
By Neil George
California is in crisis due to rolling electrical power blackouts. Households and businesses are facing power losses with no notice, creating chaos on top of the existing COVID-19 devastation. Power costs on the wholesale level have soared to $3,800 per megawatt hour (MWH).
One cause is a recent heat wave that has been driving additional power demand for air-conditioning. But the other part of the problem is the controls on power generation and distribution under the California Independent Systems Operator (CISO).
This entity oversees more than 80% of electric power that is generated and transmitted by member operators, and it has a history of mismanagement with past cases of blackouts, including the massive crisis in 2011.
The state also shut down three major gas-fired power plants representing nine gigawatts of power without replacing them with alternative fuel power-generating facilities, leaving the state vulnerable to blackouts. The CISO has been trying to buy out-of-state power that might be transmitted via its power grid system, but it continues to find little to no offers.
Three of the publicly-traded power companies, including Southern California Edison (part of Edison International, EIX), San Diego Gas & Electricity (part of Sempra Energy, SRE) and the continued mess of Pacific Gas & Electric (known as PG&E, PCG), are trying to meet demand. But under various environmental and market controls, they are largely hand-tied from increasing usable supply.
Edison International, Sempra Energy & PG&E — Source: Bloomberg Finance, L.P.
The state’s response has been to allow generators that ordinarily would be in violation of state and local laws. Think the portable gasoline varieties that are saviors in other parts of the nation.
Real Problems, Real Solutions
The real problems of the state are not unique to California. State and local authorities continue to demand that power generators move away from fossil fuels and towards wind and solar. And this is aided by Federal subsidies, including tax credits for wind and solar power-generating capacity.
The subsidies and tax credits were extended in 2016 and have been gobbled up by the likes of NextEra Energy (NEE), Xcel Energy (XEL) and Dominion Energy (D). This has resulted in these companies specifically being on the forefront of environmental, social & governance (ESG) compliance and further attracting investment capital.
NextEra Energy, Xcel Energy & Dominion Energy — Source: Bloomberg Finance, L.P.
In fact, this week, Xcel announced huge new projects to refurbish older wind turbines as part of its goal to be carbon dioxide (CO2) free by 2050. The announced new turbines will result in cost savings of 20% or more, and they are being made possible thanks to the subsidies.
But wind and solar need ancillary power supplies and backups. Yes, battery storage is being developed along with alternative storage systems like water reservoirs and even electrolysis hydrogen (otherwise known as green hydrogen), but these and other technologies are in the works and not in the here and now.
What’s really needed is what California cut off — gas-fired power plants. Natural gas is a low-emission fuel that this nation has coming out of its ears thanks to fracking, including from the fields leased out by Viper Energy (VNOM).
And NextEra, Xcel and Dominion, along with the rest of the dependable utilities inside our model portfolios, all have efficient gas-fired plants as well as other fuels, such as nuclear energy.
But in addition to the plants, we continue to need pipeline companies to gather gas at the well-head and transport it to power plants around the nation. This continues to be a legal mess of local lawsuits that slow or restrict new and expanded pipe and other infrastructure assets.
Enterprise Products Partners (EPD) and Kinder Morgan (KMI) continue to do their part to keep gas flowing for cleaner energy that keeps the lights and air-conditioning on as well as businesses and industries humming along.
Enterprise Products Partners & Kinder Morgan — Source: Bloomberg Finance, L.P.
The other thing that’s needed but isn’t getting done, particularly when it comes to getting power to California and other stressed markets right now, is new and better power transmission systems.
Much of the nation’s grid system is outdated, including operating systems controlling power transmission. Interestingly, the Federal Energy Regulatory Commission (FERC) under the U.S. Department of Energy (DOE) recently called further attention to the risks to the national grid, including so-called Black Sky risks.
Whether from hacking of systems or just a series of failures in transmission systems (including what’s happening in California), these could result in days of limited or no power. Those in the Northeastern US recall the fiasco of 2003, and those in New York City easily recall the recent blackouts in the city as well as in July of 2019.
Little is being done to aid local utility companies or national utilities to upgrade their portions of the grid like what is being done for wind and solar. But without subsidies, regulatory relief and other incentives, keeping the lights on is increasingly not something that we can take for granted.
All My Best,
Neil George
