It's been called the "World's Largest Machine". Our power grid is a patchwork of 9,200 power plants and 300,000 high voltage transmission lines. This system provides nearly one million megawatts worth of power to 300 million Americans each day. Alas, the grid is old technology, still functioning the same way Thomas Edison and George Westinghouse first conceived it.
Today's grid is still based on 1960s technology and the meter on the side of your house has not changed its basic design since the 1920s. The grid is an antique, nearly 100 years old in places. While it functions 99.97% of time, it's far from perfect. Power interruptions and blackouts cost the American economy between $80 and $150 billion a year in lost productivity.
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Need of an Upgrade
The electrical grid is in serious need of an upgrade due to increasing power consumption. Since the 1980s and the adoption of cell phones, iPads, computers and other "modern" conveniences, peak power demand has exceeded transmission growth by 25% each year. Demand is expected to double over the 20 years. This exponential demand has the grid failing more and more, with three major blackouts within the last decade. Our new electric grid needs to be bigger, smarter and more efficient in order to help cope with the fresh stresses of modern living.
Research conducted by the Electric Power Research Institute concluded that programs utilizing grid modernization could reduce the annual growth rate of U.S. energy consumption in the next two decades by 22%. The annual energy savings could total 236 billion KW by 2030. The Energy Information Administration reports an upfront $520 billion grid investment would translate to $1.2 trillion in gross energy savings by 2020.
A Big Expense
In order to build up our smart grid, substantial investment in generation, transmission and distribution are expected over the next two decades. Analysts predict that investment in the sector could be as much as $1.5 to $2 trillion by 2030. Investors have plenty of choice to play the grid build-out. From frequency regulations stocks such as Beacon Power Corporation (Nasdaq:BCON) to new smart metering technologies with Itron (Nasdaq:ITRI), there will be plenty of winners in the space. However, one of the more "low tech" ways to play the build-out is through the addition of transmission lines.
As one of the world's largest manufacturers of both high and low voltage cable, General Cable Corp. (NYSE:BGC) will benefit as new transmission lines are introduced to the grid. General Cable is also benefiting from growth in emerging markets as places like Brazil and China begin to build up basic infrastructure.
Both Pike Electric (NYSE:PIKE) and MasTec (NYSE:MTZ) are smaller heavy construction firms dedicated to energy transmission and substations. The two companies design, build and maintain transmission lines for utilities. Investors may find that these two small companies could be a better choice to play the build up as both are potential takeover targets and pure players in the industry.
Power-One (Nasdaq:PWER), Satcon Technology (Nasdaq:SATC) and Advanced Energy Industries (Nasdaq:AEIS) all make power inverters that allow wind and solar energy to connect to the grid. These inverters convert DC power into the AC power used by most of our appliances. They are instrumental in the transmission of alternative energies into the new grid.
Our current electrical grid is in need of a vast makeover; it's old, inefficient and prone to failure. As energy demand is increasing, a new smarter grid will need to be built. Investors wanting to play this vital piece of infrastructure should first focus their attention on the new transmission lines that will be required. The previous companies or First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (Nasdaq:GRID) make ideal portfolio components for long-term investors. (Learn about investing in infrastructure in Build Your Portfolio With Infrastructure Investments.)
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