It's All About Transmission

By Aaron Levitt | June 06, 2011 AAA

Germany's recent decision to abandon its nuclear generation capacity has put renewable energy sources back into the spotlight. Funds like the First Trust NASDAQ Clean Edge Green Energy Index (Nasdaq:QCLN) has rallied on the news and long term potential. However, whether that power is produced via solar panel, wind turbine or coal plant, moving that energy to where it's needed is a paramount issue. Renewable energy investors should be transmission investors as well.

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Upgrading the World's Largest Machine
America's power grid is made up of a patchwork of 9,200 power plants and 200,000 miles of high voltage transmission lines. This system provides nearly one million megawatts worth of power to 300 million Americans each day. However, the U.S. electric utility industry faces the greatest challenge in its history. Our grid is need of a serious upgrade. Our increasingly digital and connected economy has caused the demand for electricity to significantly rise. Because of the adoption of cell phones, computers and other modern conveniences, peak power demand has exceeded transmission growth by 25% each year since the 1980s . Overall, the Department of Energy estimates that power demand in the U.S. alone will double over the next 20 years. (Even in times of economic turmoil, utilities can be a good investment. For more, see Trust In Utilities.)

Location, Location, Location
Many of our nation's best renewable energy resources are considered location constrained. These resources pertain to certain climatic, geologic or topographic features that are not near major concentrations of electricity consumers. For example, most the nation's concentration of onshore wind capacity is located in on the Great Plains. However, the bulk of America's population sits along its coasts. Many potential wind, solar, geothermal and other clean generation facilities will not be developed unless transmission capacity exists to deliver that energy to market. Some have already begun the process. Utility Dominion (NYSE:D) has started the development of a high-voltage underwater transmission line to potentially support multiple offshore wind farms.

Developing the grid infrastructure will be expensive, but worth it in the long run. The Brattle Group's analysis suggests that total U.S. transmission investment could reach $240 billion to $320 billion between 2010 and 2030 and that Canadian transmission improvements could total C$45 billion through 2030. A survey published by the WIRES Group shows the grid modernization will result in $30-$40 billion in annual economic activity and create 150,000-200,000 new full-time jobs in the United States. (For related reading,see Utility Funds: A Bright Choice In Bear And Bull Markets.)

Portfolio Options
Revitalizing our electrical grid has huge potential. For investors, seizing that potential may offer outsized gains in the long term. Adding a fund like the First Trust NASDAQ Clean Edge Smart Grid Infrastructure (Nasdaq:GRID) or the PowerShares Dynamic Building & Construction ETF (NYSE:PKB) can tap into that promise. However, there are plenty of picks for the sector. (For related reading, see Water: The Ultimate Commodity.)

Building out the grid will take plenty of overhead transmission lines. Among its HVAC systems and various hardware components, Thomas & Betts (NYSE:TNB) is major manufacturer of steel utility structures including lattice towers and substation units. The company will also benefit from the growth in the wind industry as it produces wind towers as well. Similarly, Valmont Industries (NYSE:VMI) offers a double-play on transmission and agriculture. Valmont recently raised its dividend by 9%.

Both General Cable (NYSE:BGC) and American Superconductor (Nasdaq:AMSC) will benefit as new transmission lines are introduced to the grid. General Cable is benefiting from growth in emerging markets. AMSC's recent haircut could allow investors to add its superconductor power cable systems cheaply.

Finally, for investors looking to profit from the transmission line owners, ITC Holdings (NYSE:ITC) operates a variety of transmission lines that other power generators use. Shares of ITC yield 1.9%. For a broader infrastructure asset owner, Brookfield Infrastructure Partners (NYSE:BIP) yields 5.1%.

Bottom Line
The promise of renewable energy is great. However, without the proper grid infrastructure, that potential is dead in the water. Investors interested in the green energy must first be transmission investors. The previous picks along with grid construction company Dycom Industries (NYSE:DY) are great ways to add the market sector. (For related reading, see Clean Or Green Technology Investing.)

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