Categories

Investing Liberty Investor Alert Observation & Opinion

Tools

  • Economy & Politics
  • Investing
  • Personal Finance
  • Related Posts


    Big Data Knows You Like Losers
    Here’s Why Oil Giant Shell Is Slashing Thousands Of Jobs
    3 Misconceptions About Leading A Successful Team
    This Court Ruling Just Made It Easier To Sue Companies That Get Hacked
    The US Taco Bell That’s Selling Alcohol Will Also Feature A Bouncer At The Door
    Uber Customer Complaints From The US Are Increasingly Handled In The Philippines
    Play China’s $67 Trillion Surge With This Stock
    This Media Darling Is Worth 98.22 Percent Less Than Goldman Sachs Thinks (NYSE: GS)
    Whole Foods Plunges As Earnings Disappoint
    Tesla: Social-referral Incentive For Model S
    Facebook Is Still A Work In Progress
    Profit Growth Turns Positive For Q2
    Twitter Shares Plunge After CEO Comments
    How You Know It’s Time To Leave Your First Job
    Will Consumers Upgrade To Windows 10?


    An Expert Weighs In On Utilities

    Editor’s Note: I recently had a chance to talk with Roger Conrad, co-founder and co-editor of Capitalist Times and editor of Conrad’s Utility Investor. Conrad is one of the pre-eminent experts in the utilities and income sectors. It’s always interesting to hear what he has to say about these sectors.

    Early: As you know from all those years when I was editing your former utility letter, though, I’m not just a rubber stamp. I have some real questions about this industry you’ve been covering since 1988.

    Let’s start with renewable energy. I trust you’ve seen the article I sent you from Greentech Media regarding utility solar energy economics versus distributed generation solar. That doesn’t look so good for the industry, does it?

    Conrad: I very much agree with the authors of the article.

    First, it’s hard for electric companies to construct large, baseload power plants right now in most of the U.S. There’s the question of permitting (securing permits to build) in an era of rising environmental regulation, but also weak wholesale electricity prices.

    In fact, most of the new construction we’re seeing is renewable energy such as wind and solar, which enjoy tax incentives/credits and mandates in three States that force utilities to buy their output. Companies building under a regulated model are increasingly challenged to recover their investment in rates, particularly with officials anxious to keep those rates low at a time of modest economic growth in the U.S.

    Second, it’s obvious that there’s a boom going on in constructing distributed generation sources, from rooftop solar to gas-powered generators. The authors of the article cite a 90 percent cut in solar panel costs as one major catalyst. I think the increased power outages we’ve seen due to storms over the past year are another big factor, particularly in the Northeast.

    I also agree that at least some of the builders and operators of rooftop solar facilities have a very nice business model now. They’ve figured out how to get people hooked under long-term contracts that really amount to an annuity. And the more they build, the fatter the cash flows will be.

    Where I disagree strongly, however, is [with] their premise that a new breed of companies will eventually rule this business, rather than the incumbent utilities who already have the customer relationships and have seen the light, so to speak, with rooftop solar.

    Probably not a lot of people have heard of New Jersey Resources (NJR). But they’ve been making a tidy profit with rooftop solar for several years. And I have no doubt the “progressive” utilities cited in the article like Duke Energy (DUK) and Sempra Energy (SRE) will wind up doing the same.

    However, the electric utility industry isn’t known so much for visionaries as for trend followers. But it’s certain that once big utilities see the profit in this business, their push into it will be irresistible. And it’s hard to see how even a larger pure play like SolarCity Corporation (SCTY) that had just $133 million in revenue last month can keep up. In fact, I think the best end game for these companies is getting acquired.

    As for whether or not utilities will keep building solar and wind plants — or buying their output from others — that really depends on government policies.

    So long as the law requires these companies to buy output of large wind and solar farms under long-term contracts, they will. And the generators will be able to lock in those long-term cash flow streams, which is really all they’re after anyway.

    Early: It also raises another question. Natural gas has been very cheap, to the point where many utilities are closing their older coal plants and switching to gas-fired generation to cut costs. Do you see this trend continuing and, if so, how will it affect utility profitability, as well as use of renewables?

    Conrad: The real fault line here appears to be natural gas at $3.60 or so per million British thermal units (mmBTUs). So long as the price is below that, gas economics definitely beat coal economics.

    What we saw this winter, however, showcased the limits of that trend. That is, gas went above $4 and companies began switching back to coal in a big way.

    I think if you’re looking for a model here, look at what Southern Company (SO) has done. The company has basically built a system that can swap between coal and gas, depending on whichever is cheaper. If we get a carbon dioxide tax at some point, the inflection point for gas versus coal obviously rises a bit, since gas emits about half the CO2 that coal does.

    As for renewable energy, it comes down to extending the government policies that favor it. Renewing wind energy tax credits seems to be an annual event. I have to admit I was a bit surprised when Washington did it this year, though some of my contacts in the industry said they had more than an inkling that would happen.

    But if those credits end, you’d see new development fall off a cliff, which it did last year in anticipation of the wind power credits expiring for good.

    Obviously, if we ever get back to $5 gas, wind is a lot more competitive, even without the credits. And I think we will get back there eventually, once producers can export.

    That’s a few years off, however, as most of the planned liquefied natural gas export facilities in North America have yet to be approved. And then they have to get built.

    We will eventually get there. But it’s going to be five years down the road, which may not be in time to maintain new construction of wind and solar. That’s why long-term contracts for generators — or even rooftop solar companies — are so important.

    Early: Maybe we should talk a bit about what distributed generation is. How do you see it affecting the adoption or rejection of alternative energy resources into the power grid?

    Conrad: Distributed generation is really I think a natural offshoot of growing electrification. Mainly, the more dependent on power we’ve become, the less we can afford its interruption for any reason. Distributed generation — or basically having a power generation system in your home or business — cuts interruption risk. I think the economics are still a work in progress for the user. But they’re certainly not for the provider who can lock in a long-term contract and realize tax incentives at the same time.

    I think that, over time, distributed generation of renewable energy could wind up replacing quite a bit of the centralized generation we now have in this country. That could really, really help utilities who use their scale and customer reach to grab the lion’s share of the business. After all, who wants to take the risks of building a huge new power plant when they can replace the generation with distributed generation and keep the revenue?

    The real question for investors is going to be how their companies are responding. And if history is any guide, some will do well while others do far less well. That’s why we have to watch the earnings results every quarter.

    — GS Early

    Discuss this Story:

    Comment Policy: We encourage open discussion. Comments including racist statements, profanity, name calling or spam will be removed at our discretion. We use filters for spam protection. If your comment does not appear it is likely because it violates the policy.

    Subway Becomes Largest Restaurant Chain To Offer Mobile Ordering
    The FBI Built a Database That Can Catch Rapists — Almost Nobody Uses It
    Procter & Gamble Sales Fall For Sixth Straight Quarter
    Conoco Results Beat Estimates, Cuts Capex Amid Low Oil Price
    U.S. Stock Futures Little Changed As Investors Await GDP Data
    Health Insurer Cigna’s Profit Rises As It Adds More Members
    Shell To Axe 6,500 Jobs And Cut Spending To Cope With Lower Oil Prices
    Dollar, Bond Yields Rise On U.S. Rate Hike Bets
    Boeing May Move Work Abroad With Ex-Im Future Uncertain
    Facebook Profit Falls 9 Percent As Costs Soar
    ITG Sets Aside $20.3 Million Related To Dark Pool Investigation
    A Critical Pivot Point For Gold And Everything Else
    America, Meet McDonald’s Self-Service Kiosks
    Why Economists Have Trouble With Bubbles
    It’s Bounce Or Else For This Key Stock Market Gauge
    What Happens When Markets Realize China Is A Forced Seller Of Treasuries
    The Rise Of The Yuan Continues: LME To Accept Renminbi As Collateral
    Faster Pace Of Fed Rate Hikes Could Spook Market
    Facebook Earnings: Expectations Are High
    3 Stocks For Retirees To Buy
    T-Mobile To Take No. 3 Slot From Sprint
    Frontier Airlines Will Attempt To Reinvent The Middle Seat
    The Fastest-growing Mobile Phone Markets Barely Use Apps
    How To Get $3,000 A Month In Retirement
    American Airlines’ 787 Dreamliner Nightmare
    MasterCard’s Quarterly Profit Falls As Costs Rise
    Health Insurer Anthem’s Profit Beats As Medicaid Memberships Rise
    Microsoft Launches Windows 10, And It’s Free!
    Thomson Reuters Profit Beats, Currency Weighs On Revenue
    GlaxoSmithKline Beats Profit Forecasts Despite Advair Hit, Lower Margins
    Read more from Investing...

    Liberty Investor Digest

    Get today's most important
    financial headlines all in
    one place by email!



    Sources


    close[X]

    Sign Up For Liberty Investor Digest™!

    Get Liberty Investor Digest FREE By Email!

    Input your name and email address in the fields below and get today's most important financial headlines sent straight to you inbox!

    Privacy PolicyYou can opt-out at any time. We protect your information like a mother hen. We will not sell or rent your email address to anyone for any reason.