Powering Tomorrow: Two Energy Paths for the Future

Created by EQUITIES Magazine

How will potential initiatives in the energy sector affect your portfolio?

Just more than a month into its existence, the Car Allowance Rebate System, known colloquially as “Cash for Clunkers,” has been one of the U.S. government’s most successful stimulus programs in recent history. More than 250,000 cars were sold in one week alone, providing a much needed boost for the beleaguered car industry, while at the same time slightly reducing our dependence on foreign oil because the new vehicles purchased had an average 61% increase in fuel efficiency, according to the Department of Transportation. With the initial $1 billion for the program exhausted by July 30, 2009, Congress scrambled to approve an extra $2 billion to keep the program afloat.

The immediate and influential effect of the “Cash for Clunkers” program on consumer and government spending stands in stark contrast to the lack of spending in the energy industry so far this year. Under the $787 billion American Recovery and Reinvestment Act, signed into law in February, more than $61 billion was entrusted to the Department of Energy to “jump-start our economy and build the clean energy jobs of tomorrow,” a White House press release stated.

Given the sheer size and complexity of the energy sector in the United States, significant initiatives have proved difficult to enact on a national scale given the litany of red tape and regional monopolies that often get in the way of progress. However, two energy initiatives that are gaining support could provide an immediate solution to some of the country’s energy issues, while at the same time stimulating the economy: the Pickens Plan and the Department of Energy’s plan to install smart meters in homes across the country. It is important to monitor the success of these initiatives because the immense scope of their aims will create great windfalls for companies catering to these new markets.

Pickens Plan
According to T. Boone Pickens, a former oil tycoon turned clean energy advocate, energy independence is the most important challenge facing America today. Because nearly 70% of our oil inventories are imported from abroad, Pickens asserts that even a minor disruption in oil deliveries could send our already weak economy reeling. Therefore, he argues we must act fast to curb this addiction through the use of an abundant and cost-effective domestic fuel. Pickens’ self-titled plan states that natural gas will be this “bridge fuel” that will help us lessen our addiction to foreign oil, while at the same time “buying us time to develop new technologies that will ultimately replace fossil transportation fuels.”

Commercial 18-wheel trucks are critical to this program’s success because they will provide the quickest and cheapest impact from a conversion to natural gas. Nearly 20% of every barrel of oil imported by the United States is used to fuel the 18-wheelers that create the backbone of our domestic shipping industry. Pickens claims that by incentivizing trucking companies to replace their heavy diesel-burning trucks with trucks that run on clean-burning natural gas during the regular course of fleet renewal, the U.S. government could immediately take great strides toward lessening our foreign oil dependence. If the government helps subsidize the conversion of 350,000 of the nation’s fleet into natural gas-burning vehicles—roughly equal to the amount of trucks that break down every year and need to be replaced anyway—Pickens posits that petroleum imports will be reduced by more than 5%.

However, the Pickens Plan comes with a hefty price tag. For the government to provide the incentives Pickens proposes, it would take nearly $23 billion, more than one-third of the stimulus money currently directed to the Department of Energy. Also, that amount would only cover the first 5% of diesel replacements, leaving the government hard-pressed to deny the next round of incentives if the program gets off to a good start. Nevertheless, Pickens has some powerful supporters in Congress and is one of the most effective lobbyists in the energy industry. If anyone is capable of stimulating government action for far-reaching energy reform, he is.

If the Pickens Plan is accepted by Congress and stimulus money is paid out to trucking companies, many publicly traded companies stand to profit from this transition, and possibly none greater than Pickens’ own Clean Energy Fuels Corp. (NASDAQ: CLNE). Pickens’ company covers the whole spectrum of services for natural gas fueling stations. It not only designs, builds, finances, and operates these stations but also supplies the needed compressed and liquefied natural gas. Aside from the stations themselves, the market for transportation of natural gas will see a marked increase if the Pickens Plan is enacted. Companies like
TransCanada Corp. (NYSE: TRP) and Enbridge Inc. (NYSE: ENB), which own and operate much of the natural gas infrastructure in the United States and Canada, are well-positioned to profit from this increased demand.

However, the Pickens Plan is far from guaranteed to be accepted by Congress, so anyone with an investment in these companies must closely monitor the government’s actions regarding this revolutionary initiative.

Smart Meters
For a safer play, you might want to look at the Department of Energy’s plans to build a smarter national energy grid complete with smart meters. Our national electric grid is fighting a losing battle between the ever-changing array of demands placed on it and the century-old infrastructure it has to work with. Unless we aggressively invest in updating this infrastructure over the next few decades, not only will we continue to have the troublesome blackouts that result in losses of around $80 billion each year, but we will also restrict our ability to cope with new sources of renewable power.

A smarter grid will do this by enabling consumers and businesses to interject their own profit motive into power usage by efficiently linking their prime usage to off-peak times and selling back excess energy generated from renewable energy sources in their home, business, or car. However, the development of a smarter energy grid does not provide an immediate solution to our energy problems. To the contrary, it will take decades to fully realize the benefit of the $11 billion stimulus the government has set aside for retooling our energy grid. Nevertheless, tax credits or incentives directed at installing new smart meters in homes and businesses across the country could help make an immediate impact on energy consumption.

The initial gains would allow the meters to automatically shut off appliances when energy demand is high. Future uses would include the ability to use plugged-in electric cars to act as an enormous energy storage system, enabling consumers to sell power back into the grid. The Department of Energy has mandated that 40 million smart meters be installed in American homes, but implementation of this goal has been sporadic. Smart meters cost about $125, and installation fees can amount to several hundred dollars more, so it may still be cost-prohibitive for the average household to put one in place on their own.

If the Department of Energy enacted a detailed implementation plan similar to that carried out in the United Kingdom, I believe hundreds of thousands of environmentally conscious households across the country would join this power revolution. If this happens, you would be wise to own stock in the largest smart-meter manufacturers in order to profit from this potentially immense market.

Unlike the gains to be realized if the Pickens Plan is initiated, smart-meter manufacturers are seeing strong growth worldwide, and they would only benefit further once the U.S. government initiates smart-meter installations on a grand scale. The market is so attractive that technology giant Google Inc. (NASDAQ: GOOG) has worked to unveil a prototype meter called PowerMeter that would effectively link all household energy systems into one easy-to-use control center. Also, General Electric Co. (NYSE: GE) has worked closely with Cisco Systems Inc. (NASDAQ: CSCO) to produce a similar product that was successfully installed throughout Miami earlier this year. If you want to invest in companies that focus primarily on this new technology, take a look at Itron Inc. (NASDAQ: ITRI) and ABB Ltd. (NYSE: ABB). Considering we live in a world with a growing population and shrinking natural resources, governments worldwide will continue to look at ways to get the most mileage out of the energy they have, increasing the necessity for smart meters in households everywhere.

The Department of Energy is in the enviable position of still having billions of dollars available to interject to make a lasting impression specifically in the economy and energy industry. For the intelligent investor, it would be wise to track how, when, and where the department is spending this stimulus money. While the Pickens Plan could bring windfall profits to natural gas companies, I believe the safer play is to load up on stock of the smart-meter manufacturers and installers because this revolution is definitely here to stay.

By Gant Morgner