5/29/13 – U.S. Energy: Beyond Fracking

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 29, 2013 9:59:42 AM

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I have written about energy before, but, based on the number of recent news stories on the topic, I think it’s worth taking another look at just how much the energy landscape has changed over the past couple of years.

Last summer, I wrote that, with so many new technologies brewing, it was almost certain that at least some of them would pan out. I wrote about the shift of narrative, recalling a meeting with clients in Massachusetts where I actually sparked an argument about which solar program was better. I wrote about how fracking would be a transition phase.

All of that is indeed happening, and happening now. Let’s start with Tesla, the only new U.S. car company to make it in decades. Tesla isn’t out of the woods yet, but, with a 99 rating from Consumer Reports for its newest car and its stock taking off, it’s clearly the company to beat for electric vehicles. Regardless of whether or not Tesla itself makes it, the notion of electric cars as vehicles you actually want to drive has come of age. By making it an aspirational object, rather than a sacrificial object, Tesla has changed how the entire population views the electric car.

Let’s move on to utility generation of energy. Today alone, there are several stories on this topic in the Wall Street Journal and New York Times. To start with, utilities are getting on board with different energy technologies. The CEO of American Electric Power, for example, sees distributed solar—generated by panels on homes and businesses—as both a threat and an opportunity, the WSJ reports. AEP and other coal-burning utilities are either exploring or actually investing in installing such systems. When utilities, a notoriously conservative industry, are looking to move from a proven model like coal to a new one, you know the trend has legs.

Also in today’s Journal, utilities are looking at Wyoming for wind energy. Two different investor groups are planning wind farms to generate power and ship it to California. What makes this interesting is the proof of concept either would provide, if they succeed. The other interesting thing is that one project is driven by billionaire Philip Anschutz. When serious, wired money starts to enter an industry, the chances of success improve sharply. Once either of these projects gets the infrastructure in place, there is absolutely nothing to prevent massive scaling across the central U.S.

In the realm of less-proven technologies, one of the smartest venture capitalists around, Vinod Khosla, is doubling down with his own money on companies that, among other things, turn wood into oil. Along the same lines, the European Union is starting to move toward burning biomass—that is, wood—rather than fossil fuels. Renewables can mean more than wind and solar, and this is the type of conceptual shift that will drive further change. There are now 20 biomass power stations in the U.S. alone, with more planned.

Make no mistake, some or even all of these ventures might fail. The reason Khosla is writing checks himself is that other investors have pulled back. The solar industry is also facing problems right now, as companies have collapsed very publicly and Chinese solar manufacturers are apparently producing defective panels, which will probably hurt the industry in the short term, according to the New York Times.

And yet, given the expansion in interest we’ve seen in the past year alone, this is a trend in its very early stages. Along with fracking, it is changing the world of geopolitics as OPEC wrestles with the impact of lower U.S. demand and increasing supply.

Alternative energy is one of the long-term trends that will increasingly support U.S. growth. It won’t have a substantial impact in the short term, but when we check in again next year, I would give long odds we’ll be even further along.

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