Disrupting the Power Industry: It’s About Time
In October 2022, major companies like Amazon, Microsoft, Deloitte, and IBM all attended a small conference on energy sector solutions
The groups met in Orange, Connecticut to discuss “disruptive technologies” – keys to making the electric power grid more robust and efficient. Here’s what the CEO of the company holding the event said:
With the uncertainty in today’s economic landscape, innovation and disruptive technology take on heightened importance as the keys to resiliency and growth.
This month, we’re going to dive into the company that hosted the conference. This company is on track to be the leading sustainable energy company in the U.S.
We’ll show you what this company is doing to make the grid better. And we’ll show you why we think it is worth owning in 2023. However, before we get into the business, we need to talk about a little history on why this meeting was so important. These companies addressed a problem that came to a head 20 years ago. And it highlighted a growing problem in the U.S.: our electrical infrastructure
The Great Blackout of 2003
On August 14, 2003, extreme heat caused power lines in northern Ohio to sag. When the lines touched nearby trees, they triggered shutdowns. Unfortunately, the alarm system designed to warn power companies of these events failed.
As Scientific American described the scene:
Over the next hour and a half, as system operators tried to understand what was happening, three other lines sagged into trees and switched off, forcing other power lines to shoulder an extra burden. Overtaxed, they cut out by 4:05 P.M., tripping a cascade of failures throughout southeastern Canada and eight northeastern states.
All told, 50 million people lost power for up to two days in the biggest blackout in North American history. The event contributed to at least 11 deaths and cost an estimated $6 billion.
The North American Electricity Reliability Council (NERC) had reliability standards, but up until this time, they’d been voluntary. And that’s where the failures began.
After the blackout, NERC created the U.S.–Canada Power System Outage Task Force to review the failures. It determined that a both human and equipment errors created the disaster. The task force’s final report made 46 recommendations to improve the system.
The key recommendation was to change the reliability standards from voluntary to mandatory. But another shortcoming the report identified was the over-reliance on natural gas. ISO-NE, the non-profit electric transmission organization in the region, warned that relying too much on natural gas could lead to shortages and even rolling blackouts during extreme cold periods.
Today, natural gas makes up about 53% of the Northeast’s electric power generation. Nuclear makes up 27% and renewables make up 19%. Those numbers need to grow if the region is going to modernize its power grid.
This month, we’re digging into one of the major players providing the northeastern U.S. with the new power supplies it needs to prevent another disaster. And it will pay us 4% per year to own it as it grows.
Avangrid (NYSE: AGR)
Avangrid is a subsidiary of the giant Spain-based clean energy company Iberdrola. Iberdrola is the fifth-largest electric utility by market cap in the world.
“Networks” are just connected customers. And Avangrid’s primary network investment is the New England Clean Energy Connect (NECEC). This is a plan to bring 1,200 megawatts of clean hydro power from Quebec to ISO-NE.
In this region, the company plans to make $200 million-plus upgrades to the existing network. That will include things like new power lines and transformers. It will also put 50,000 acres of land in conservation. And the project will expand fiber optic and broadband access, support rate relief, and prop up low-income programs in Maine.
NECEC construction started in January 2021, but it is on hold pending court rulings. There was a dispute over two tracts of public land: Johnson Mountain and West Forks Plantation.
We won’t get into the details. If this ruling changed, our investment may take a hit. But while lawsuits can be unpredictable, we are optimistic that this will end in the company’s favor.
Another transaction that could add a huge boost to Avangrid is the PNM Resources (NYSE: PNM) acquisition. PNM Resources is a New Mexico-based sustainable power company, like Avangrid. This deal is less likely to occur.
In October 2020, Avangrid agreed to pay $50.30 per share for PNM Resources stock. In 2021, PNM Resources shareholders, five federal regulatory agencies, and the Public Utility Commission of Texas all approved the merger. It brings many benefits to New Mexico, but there are political issues in the way.
In December 2021, the New Mexico Public Regulation Commission (NMPRC) rejected the agreement.
In January 2022, the two companies agreed to extend the merger agreement to April 2023. They appealed the NMPRC decision to the New Mexico Supreme Court. We should hear from the court this year.
This deal has the potential to make an impact on our investment. Right now, the stock doesn’t give any value to the PNM Resources acquisition. If the acquisition happens, it will give us a significant boost in value.
Today, we can buy a stable, well run sustainable energy company that pays us 4% per year. And we have a double-digit upside potential through the two pending acquisitions in Maine and New Mexico.
Our risk is that the NECEC agreement hits an unforeseen snag and that the PNM Resources deal falls through as well.
Short of everything going wrong, Avangrid is an excellent addition to our portfolio. It is part of the transformation currently gripping the U.S. power system. We believe that the company will continue to grow regardless of the outcome of these acquisitions.
