Read part I of Tom Konrad’s article on Investment ideas from the one-house grid.

As the one-house grid illustration shows, the oft-repeated shibboleth that we "need" baseload generation is not only misleading, but also counter-productive. Adding baseload generation will simply increase the number of hours per year that intermittent sources of power exceed net demand. I, too, formerly believed we needed baseload. I no longer do, although some level of baseload power in the grid is no doubt inevitable, at the very least produced by renewable sources such as geothermal and electricity generation from industrial waste heat.

Solutions

Returning to our one-house grid thought experiment, a number of options present themselves.

Storage. In the real world, if you build a house off the grid, you will add batteries so that you can still run your lights when the sun isn't shining and the wind isn't blowing.

Transmission. Suppose our one-house grid has a neighbor, running his own one-house grid. While generation from their PV and wind systems will be similar (but not identical), demand at the two houses is likely to be different. By diversifying the electric demand, average demand will double, but peak load will increase by somewhat less, and minimum load will more than double. This reduced volatility of electrical load brought by connecting two homes is analogous to the reduced volatility of a portfolio of two securities, rather than just one. Unless the electrical load of the two homes is perfectly correlated, there will be benefits in terms of a reduction in the overall amount of dispatchable generation needed to service the same total load. Our knowledge of the principles of diversification will correctly lead us to the intuition that connecting dissimilar users of electricity will lead to greater diversification benefits than similar users. If residential, commercial, and industrial users are all on the same grid, the same average electric demand will be easier to serve than if only residential or only industrial customers were connected, because a residential user will have lower correlation of demand with most industrial users than with other residential users.

Demand-response. My sister lives in an old house, and the kitchen is on an old, low-amperage circuit breaker. If she ran both the microwave and the toaster at the same time, it would trip the breaker and she would have to trudge outside to turn it back on. Needless to say, she quickly stopped using the toaster and the microwave at the same time, and thereby reduced the peak load in her kitchen. Demand-response involves getting electric customers to agree ahead of time to refrain from using high-wattage appliances during times of high electric demand. In the one-house grid example above, dad might choose to record the football game and watch it later in that evening.

Energy efficiency. Another way to reduce volatility of demand is simply to reduce overall demand. If dad had decided to buy an LCD TV rather than a plasma TV, the demand from his 60" TV might have been reduced by as much as 200-300 watts, depending on the models, and this in turn would have reduced peak load.

Investments

Each of the above solutions leads to an investment, and as intermittent power sources grow as a percentage of total generation, the needs for these solutions will increase. Below is a selection of companies working to provide each of the above solutions to the overall problem of matching electrical supply and demand.

Electricity storage

Electricity storage can serve several related needs of the grid. First, it can absorb excess supply of power at times of otherwise low demand, which means that intermittent and baseload sources of power do not need to be curtailed, even though they are producing power at near zero marginal cost. Second, when charged, energy storage can provide ancillary services to the grid, by supplying power to meet short-term spikes in demand or drops in supply, and absorbing power if intermittent generation ramps up unexpectedly, or demand suddenly drops. According to Paul Denholm of the National Renewable Energy Lab, the revenues from these ancillary services are significant, and should not be discounted in any economic assessment of an energy storage technology. Finally, storage can help to shave peak load by supplying power from off-peak charging.

I have previously written about investments in large scale batteries for the electric grid, but when I did so I neglected to consider the value of ancillary services. Since I wrote that article, both VRB Power (TSX: V.VRB, Stock Forum) and NGK Insulators (OTO: NGKIF, Stock Forum) have continued to sell their respective solutions to utilities, telecoms, and other consortia. However, these technologies are still searching for general market acceptance. Beacon Power (NASDAQ: BCON, Stock Forum) recently commissioned a 20 MW flywheel-based plant to supply frequency regulation services to the New York grid, which will primarily be used for frequency regulation. Given the enormous potential of demand-response and electricity transmission to improve long-term electricity price volatility, I am currently much more bullish about companies using energy storage primarily to provide ancillary services over large-scale storage. Because of that, I have recently increased my investments in Beacon, Maxwell Technologies (NASDAQ: MXWL, Stock Forum), and Active Power (NASDAQ: ACPW, Stock Forum).

Maxwell's ultracapacitors can be used in various power quality applications, as well as a high-power, low-energy supplement to batteries in hybrid electric vehicles. (As a side note, high power is more of a concern in hybrids than pure electric vehicles, because the smaller battery pack has difficulty producing enough power for rapid acceleration.)

Active Power, like Beacon, uses flywheel technology, selling mostly into the customer side, rather than the utility side, of the market. However, as the market for ancillary services grows and becomes more sophisticated, I could see Active Power's UPS systems selling ancillary services to the grid, in addition to their primary function of protecting data centers and other sensitive equipment from temporary power outages.

Transmission

I've written extensively about investments in electricity transmission and distribution. My top picks are ABB Group (NYSE: ABB, Stock Forum) and Siemens (NYSE: SI, Stock Forum), Composite Technology Corporation (OTC:BB: CPTC, Stock Forum), ITC Holdings Corp. (NYSE: ITC, Stock Forum), Quanta Services (NYSE: PWR, Stock Forum), General Cable (NYSE: BGC, Stock Forum), and National Grid (NYSE: NGG, Stock Forum). Geographic diversification of electric supply and demand is as essential as financial diversification in your portfolio.

Demand-response

I haven't written about demand-response aggregator EnerNOC (NASDAQ: ENOC, Stock Forum) since before its IPO in March 2007, but that doesn't mean I'm no longer interested. EnerNOC, along with demand-response/Smartgrid companies Comverge (NASDAQ: COMV, Stock Forum) and Echelon (NASDAQ: ELON, Stock Forum) all became quite expensive on a wave of investor euphoria in 2007, which is why I was not buying or writing about them much at the time. That has now changed, with all three losing about 70% from their peaks, and making them look relatively valuable. I have been taking positions in all three over the last few months.

Energy efficiency

Unfortunately, few pure-play energy efficiency companies exist.  The recently named Waterfurnace Renewable Energy (TSX: T.WFI, Stock Forum) is one I've recently been adding to my portfolios.  I've previously written about Flir, Inc. (NASDAQ: FLIR, Stock Forum), a thermal imaging company which I do not currently own due to valuation concerns, a pair of LED companies, Cree (NASDAQ: CREE, Stock Forum) and Lighting Science Group (OTC:BB: LSCG, Stock Forum), and a number of energy efficiency related conglomerates.

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Disclosure: Tom Konrad and/or his clients have long positions in VRB Power, Beacon Power, Active Power, ABB Group, Siemens, Composite Technology Corporation, ITC Holdings Corp., Quanta Services, General Cable, National Grid, EnerNOC, Comverge, Echelon, Waterfurnace Renewable Energy, Cree, and Lighting Science Group.

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