Two new trends are emerging in the utility industry. The first is about long-term commodity prices and the second is about energy distribution systems. The combination suggests moving into utilities that specialize in distribution systems.
I previously reported that Exelon (EXC) warned of persistently low prices in the nation's wholesale power prices. While they remain hopeful for 2015 and beyond, it is just that, hope.
Exelon is not alone. Other generators are also concerned about low prices. As the nation turns toward energy efficiency as a resource, independent power companies, such as Calpine (CPN), NRG Energy (NRG) and Dynegy (DYN) can no longer rely on history to forecast future demand and revenue.
Exelon is counting on their competitors' failures. They are expecting dozens of old, inefficient power plants will become unprofitable, and those plants will be forced to exit the market. With supply declining, Exelon hopes prices will rise.
Working against Exelon's hope are two issues. One has to do with the retiring plants and the other is about consumer behavior. Old power plants that are retiring and exiting the market are, for the most part, marginal facilities. Marginal plants spend too much time on standby. They don't produce profitable energy unless there are spikes in demand.
Having these units exit the market may not have as much as an impact on energy supply as Exelon hopes.
Adding to Exelon's supply-demand challenge is the consumer. As new demand-response programs accelerate, a growing number of consumers will be avoiding high-priced power, opting instead to wait a few hours for lower-priced power. This is called load shifting.
Exelon and other independent power producers hope more power plants will exit the market than consumers will shift load. Their other hope is the economy will return to robust levels where consumers won't care about energy prices. All they need is one out of two to become reality.
While consumers will avoid high prices, they want reliability. Eastern utilities learned from the derecho last July that consumers would not tolerate sustained periods of no power. Pepco Holdings (POM) became a target when they left customers without power for days -- again.
Hurricane Sandy amplified the issue. Now, Long Island Power Authority (LIPA), a non-profit utility, is facing customer outrage. It's not just Pepco or LIPA; it is all utilities wanting to avoid hostile public relations. Reliability is the new priority and consumers demand a response.
The priority is on distribution systems, not transmission systems. Transmission systems are interstate backbones that move bulk power from generators to dozens of individual local distribution systems. Distribution systems take power from transmission lines, move it through communities and deliver it to individual consumers. The derecho and Hurricane Sandy hit distribution systems harder than transmission systems.
It appears consumers are willing to pay more to achieve higher levels of reliability. While their willingness is limited, substantial investment in reliability projects are all but assured. But for most utilities, capital investments are initiated only if prudent returns are assured.
For regulated utilities, state regulators provide the necessary assurance. It turns out that all the nation's utility distribution systems are regulated by state utility commissions. Even in so-called deregulated states, distribution systems are regulated. As such, when state regulators approve upgrades, utilities should be assured prudent returns on their investments.
This makes distribution-only companies such as Consolidated Edison (ED), Northeast Utilities (NU) and even Unitil (UTL) attractive. Integrated and regulated utilities like NextEra Energy (NEE), Southern (SO), Duke Energy (DUK) and Dominion Resources (D) may even lead the pack. They have the financial resources and the influence with state regulators to deploy the most appropriate technology, including state-of-the-art smart grid and microgrid technologies.
The likely winners are American Electric Power (AEP), Consolidated Edison and Sempra Energy (SRE). Prior to the storms, these companies were already leaders in microgrid technologies. Microgrids are an important key in smart grid technologies and they will help increase system reliability and utility response times.
Another likely winner is Pike Electric (PIKE). Pike is not a utility. It's a utility contractor. Pike's services include siting, permitting, engineering, design, installation, maintenance and repair of power distribution systems. Pike is the company utilities call when they need work done on their power delivery systems.
If I had to make a choice today, I would ignore Exelon and similar independent power producers and I would bet on Pike and Consolidated Edison. Pike sits on the intersection of opportunity and competence. Consolidated Edison already owns smart grid technologies; they have a demanding consumer base and motivated regulators. Even better, Consolidated Edison has almost no exposure to commodity prices.