| The new carbon world will have a considerable | | | | Trust ISE Global Wind Energy ETF (FAN) is a new |
| affect on the outlook for the utilities sector. | | | | ETF that specializes in wind energy. Sixteen |
| Electric utilities will be facing significant new | | | | percent of the fund is allocated to the U.S. with |
| challenges as they adjust to the green initiatives | | | | additional companies in Denmark, Germany, Spain |
| from the new administration and Congress. About | | | | and the United Kingdom. For example, |
| 56% of the electricity generated in the United | | | | REpowersystems AG makes up 10.51% of the |
| States is from coal, a significant contributor to | | | | funds holdings while Vestas is 10.28% and |
| carbon emissions. Natural gas generates about | | | | Gamesa is 8.81%. This fund is a way for U.S. |
| 27% of the electricity, wind generates about 1% | | | | investors to participate in pure wind energy plays |
| and solar generates about 0.1% of the electricity | | | | globally. |
| used in the United States. The cost to reduce | | | | Within the U.S., the companies that trade on the |
| carbon emissions will have a significant impact on | | | | stock exchanges are GE and Siemens (SI) are |
| the economics of the utilities sector and their | | | | the top producers of wind turbines. The problem |
| support industries. | | | | is these are large diversified companies, so the |
| Political Shift | | | | impact of wind energy will be minimal on the |
| The shift from a market-based economy to one | | | | returns for investors. ABB Ltd. (ABB), a Swiss |
| that is more politically controlled will have | | | | company is involved in electricity distribution and |
| long-term ramifications for the U.S. economy and | | | | grid upgrades where they have a dominant |
| certain industries. The 110th Congress produced | | | | position. Upgrading the electrical grid in the U.S. as |
| six carbon cap-and-trade bills that could not get | | | | well as other countries will be a major focus as |
| through all the politics in the capital. Now that the | | | | countries seek to invest in their infrastructure. |
| 111th Congress is in session, the shift in the | | | | Other U.S companies that will benefit from the |
| political make up of Washington is likely to change | | | | growth in wind energy include American |
| the operations of carbon producing industries , | | | | Superconductor Corp (AMSC) who provides |
| especially the electric utilities. | | | | electrical components for the electrical grid and |
| President Obama has continued to back his | | | | wind generation of electricity. The other |
| campaign pledge to take action to reduce carbon | | | | wind-based firms are start-ups traded in the |
| emissions. In a re-alignment of the house | | | | over-the-counter market Bulletin Board market. A |
| committee leadership, Representative John Dingell | | | | few will be winners and the remaining will |
| (D. Michigan) was replaced by Representative | | | | disappear. |
| Henry Waxman (D. California) as chairman of the | | | | Proponents of wind energy believe the U.S. can |
| House Energy and Commerce Committee. | | | | achieve 20% of the total generating capacity by |
| Representing Michigan, Dingall has been a long time | | | | 2030. The problem is that the demand for |
| ally of the automakers and he favored a slower | | | | electricity is expected to continue to grow. This |
| approach to reducing carbon emissions. His most | | | | means there will still be a need for new sources |
| recent bill required total carbon emissions to be | | | | of electrical power. Therefore, nuclear may also |
| 6% below 2005 levels by 2020. | | | | see renewed interest, despite the decades long |
| Representative Waxman favors a more | | | | absence of any new construction of nuclear |
| aggressive approach seeking 14% reduction from | | | | power plants in the U.S. Nuclear has zero direct |
| 2005 levels by 2020. Now that he is the chairman | | | | carbon emissions. In this case Excelon (EXC), the |
| of the committee that will produce the bill for the | | | | largest nuclear power producer my see some |
| House, it is very likely that the bill that will be put | | | | new interest. Excelon’s goal is to reduce, |
| before the House will be much closer to what he | | | | offset or displace more than 15 million metric tons |
| favors. Representatives from coal producing | | | | of greenhouse gas emissions per year by 2020. |
| states are not likely to support measures that are | | | | They are exploring construction of new nuclear |
| more aggressive. However, Representative | | | | plants with up to 3,040 MW in capacity. |
| Waxman has the support of other powerful | | | | Speaking of construction, firms that have |
| House members including Speaker of the House | | | | experience in nuclear plant design and construction |
| Nancy Pelosi (D. California). Speaker Pelosi is | | | | should also benefit. McDermott (MDR) has built |
| known for keeping her ranks in line and seeks to | | | | large power plant boilers and generation |
| take advantage of her newfound power. | | | | components, and they are one if the primary |
| The Senate presents a slightly different situation | | | | contractors to the US Government for nuclear |
| where Democrats increased their majority. | | | | services. Fluor Corporation (FLR) has extensive |
| However, the Republicans still hold at least 41 | | | | design and construction expertise that would |
| seats, enough to block the Democratic | | | | benefit from new interest in nuclear power |
| majority’s initiatives. Of course, some | | | | generation. |
| Republicans may vote with the Democrats, so | | | | Utilities that use natural gas should also do well. |
| party lines do not always work as expected. A | | | | Natural gas has lower carbon emissions than coal |
| Senate bill is likely to have lower carbon emission | | | | and oil, though higher than wind and nuclear. |
| goals than the House version, setting up a fight | | | | Moreover, it is currently abundant with excess |
| over which one will become the final version. | | | | supply available and additional sources still to be |
| Again, the senators from states that have a | | | | drilled. The iShares Dow Jones US Oil and Gas |
| major stake in the impact on the economies of | | | | E&P ERF (IEO) has significant exposure to |
| their states will influence the outcome. | | | | the natural gas producers. |
| The changing of the guard in Washington is setting | | | | Should Washington pass less stringent carbon |
| up a new political environment that will have | | | | emission restrictions, then there will be fewer |
| long-term consequences for the Utility industry. | | | | winners and losers. While this is not likely in the |
| Special interests and the intense lobbying will try | | | | current political environment, it is something to be |
| to influence the outcome. In the mean time, | | | | considered. |
| investors must try to understand how to proceed | | | | The losers in a carbon-capped setting will be the |
| in this new environment. | | | | firms that depend on how each state regulator |
| Impact of Carbon Caps on the Utilities Sector | | | | treats carbon costs. If the regulators allow the |
| Assuming more restrictive carbon emission | | | | firms to raise customer rates to pay for the |
| standards become the law, the winners in this | | | | higher costs, the utilities should be unaffected. On |
| battle will be those that are able to produce most | | | | the other hand, if regulators shy away from |
| of their power from low-carbon or carbon-free | | | | allowing the companies to pass on the higher |
| sources. Think renewables and nuclear power | | | | costs, then the utilities will suffer accordingly. |
| plants. The losers will be the utilities that use | | | | Utilities such as Allegheny Power (AYE), American |
| carbon-intensive fuels to generate their power, i.e. | | | | Electric Power (AEP) and Dayton Power & |
| coal. | | | | Light (DPL) could experience lower earnings. |
| Of course, the wind and solar companies will | | | | The Bottom Line |
| continue to benefit. Powershares WilderHill Clean | | | | The political economy and especially the move to |
| Energy ETF (PBW) has broad exposure to clean | | | | carbon-caps will have a significant impact on the |
| energy technologies. Xcel Energy (XEL) is | | | | utilities sector and their suppliers. If, as expected, |
| committed to achieving 20% of its power from | | | | the government passes more restrictive carbon |
| wind. Their Windsource and Renewable Energy | | | | emission and trading legislation, some utilities will |
| Trust was ranked first in the number of | | | | benefit and other will suffer. Moreover, this political |
| customers and fifth in energy sales out of 5,000 | | | | influence will encourage investing in various |
| U.S. utilities by the National Renewable Energy Lab. | | | | alternative energy companies especially wind |
| Florida Power and Light (FPL) is the U.S.’s | | | | generation of electricity. The more conservative |
| largest merchant of wind power. | | | | approach is to buy utilities that will benefit from |
| Wind energy has had much greater success in | | | | the new emission standards and avoid those that |
| Europe where Denmark, Germany and Spain are | | | | are heavily dependent on coal fired generation |
| leading. In Spain, they produced up to 40.8% of | | | | capacity. |
| total demand for electricity using wind turbines. | | | | Investors that are more aggressive should look to |
| Vestas (VWSYF.PK) is the world's largest wind | | | | invest in wind generation companies where they |
| turbine manufacturer is based in Denmark along | | | | are proven. So far, most of the companies that |
| with NEG Micon (NEGMF.PK) and Bonus (BONU.CO). | | | | are achieving success are based in Europe. U.S. |
| These companies trade on the Copenhagen stock | | | | based investors can participate in these firms |
| exchange. The German wind market is by far the | | | | through ETFs that invest in these companies. In |
| largest in the world and includes Enercon | | | | the U.S., there are a number of start-up |
| (ENDC.PK) and Nordes (NRDXF.PK). None of these | | | | companies that have yet to demonstrate a |
| companies’ shares are listed on U.S. stock | | | | proven record of accomplishment. This makes |
| exchanges. | | | | them a more risky alternative. |
| According to some analysts, inconsistent | | | | The utility sector is about to undergo significant |
| wind-energy incentives in the U.S. have made it a | | | | transformation that will have winners and losers. |
| challenge for foreign and domestic companies to | | | | Investors should be aware of the characteristics |
| operate in this country. However, Gamesa | | | | of each company so they can invest accordingly. |
| (GAM.MC) is expanding beyond its home market | | | | It is a time of greater opportunity and greater |
| in Spain and entering the U.S. market. The First | | | | risk. |