Quantifying the impacts of renewable portfolio standards (RPS) on utility integrated resource plans (IRP) sounds straight forward—just add more wind, solar, hydro, biomass, etc., to the plan and...
The New Venture Capitalists: Utilities Go Shopping for Deals
How gas supply and price disruptions now outweigh Big earnings potential plus an energy-related focus are prerequisites when AEP and Cinergy sort through investment projects.
Power companies fast are becoming in the venture capital (VC) community . A scan of utility press releases reveals that utilities are investing in emerging companies at an alarming rate. Indeed, many electric utility companies aggressively are pursuing ventures with high growth potential in an effort to spur earnings, diversify their investment portfolios, and capitalize on their corporate strengths. As the days of rate base regulation slip away, power companies are gearing up to shift investment focus, at least to some degree, away from the traditional business of generation, transmission, and distribution. Finding new, profit-boosting investments is a full-time endeavor for a new breed of utility managerthe venture capitalist.
Above all, utilities are driven by the potential earnings offered by venture capital investments, which are especially attractive compared to the uninspiring regulated rates of return utilities historically earn. One way to make Wall Street take notice is to grow earnings with a portfolio of strategically and soundly placed venture capital investments. Of course, companies also must protect investors from excessive risk by remaining focused on energy-related ventures. Typical utility price-to-earnings ratios, or P/Es, are in the low teens, reflecting the regulated, relatively low-risk/low-reward returns. By creating earnings through successful ventures, the utility can break out of that mold; in fact, combined growth in earnings and P/E ratio may lead to potentially explosive stock price appreciation.
Even the most aggressive venture-focused utilities tend to seek business opportunities that are related to their core business. In theory and in practice, the utilities described in this article emphasize the need for their venture capital to flow to energy-related companies. Through their VC investments, these utilities aim to better serve their own changing markets with the resulting new technologies and energy products.
Two potential growth markets are emerging for energy-related projects (and, therefore, venture capital investments):
- power quality, and
- emissions control.
During the last decade, computer-related energy usage has risen substantially. For most commercial computer applications, reliability is critical to the bottom lineindeed, individual outages can cost Internet and communications firms millions of dollars in lost revenues and liability. For that reason, many high-tech commercial energy consumers are willing to pay a premium for ultra-high reliability service. The power control market, also known as the "nines" market, named for the labeling of the electric service reliability metric, comprises products and services to meet this need.
The "nines" represent the number of nines to the right of the decimal point, in excess of 99 percent, in the measure of reliability. For example, one would pay a "two nines" price for 99.99 percent reliability, and a "three nines" price for 99.999 percent reliability. More "nines" cost more money, naturally, so price points for each nine will be set by a load-serving entity. Clearly, a number of ventures and existing products already are attacking the reliability market, including those related to backup power, distributed generation, and protection equipment. The consensus is that this