The Biden administration has set an ambitious target to generate 80% of the United States’ electricity from renewables by 2030 and 100% carbon-free electricity by 2035. However, the country’s aging infrastructure is already struggling to keep pace with the rapid growth of renewable energy, with experts saying a massive grid overhaul is required to make intermittent generation possible.
Unfortunately, the cost of doing this the traditional way is prohibitive: last year, the Institute of Electrical and Electronics Engineers (IEEE) provided an estimate that it would cost $2.5 trillion for improvements and replacements to the grid’s 8,000 power-generation units; 600,000 circuit miles of AC transmission lines and 70,000 substations to support increased renewable energy and battery storage. That’s five times the $500 billion the Inflation Reduction Act has allocated to new spending and tax breaks that aim to boost clean energy.
To aggravate matters, such a huge undertaking would have to contend with plenty of red tape in the form of easements and land purchases for the wires to go across, inspections, environmental reviews, permitting and engineering approvals, and drag out for many years, if not decades.
Last year, a study from Lawrence Berkeley National Laboratory called “Queued Up” revealed that at the end of 2022, more than 10,000 power plant and energy storage projects (95% were zero-carbon resources) were waiting for permits to connect to the grid. That’s enough additional capacity to double the country’s electricity output, mostly from clean energy. Related: OPEC+ Could Extend Output Cuts Through Year End
Enter reconductoring, a process of restringing existing transmission lines with more advanced wires that can carry bigger power loads. According to researchers at the University of California, Berkeley, and Gridlab, an energy consulting firm, reconductoring has the potential to double the amount of electricity our existing transmission system can handle, for less than half the price of building new lines. Most of our existing power lines consist of a steel core surrounded by strands of aluminum.
In reconductoring, advanced conductors replace the steel core with a core made of a composite material, such as carbon fiber that’s not only lighter but stronger. This might seem like a very subtle shift in materials and design; however, it allows power lines to operate at higher temperatures and sag less, significantly increasing their load capacity.
Whereas advanced conductors cost 2-4 times more than conventional power lines, upgrading existing lines using advanced conductors actually costs less than half what a new power line would cost because it does away with much of the construction spending as well as fees from permitting for new rights-of-way, with power companies only needing to apply for a maintenance permit to put new wires, the researchers have found.
High-Flying Power Infrastructure Companies
The power infrastructure industry has lately been on a tear, with Pioneer Power Solutions (NASDAQ:PPSI) having rocketed 75.6% over the past 12 months; EMCOR Group, Inc. (NYSE:EME) has jumped 66.8%; Quanta Services (NYSE:PWR) has returned 45.6%, MYR Group (NASDAQ:MYRG) has gained 39.6% and Pampa Energia S.A. (NYSE:PAM) is up 29.2%.
Equity analysts at Stifel have resumed coverage of specialty engineering and construction companies MasTec (NYSE:MTZ), Quanta Services and MYR Group with Buy ratings, saying the stocks are set to benefit from tailwinds from Inflation Reduction Act funding and recommended them as "pick-and-shovel" ways to play the renewable energy transition.
Stifel's Brian Brophy says recent margin pressures related to supply chain challenges will improve in 2024, and expects additional margin tailwinds thanks to industry supply/demand dynamics tightening amid ramping stimulus funding. The analyst says the recent pullback for the group creates attractive entry points, particularly for MasTec, which has declined 23.5% over the past 12 months.
Brophy sees an opportunity for an upward re-rating over time for MasTec after a business transformation that has resulted in T&D and clean energy now accounting for roughly half of the company’s sales, as well as a post-Q3 reset in expectations that also has resulted in significant insider buying.
Brophy has also recommended Quanta Services and MYR Group for their outsized T&D and considerable renewables exposure.
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However, Goldman Sachs has picked MasTec as one of the companies that could come under pressure if the Fed keeps interest rates higher for longer, “While easier monetary policy could extend the cycle, it is also likely to come at a cost of ‘higher for longer’ re-asserting itself at a time when equity positioning has significantly increased, and valuation has re-rated back to levels when short-term rates were close to zero,” the analysts wrote.
By Alex Kimani for Oilprice.com
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