Going Long Electricity

There is a thought-provoking new data-rich report out from the North American Electric Reliability Council. It looks at the reliability and adequacy of the North American grid, and the results are eye-opening, with grid capacity margins delining precipitously over the next decade:

Some other highlights:

  • Electric capacity margins will decline over the 2006–2015 period in most regions.
  • The projected decline in margins reflects a short-term resource acquisition strategy that has been the norm for most of the past ten years.
  • Electric utilities forecast demand to increase over the next ten years by 19 percent (141,000 MW) in the United States and 13 percent (9,500 MW) in Canada, but project committed resources to increase by only 6 percent (57,000 MW) in the U.S. and by 9 percent (9,000 MW) in Canada.


  1. How does this projection fit with the projection of new nuclear power plants and shaky future of alternatives like nat gas, given its high price?
    And what about possible climate change regulation impact?
    America can solve its issues regarding greenhouse gas emissions by building nuclear power plants. A mere 400 nuclear power plants could supplant the majority of our baseload capacity needs by say, 2030. To do so would require a major build-out of nuclear power plants.
    141,000MW is equivalent to 141 1GW plants.
    If you want to go long electricity, go long nuclear power, its the only economic and environmentally sound solution for maintaining the electron economy, and we would need to build 20 plants a year (not the 20 plants in next 10 years on drawing boards) to keep up.
    These plants cant be solar (expensive), wind (niche/costly), nat gas (cost/supply), coal (environmental issues) … nuclear it is.
    In this kind of environment, I’d buy the operators (Excelon) and the builders (Westinghouse, Bechtel, etc).
    Disclosure: Long EXC, Excelon.

  2. Andy Nelson says:

    Westinghouse changed its name to CBS and sold the Westinghouse brand name. BNFL had it for a while and now I think Mitsubushi has it. Bechtel is not for sale and many of their competitors are private too. If you look at their public competitors you can see why they won’t be going to public markets any time soon. Deferred revenues and prepayments are greater than their inventories and receivables. They have less than zero working capital. I have previously only seen that with beer and cigarette companies. Look for manufacturers who kept their N-stamp certifications through the lean decades (e.g. McDermott), they should do well in the early stages of the nuclear build up. Watch for companies that are investing in getting their Asian factories certified to North American nuclear standards. Operators like Excelon will not have exclusive geographical jurisdictions the way that they did during the last build out phase and will have to compete.
    There is no market for capacity, although in theory there could be. That means that governments, agencies, or regulators need to intervene to pay for capacity, as well as things like reactive power or black start capability and then use their taxing power to get rate payers to pay for it. The Ontario Power Authority web site has template contracts that show the formulas for making top up payments if day to day power sales don’t cover the costs of building the capacity. In most jurisdictions this approach is now considered preferrable to letting prices increase by 10000% during peaks. It also reduces the probablitity of power traders being indicted. But it undermines the competitive market.
    I agree with Patrick that the best (I think only way) to take a long position in electricity is in the stock market because electricity trading is not as market oriented and deregulated as is commonly believed.
    Sorry if this post is way too old economy for this blog.

  3. Andy, great comments, and thanks for correcting on Westinghouse, owned by BNFL now and soon to be Toshiba. I didnt know this prior:
    “TOKYO, Oct. 4 /PRNewswire/ — Toshiba Corporation today announced that
    it had passed a major milestone in its acquisition of BNFL USA Group Inc.
    and Westinghouse UK Limited (collectively Westinghouse) … with a view to closing the acquisition in October 2006.”
    This is info on the Westinghouse design, likely be used in upcoming nuclear power plants that are planned:
    I like Excelon because they have become a best-of-breed operator of nuclear power plants. One of the problems of the early industry was regulated utilities that attempted to build and operator 1 or 2 nuclear power plants. No economies of scale and little management skill in managing the complex issues involved.
    Moving to a small number of large fleet operators
    is a better way to go, economically and for safety
    and management reasons.
    Also good point on capacity. “There is no market for capacity” etc.
    But I wonder. There is a company in the Northeast that has a business selling back load reduction to the utilities (ie, it has a contract to get payments to reduce the load at peak times), and does it by working deals with companies to cut off power usage in exchange for a cut of the benefit. Uses networks and computers to do it automatically and instantly.
    I mention this because it is an example of using information technology to enable a lower capacity margin overall. Maybe we can live with lower capacity margin in the future?