From The Cities… To The Fields… And Back Again

In the waning days of the Great Depression, Franklin D. Roosevelt signed the Rural Electrification Act (REA) of 1936 into law, heralding a new era of growth and prosperity for the U.S. heartland.

You see, while electricity was generally available in cities and towns, it was nearly unheard of on farms, ranches and other rural areas. But the REA brought electric power to these sparsely populated Midwest farms and ranches.

Today, we’ve got the opposite situation.

President Obama is hoping that rural areas in the Midwest will return the favor by providing much needed wind-generated power to densely populated cities and towns on both the east and west coast.

Trouble is, the wind turbines that produce such power are huge and not well suited to heavily populated areas. They’re a better fit in the vast, open plains of the nation’s heartland, where the wind almost never stops blowing.

Here’s why wind power is still going to be the driving force that changes the way we use energy – and one of the biggest obstacles it currently has for getting us to where we need to be…

Gale-Force Growth

2008 was a banner year for the wind power industry. Previous installation records were smashed, with over 8,500 megawatts (MW) of new generating power installed in the U.S. alone. That’s enough to light over two million homes.

In fact, wind power installations represented 42% of all the new power generation capacity added in 2008. And the 44 million tons of carbon emissions avoided in the process equates to taking seven million cars and trucks off the roads.

As a result of the current recession, wind energy installation for 2009 will be somewhat muted compared to last year – about 5,000 MW expected to be installed. But despite the downturn, the industry is still in expansion mode.

And for the U.S., that bodes well, since a lot of the components are engineered and “made in the USA” – components that now make up about 50% of the average system, up from 30% in 2005.

And like any other burgeoning sector, when business is booming, companies expand and hire people. For example…

• In just the past two years, wind turbine, tower and component manufacturers added or expanded 70 facilities, 55 of them in 2008 alone.
• Today, 85,000 people are employed in the wind industry – a 70% increase from just one year ago.

So it’s all good news, right? Well, almost all of it…

Power Gridlock

As I noted earlier, while plenty of wind farms dot the ranchlands of the Midwest, the bulk of the power is needed in the dense urban areas on the east and west coasts.

But there’s a big problem: The existing power grids won’t get the job done.

Consider this: 3,000 utilities generate power and send it to 500 transmission owners. They control over 164,000 miles of transmission lines, divided into three major interconnection regions: East, West, and Texas.

As an electrical engineer, I can appreciate the technology, but it’s truly amazing that it all plays together.

But they’re fragmented, low-power grids that aren’t capable of transmitting the hundreds of thousands of megawatts needed for the big metropolitan areas that are thousands of miles away from the wind farms.

The bottom line is that in order for the estimated 300,000 MW of proposed wind power to get to where its needed, the U.S. will need to spend $60 billion on grid upgrades and interconnects by 2030.

But even if that $60 billion were available on this kind of alternative energy right now, not a dime of it would be used to build transmission lines.

The problem? Red tape with a capital “R”…

Can The Wind Industry Blow Through A Mass Of Red Tape?

Here are just three regulatory problems standing in wind power’s way…

• Regulations that aren’t designed for power transmission between states.
• Rules that burden the local ratepayers unfairly with the construction costs instead of distant beneficiaries.
• Approval times are measured in years, not months.

Here’s an example of how ridiculous it gets: American Electric Power (NYSE:AEP) is a public utility holding company in the business of generation, transmission and distribution of power at both the retail and wholesale level.

As part of an expansion of its network, the company erected a transmission line between West Virginia and Virginia. The construction time was two years. The approvals took 14.

Susan Tomasky, AEP Transmission President, explains the problem: “There are lots of people with authority to make pieces of the decision – and no single entity that can say ‘yes’ or ‘no’.”

Clearly, what we need is a federal permit to locate cross-country transmission lines. And it’s not a new idea. The government has done it with natural gas pipelines since the 1960s.

The Future For Wind Power

So what are the chances of the feds saving us and getting it done in the near future?

Better than you might think. Jeff Bingaman – Chairman of the Senate Energy Committee – has a proposal that will require comprehensive plans for grid interconnections.

More importantly, it will greatly expand the Federal Energy Regulation Commission’s powers to include locating big new transmission lines at the federal level (bypassing the myriad of local regulations) and the authority to properly allocate their costs.

And firms like AEP and ITC Holdings Corp. (NYSE:ITC), another power generation and transmission company, are both eager to invest and build lines from the Midwest to cities in the east.

However, even if all goes according to plan – which isn’t ever the case in Washington – these lines wouldn’t be in service until 2020 or so. Clearly, a more streamlined approach is needed. And the refreshing news… it appears that politicians are actually working on the problem.

I’ll be watching and reporting on it here and in my Energy and Infrastructure newsletter, soon to be published by The Oxford Club.

Good investing,

David Fessler
Guest Contributor, Smart Profits Report