Power Grid Shortages an Investment Opportunity

Chris Mayer - Thu 25 Jan, 2007

Recently, Chris Mayer reported on the pressing issues facing power grids all over the world. Today, he points out the investment opportunities that relate to this power crunch...

The Perfect Storm dramatized the events surrounding a
powerful nor'easter that raged over the Atlantic Ocean
in 1991. The storm was the product of some fluky weather
patterns, all of which converged to create a monster of
a storm. The movie focused on the ill-fated travails of
a small fishing boat, the Andrea Gail of Gloucester,
Mass., which was lost at sea. It was a good movie, I
thought. You could almost smell the fish and salty sea
air and feel its cold dampness on your skin.

Probably in part due to the success of that film, we
commonly use the phrase "perfect storm" these days to
describe a combination of events which, taken
individually, would have been far less powerful.

The idea of a "perfect storm" comes to mind when I think
about the world's need for new electrical power grids.

I recently wrote readers of the US Daily Reckoning about
the pressing issues facing the North American power
grid. Blackouts already occur about once every four
months on average in the US alone. And that includes
only those blackouts that affect at least half a million
homes.

Of course, it's more than just a problem for those of us
in North America. Power shortages exist in markets all
over the world. That's one of the things that make this
so fascinating - and which bring to mind the idea of
a perfect storm.

If it were just the US and Canada, perhaps that would
not be such a powerful investment theme. But it's the
combination with other parts of the world that give it
an out-sized feel. Just adding China alone to the mix
makes quite a difference.

I recently finished a book titled From Wall Street to
the Great Wall, which further brings home this point.
"Electrical power shortages are chronic today" in China,
the authors note. "Blackouts are not uncommon, and
manufacturing is affected directly."

Later, the authors quote a story from the Guardian:
"China is on the biggest power plant building spree the
world has ever seen." Hydroelectric dams, coal-fired
generators and nuclear facilities sprout like weeds
throughout China. "The equivalent of Britain's entire
electrical output is being added to the capacity of the
country's national grid every two years."

Really, the power story is only part of a bigger thread.
The more you look into this sort of thing, the more you
find that it is about more than just power (or just
water, for that matter). It's a combination of all of
these things. What we're talking about is
infrastructure. Admittedly, infrastructure is an ugly
four-syllable word that leaves a lot of room for
interpretation. As with pornography, you know it when
you see it.

India, often paired up with China in these kinds of
stories, has its own infrastructure problems. Wandering
cows in the middle of pockmarked roads is only one of
them. So notes The Wall Street Journal: "The nation's
capital is bedeviled by the same sort of cramped
airports, rough roads and frequent power outages that
recall the darker days (often literally) of China's own
economic opening."

These are the headline cases. At the margins, though,
you see similar trends in smaller emerging markets. All
of it is more fuel for the perfect storm. Take a look at
Africa.

There is an old joke told in many parts of Africa. It
goes like this: "What did we do before we used candles?"
Answer: "We had electricity." War, poor management and
under-investment have done their usual thing. And while
the infrastructure of Africa crumbles, the population
has tripled since the 1960s.

Investment dollars, though, are trickling back to
Africa. There is the promise, for example, of the great
Congo River. Harnessed, it could generate over 40,000
megawatts of electricity. That's more than all of what
South Africa produces today. Given a decent power
station and linked to a modern power grid, the Congo
River could supply power Africa needs for a long time.

Congo is typical of much of Africa. At Inga, Congo,
there are two hydropower stations. The more modern one
has eight hydroelectric turbines. However, years of
neglect have left only three working. The Dark Continent
- a term used originally to describe unexplored Africa -
truly earns its name.

China has taken a big interest in Africa in its quest
for natural resources - in particular, oil. The Chinese
have already committed $10 billion in infrastructure
projects. They've already built roads, railways, ports
and more in Africa. China's approach to Africa is a
pragmatic one.

When the dollars don't come from China, the World Bank
or other places abroad, they come from within. For
example, in South Africa, investment in infrastructure
is a top priority. The government plans to spend $49
billion on roads, ports and power plants over the next
three years.

This is an admittedly brief look at Africa. I could also
tell you similar stories about the Middle East. Or I
could talk about Southeast Asia (in particular, Vietnam
and the Philippines). All of them plan to raise, or
have raised, billions and billions of dollars for
building the basics - things like power grids. It's all
part of the perfect storm I see shaping up in the
world's electrical power systems.

Regards,
Chris Mayer
for The Daily Reckoning

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