The Power Grid Expansion, Part 3: Investments

Introduction

Continuing with our exploration of investment opportunities arising from the expansion and upgrade of the power grid to accommodate the increasing demands from AI data centers and EVs, we now turn our attention to alternative energy sources, utility companies, and other entities connected to the power grid infrastructure. This third and final part of the series is recommended for those who have already read Parts One and Two.

Alternative/Renewable Energy Sources

According to the Department of Energy's 2022 calculations, renewable energy from sources such as solar, wind, hydro, geothermal, and biomass made up a fifth of all electricity generation. The International Energy Agency (IEA) predicts that by 2028, this figure will double to 42%, with solar and wind power expected to be the primary alternative energy sources.

Investments in solar, wind, and other alternative energy sources, along with natural gas, coal, and nuclear, will become increasingly crucial to power our utility plants. If the US and other nations continue to strive for net zero emissions by 2050 and other environmental goals, the demand for existing and new alternative energy sources will surge.

Renewable Stocks Are Not Following the Narrative

Despite the expected growth in renewable energy, investors do not seem as hopeful. The recent narrative encouraging investors towards power grid-related investments has bypassed renewable stocks. The graph below shows two popular alternative energy ETFs, Invesco’s Solar ETF (TAN) and iShares Global Clean Energy ETF (ICLN). Both ETFs are well off their 2008 highs and recent peaks in late 2020.

Batteries Technology Is Vital To Renewable Energy

Due to weather conditions, solar and wind energy are not dependable. As a result, utilities need more efficient batteries to store excess renewable energy for use during peak demand periods and when the weather isn't conducive for electricity generation. Without more efficient batteries, unreliable alternative energy sources cannot be relied upon as much as the environmental goals demand.

Battery Diversification May Be Critical

Identifying which type of battery will be the 'winner' and which company will be a primary producer of the battery can be a challenging task. Unless you have good insight into battery technology and the key players in the industry, a diversified battery ETF may provide the best investment results. However, ETFs in this space are limited.

Lithium Miners

If lithium remains a crucial component in electricity storage batteries, its miners should do well, especially given the recent decline in lithium prices and the related stocks. However, lithium deposits are being actively explored. Assuming success, the lithium supply may limit the price appreciation of lithium.

Utility and Grid Operators

Utilities will generate more power, thus increasing their revenue. However, they must invest significant capital to modernize, expand, and reduce greenhouse emissions. AI data center locations are partially chosen based on their ability to source cheap electricity. Thus, utility companies in the Southeast and Midwest, with access to cheaper natural gas and more reliable alternative energy generation, will be the most cost-effective locations for data centers.

Additional Investment Ideas

There are many other businesses set to profit from the coming infrastructure boom. Those looking for a diversified investment approach in the power grid may want to explore thematic ETFs. For example, the First Trust Clean Edge Smart Grid Infrastructure Fund (GRID) holds 103 positions. Beyond diversification and portfolio manager expertise, the fund can buy stocks in foreign markets, which many US investors do not have access to or are uncomfortable with.

Summary

The more we researched the power grid expansion, the more industries, and companies we exposed that could benefit from it. While this article stops here, we will continue investigating the topic and share any exciting findings in the future. The number of rabbit holes is seemingly endless. We encourage you to explore the topic and share any findings you may uncover with us.

Like the birth of the internet, some companies like AOL, Yahoo, and Sun Microsystem, which were the supposed internet leaders, fell by the waist side. Other companies, some already large, others virtually unknown, become leaders. The key to investing in this expansion is to remain vigilant for new companies and technologies that can blossom. Do not assume that the companies in charge today will be so tomorrow. Keep your head on a swivel.

For those unable to invest the time and effort to understand industry trends and identify companies likely to profit, a fund(s) with professionals highly focused on the industry may prove an excellent way to take advantage of the potential infrastructure boom.

Final Thoughts

The expansion and modernization of the power grid present a wealth of opportunities for companies and investors alike. However, it's vital to keep in mind that with great rewards come substantial risks, especially for smaller companies with limited product offerings. Diversification will prove to be essential for investors. What are your thoughts on this matter? Do share this article with your friends and sign up for the Daily Briefing, which is everyday at 6pm.