The big idea and why it matters: There are numerous ways to invest in the ongoing development and improvements of the US electrical grid across both public and private markets. Upgrades of existing infrastructure for increased capacity, along with new projects for power generation, can both help modernize, diversify, and decentralize the grid for greater robustness. Nuclear energy is expected to play a significant role, but to what extent is uncertain.
“We often take for granted that our lights will come on when we flip the light switch, but the reality is that our reliability standards and the current state of the transmission grid leave us all vulnerable to blackouts.” -Richard Burr (US Senator)
As we learned in Part 1, the grid is a massive network that ties power generation, transmission, and distribution together – all of which require significant maintenance to remain operational. Today, we can utilize these areas to identify opportunities for improvement and investment across themes of modernization, diversification, and decentralization. If done right, it can not only represent a source of investment returns but also improve the quality of life for generations to come. Here we go!
Broad Strokes
If you want to keep it simple, there are a variety of publicly traded stocks involved in energy generation, transmission, and distribution – some of which are dividend growers! This article takes an interesting crowd-sourcing approach (if by “crowd,” you mean “hedge funds”), examining hedge-fund ownership of these types of companies as a barometer of which are the best candidates. You can also apply other preferences, such as the regions they serve and where they focus their attention; some are more focused on the development of power plants, while others are dedicated to transmission.
Even more broadly, there are a variety of grid, electrical infrastructure, utility, or general infrastructure ETFs that could be a way to gain exposure to this theme (like here, here, or here) – and even some more specifically targeting nuclear via uranium production or companies that operate in that space, like these or some of these.
Can public investment options easily provide convenient and liquid exposure to these themes with no investor qualifications? Yes. Will that exposure enable targeting of specific projects or make you feel like you’re making a difference in improving our energy future? Probably not. Those objectives are likely to be much better accomplished in private markets, which finally brings us to Alts.
General Private
In what sounds like a paradoxical army title, there are ways to get general infrastructure exposure in private markets, similar to what we saw in the above public market examples. Recently, Blackstone announced the purchase of TXNM for $5.7B, which “provides electricity to about 800,000 homes and businesses in New Mexico and Texas.” More specifically, TXNM is being acquired by Blackstone Infrastructure – a private equity fund with about $60B of assets under management that owns companies with nearly $200B of enterprise value (the difference between those two numbers comes from “leverage” aka “credit” aka “borrowing” aka “debt” – pick your favorite term).
Blurring the line further is that several private equity companies are now publicly traded stocks that generate their earnings from a massive number of underlying private funds and investments. However, the structure of private funds can be viewed as more naturally aligned with longer-term investment holding periods, as investor inflows and outflows can be limited by the manager, which can work well with infrastructure projects.
Both AND
Unlike a real estate deal, it’s unlikely that your friend is going to approach you to invest in a nuclear power plant or electrical grid project he’s putting together. In addition, these projects require quite a bit of scale and time, so – if you’re looking to the private investment realm to participate in the betterment of our future grid – then a fund structure is generally going to be better suited for access, diversification, sizing, and portfolio planning.
But where exactly do we think capital may be deployed? PJM, one of those regional transmission organizations (RTOs) we touched on in Part 1, recently identified 51 projects for improvement or new generation initiatives. That brief article is helpful for gaining a sense of how and where resources and attention can be pragmatically focused: a combination of both new construction generation/storage and increasing the capacity of existing infrastructure (aka “uprates”). More specifically, those 51 projects can be broken down into “39 uprates and 12 new construction projects. The uprates apply to existing natural gas, nuclear, coal and onshore wind resources. Of the new projects, half are gas, five are batteries, and one is nuclear.” Thus, the opportunities for improvement are across the board, including increasing capacity and creating additional power generation, which helps modernize, diversify, and decentralize our grid.
New Nu
A “current events” fun fact: on the military side of the equation, there is new nuclear news regarding how the US has created its latest nuclear gravity bomb ahead of schedule. But that’s not the “new nu” we’re concerned with for improving the grid.
On the grid side, new nu is likely a vital part of the energy long-game, but it is just that: a very long-term undertaking, at least by today’s estimations of “years, or even decades.” But it’s not all bad news. The quickest way to get additional nuclear energy online may be to revive some closed plants, as long as that is economically viable, and with significant big-tech interest in the space because of anticipated AI energy needs, perhaps we’ll be able to simplify permitting, improve technologies, and shorten the implementation lifecycle vs. current expectations.
We also don’t know what we don’t know. There are new nuclear technologies being developed and tested. Along these lines, the continued development of small modular reactors (SMRs) could be a game-changer across the board for achieving our objectives of diversification and, in particular, decentralization. If reactors can be mostly built in a factory and then delivered on-site to businesses, it could significantly increase the robustness of the grid. It’s akin to modular houses, which are more energy-efficient, less expensive, and built in about half the time compared to ground-up home construction. Exciting stuff.
Private I’s
For compliance purposes, I’ll avoid naming names, but a quick Google search will reveal several private equity firms developing strategies focused on improving and implementing nuclear energy. Some can make tangential moves, like migrating from Oilfield services, considering nuclear a natural evolution of their experience and capabilities. Others may turn their past M&A sights toward consolidating and improving nuclear-related companies and technologies.
Like many industries, there may be a PE roll-up story in the nuclear sector. Given the fragmentation of nuclear equipment manufacturers and services providers, combining and streamlining these companies can lead to wins for PE investors. You could even call it “going nuclear.” But I wouldn’t call it that because I don’t make bad jokes.
Extra Credit
Of course, where there is private equity, there is typically a need for private credit, so don’t forget about the lending side of the equation. If one is looking to increase income and decrease risk vs. private equity, then private credit can be a better fit (given a high-quality private credit team and sound underwriting process!). And even if one wouldn’t want to own a solar panel field (i.e., ownership via private equity), the math of financing that type of project could be mathematically compelling (i.e., via private credit).
What could be interesting about both private equity and private credit in the grid space is that projects could come with guaranteed buyers of the increased power available from a project (e.g., tech companies, utility companies), which could help mitigate risk for investors.
Electricity flows from negative to positive.
As Bill Gates said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.” If we’re to get from our “Grid-E” to the promised land of “Grid-A,” then we’ll have to keep a positive attitude. I’m optimistic that if we revisit this topic in 2035, the world of energy generation and the US grid will be significantly improved (though I give it a zero percent chance that the electrical lines outside my window will be underground by then).
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
