Virtual Power Plants
Profit While Preventing More Texas Blackouts With Four Distributed Energy Stocks
Rolling blackouts are a new normal for millions of Americans.
Nearly a million Californians lost power in August of 2020 as a record-breaking heatwave stretched the Golden State’s poorly-planned power supplies past their limits.
And of course, in February 2021, over 3 million Texans were forced to brave arctic weather without power due to outsized demand and intermittency issues among the state’s natural gas power plants.
2022 saw another rise in power outages, with California and Texas once again taking the brunt of it. But Michigan, North Carolina, and Pennsylvania also saw an increase in the number of weather-related outages.
And according to energy economists, this is only the beginning of America’s electricity crisis.
Crumbling infrastructure, intermittent sources, poor planning, surging demand, and unpredictable natural disasters driven by climate change are combining to create a future in which incidents like those in California,Texas, and other states could be commonplace throughout the country.
The Old Electrical Grid Isn’t Enough For This Brave New World
Politicians on both sides of the aisle have been peddling incorrect and heavily-partisan explanations for the growing unreliability of America’s electrical grid.
Republicans have falsely claimed that renewable energy was at fault for California’s blackouts, while Democrats have disingenuously tried to use the Texas disasters as a cautionary tale against the state’s laissez-faire economic policies.
In truth, the issue has nothing to do with turbines or taxes — it’s simply the result of an outdated grid that is woefully unprepared for an increasingly chaotic set of weather conditions and electrical demand patterns.
The “grid,” in this context, refers to the traditional model of electricity generation and distribution in which large, centralized power plants are responsible for the entire power supply in a given region.
Power plants do their best to change their capacity in real-time in response to changes in demand — but they’re large industrial facilities that can’t easily start and stop on a dime.
Sometimes, they don’t react fast enough to extraordinary events like heatwaves, cold snaps, or power plant failures — and simply don’t produce enough electricity for all the buildings in their region to keep their lights on — causing blackouts.
Recently, however, engineers have started to experiment with a different model of electricity generation and distribution — one which could put an end to rolling blackouts, even in times of erratic demand and chaotic conditions. It’s called distributed energy — and it’s one of the most underhyped investment opportunities of the 2020s.
What Is Distributed Energy?
Distributed energy sources — also known as virtual power plants — are decentralized networks of grid-connected small power generators like wind turbines and rooftop solar installations, storage units like household and commercial battery systems, and “demand response” consumers who are willing to voluntarily reduce their power usage during periods of surging demand.
By combining these small assets — which are often built into homes and businesses — distributed energy planners can supply electricity to the grid and adjust output in response to changing conditions much more nimbly than a large power plant can.
And since distributed energy consumers participate in the grid themselves — producing and storing much of their own energy in their homes and workplaces — they often end up paying a lower price than conventional electrical utilities charge.
In other words, virtual power plants serve all the functions of traditional power plants, but better and cheaper — and without the need for a physical power plant facility.
And these aren’t just theoretical advantages. Although a very new technology, virtual power plants already have a record of rescuing the grid during extraordinary situations that traditional power distribution models can’t handle.
Just a week after California’s mid-August-2020 rolling blackout weekend, the state was hit with another heatwave that threatened to stretch power supplies beyond their limits and plunge the state into darkness for a second time.
In a bid to avoid more rolling blackouts, grid operator CAISO made a desperate plea to demand response consumers, battery aggregators, generator owners, and even electric vehicle charging companies to add all the electricity they could spare to the grid — and it worked.
During that third week in August, California’s centralized grid providers technically failed to provide enough electricity to meet the state’s heatwave-driven demand — yet lights (and air conditioners) stayed on throughout the state.
According to subsequent reports by CAISO and the California Public Utilities Commission, the ad-hoc virtual power plant of private assets which was mobilized by CAISO’s distress call made up the difference.
It happened again in 2022, with Californians using their home energy systems to provide stored power back to the grid. More than 30,000 storage system owners provided enough power to run a midsize natural gas plant. This helped balance the power grid during a moment of crisis and prevent the kinds of massive blackouts that would happen in prior years.
Distributed energy has also seen a flurry of interest from public officials in the aftermath of the Texas energy crisis. Just take this comment from Energy Secretary Jennifer Granholm when asked about distributed energy by the Washington Post:
“I’m very supportive of microgrids, of these small modular nuclear reactors, of the ability to have distributed energy resources, community-based solar attached to a microgrid.
“Those solutions are very exciting and could be, and certainly should be, part of the national system. We should be incentivizing communities to think about that so that they are not so dependent on, you know, poles with wires atop that were constructed 70 years ago.”
But the recent shift toward distributed energy isn’t just a disaster response strategy. Several public and private-sector catalysts had started to draw investor money long before the California or Texas blackouts…
Why The Smart Money Is Betting On Virtual Power Plants
Distributed energy investments have already shown significant momentum around the world. Market research firm Fortune Business Insights projects that the space will grow at a 27.2% compound annualized growth rate (CAGR) through 2027, with especially strong growth forecasted in Europe, North America, and Asia.
In the U.S., private-equity investment in virtual power plant startups has accelerated significantly due to a perception that the Biden administration will introduce favorable policies for it.
In December 2020, Sidewalk Infrastructure Partners, a venture capital arm of Alphabet (NASDAQ: GOOG), announced that it was working with distributed energy startup OhmConnect to build the world’s biggest power plant.
The “Resi-Station,” as OhmConnect is calling it, will be a 550-megawatt project made entirely of batteries embedded into California homes and businesses. The project has received praise from former Obama EPA administrator Carol Browner.
And indeed, distributed energy policy is already changing in the U.S. In fact, it started changing significantly several months before Biden was even elected.
Back in September 2020, the Federal Energy Regulatory Commission (FERC) issued Order No. 2222 — a change which removes regulatory barriers to virtual power plants by requiring grid operators to accept power from them — and to pay them at the same rate as traditional power plants.
The order went into effect in February 2022 and grid operators throughout the US are beginning to submit their compliance filings. The order has been compared by energy economists to the 1993 computer networking regulatory changes which allowed private companies to use the previously-public-sector-only NSFNet telecommunications infrastructure, creating the modern commercial internet.
In the aftermath of those 1993 NSF changes, several entrepreneurs launched startups with the then-experimental idea of selling goods and services on the newly-opened network. Today, we call a few of those startups Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), and Netflix (NASDAQ: NFLX).
As you can see — and as you probably knew already — all three companies have handed investors multiple-digit returns since the ‘90s.
Investors today have a similar opportunity to invest in distributed energy upstarts that are among the first companies to profit from America’s newly-opened energy network. Below, we’re profiling four virtual power plant operators that could be the Amazons, Googles, or Netflixes of energy…
Stem (NYSE: STEM)
Stem, a global leader in AI-driven distributed energy systems, merged with Star Peak Energy Transition Corp, a special purpose acquisition company (SPAC) — a sort of blank-check firm — in April 2021 to become the entity it is today.
Stem already has a track record of building virtual power plants using an innovative mix of assets. In early 2017 it built a 1-megawatt plant in Hawaii entirely out of commercial energy storage installations. t
The company already produces revenue and is on track to be EBITDA- and free-cash-flow positive by 2025 at the latest.
Given its $127 million in 2021 revenue, we can compare Stem to far more speculative charging and energy storage firms — like Blink or ChargePoint — and calculate a price target well above $20.
ABB (NYSE: ABB)
Founded in 1988 and based in Zurich, Switzerland, ABB is a multinational industrial automation firm with interests in robotics and power management.
Unlike Stem, ABB isn’t a pure-play on distributed energy — but like Stem, it has a track record of building functional virtual power plants.
In fact, it constructed one of the largest virtual power plants currently in operation — a 226-megawatt behemoth that it built out of small generators and storage devices for China’s Hebei province in 2016.
Like other names in the space, the stock has experienced some pullback because of the general market conditions. This presents a strong buying opportunity for anyone who needs a solid long-term investment.
Analysts who have been following the firm’s distributed energy projects give it a price target of around $30 — implying 20% upside in the year ahead, not including the return from the firm’s 2.8% dividend yield.
That dividend has grown considerably in the last five years — and given the tailwinds ABB is riding, it should help shareholders compound their gains for many years to come.
Edison International (NYSE: EIX)
Founded in 1886 and based in Rosemead, California, Edison International is the parent company of electricity supplier Southern California Edison, among other assets.
Southern California Edison is perhaps the most distributed energy-minded utility company in America. It already has contracts to operate virtual power plants with Sunrun, Stem, Advanced Microgrid Solutions, and Swell, among other partners.
As we’ve discussed, the last year has been a rough one for California utilities, and that is reflected in Edison International’s stock price…
Yet the company has remained profitable on an earnings per share (EPS) basis despite market pullbacks and general economic turbulence.
Its 4.43% dividend yield is also nothing to sneeze at — and has grown considerably over the last few years. Given its resiliency and forward-thinking investments in distributed energy, it’s easy to see Edison International breaking $75 in the next year.
SunPower (NASDAQ: SPWR)
Founded in 1985 and based in San Jose, California, SunPower is a manufacturer of photovoltaic cells for solar power generation — one of the most important power sources for virtual power plants.
Solar power companies with distributed energy interests are an especially hot segment of the distributed energy market — especially in the aftermath of rival Sunrun’s recent work to build a virtual power plant with Edison International.
SunPower may not have won that particular contract — but it’s just as invested in distributed energy as Sunrun, if not more. SunPower currently builds electrical storage capacity into roughly a third of its solar projects — and used some of that storage to test its own virtual power plants with New York’s ConEd.
Unlike many names in the sector, Sunpower’s stock price has proven to be resilient over the last year in the face of market volatility. It’s one name that remains undervalued, and has plenty of upside in the years ahead that could show itself when the market turns around.
Where Will The Next Texas or California Blackouts Happen?
As we discussed at the start of this report, politicians on both the left and the right have been quick to blame the Texas and California electrical crises on peculiarities of those states. But in truth, the next wave of blackouts could be much further-reaching.
Texas was left to brave the cold without power because of intermittency issues at its natural gas power plants. Louisiana, Pennsylvania, and Florida are the next-largest consumers of this popular-but-finicky energy source for traditional grids — and they’re collectively home to almost 40 million people. Those grids have already started showing issues that have been enough to get officials to act. So you can expect more news from the companies outlined above as they work to bring solutions to these problems to market.
Here at Daily Profit Cycle, we want to help you stay ahead of the next crisis — and help you grow your family’s wealth in the process. This report outlines just one of dozens of investment trends that we’re researching.
For more, we've got an entire video about energy stocks and how to invest in them here.