NEW ENERGY & TEXAS GOLD

The big TXU deal in February 2007 changed the face of Texas energy. The deal only went through when TXU promised to cancel 8 of 11 planned coal-fired power plants. Since then, the rush has been on to build wind energy and the transmission to carry it. Some worry the short term will produce an energy squeeze. But as more and more states respond to long term changes in energy supply, Texas will be in position to resume the power role it is accustomed to in the energy market.

The tip on this story came from Cindy M. in Austin. Thanks, Cindy. Keep up the good work. Austin is lucky to have you.

Texas electricity market lures big investors; Buffet, Gates, Pickens bet that state’s market will bring hefty returns
Edward Klump, September 18, 2007 (Bloomberg News)

WHO
Warren Buffett’s Electric Transmission Texas (w/ American Electric Power Co.), Bill Gates’ Cascade Investment LLC, T. Boone Pickens’ Mesa Power, Hunter Hunt’s (son of billionaire Ray L. Hunt of Hunt Oil) Sharyland Utilities, TXU Corp.

Not your grandfather's Texas energy titans.

WHAT
Electricity demand in Texas is rising and big investors, big names with deep pockets, are rushing in to build transmission, meet the rapidly growing need and seize the long term profits.

WHEN
- Electricity spot price the week of September 11, 2007: $65/megawatt-hour; 1 year out futures price: $81.25/ megawatt-hour.
- First 6 months, 2007: Texas electricity = 7.83 cents/kilowatt-hour, 25% above US average (6.25 cents/cents/kilowatt-hour)
- Mesa Power’s wind generation expects to produce in 2011.

A small part of the big campaign for new transmission in Texas. Soon to be seen all over the US and around the world. Which is why the titans are getting into the business. (click to enlarge)

WHERE
Texas. But this is what most states must go through in the transition to New Energy. In an energy constrained world, all states must increase capacity, build out transmission infrastructure and become more efficient or their economic competitiveness will fall off.

WHY
- Buffett’s venture will build 1000 miles of new transmission. Hunt’s will build 800 miles of transmission in the panhandle. Pickens is building the biggest wind farm in the world. Both he and Gates are investing in generating plants.
- Ercot, the state power manager, says marginal power capacity could fall below the necessary 12.% in 2009 and get as low as 5.9% in 2012 if supply and grid capacity do not come up. This would create higher energy prices and compromise business’s ability to compete.

Betting on wind because the hole card he's holding is transmission.

QUOTES
- Barry Abramson, co-manager of $28 billion assets, Gamco Investors: "It is a huge market that keeps growing…[with] the perception that [Texas] regulators and government agencies are supportive of new power-plant development…"
- Calvin Crowder, vice president, Buffett’s venture: "There's a very real opportunity in Texas to earn a reasonable return on investment in utility, and especially transmission utility, business…Transmission business doesn't provide extremely high returns, but it also does not have extremely high risk…''
- Pat Wood III, Sharyland Utilities & formerly w/Federal Energy Regulatory Commission: "The cost recovery here is virtually guaranteed…''