Published March 12, 2015

How Tesla Will Kill Your Portfolio, Even If You Don’t Own It

As this is the last regularly scheduled edition of the Daily Dispatch on technology, I want to break with the usual format to bring you something particularly special and potentially profitable.

Quickly, before we get to that, I want to assure you that the changes coming to Casey Research are quite exciting and that you will continue to hear from us, just in a fresh new format. We’ve embraced a less-is-more philosophy across the company to try to ensure we get you only the most important and relevant market news and investment research in the formats you prefer. That’s all I’ll say for now, lest I spoil the surprise.

Now on to those profits I mentioned, as our intrepid investigator Doug Hornig reviews a sea change in the way we produce and consume electricity—a change which has quietly happened under our collective noses and is accelerating at a phenomenal pace.


Alex Daley
Chief Technology Investment Strategist
Casey Research

Will Electric Utilities Blow a Hole in Your Portfolio?

Doug Hornig, Senior Editor

The short answer is no. Not yet, anyway. But they are definitely in an environment that’s changing rapidly—and threatens the way in which utilities traditionally conduct their business.

During the better part of the past century, demand for electricity advanced inexorably year after year, save during a couple of economic downturns and the Depression itself. Now that trend has come to a screeching halt.

You might find this hard to believe. But the data don’t lie, and here they are:

Electricity demand peaked in the summer of 2008, before flatlining and actually declining a little over the past 6.5 years. That hasn’t happened for a comparably long period since the 1930s.

So what’s going on here?

Many analysts attribute the situation to an anemic economy which has struggled to recover from the meltdown of 2007-‘09. This factor surely plays a part, but there are other powerful forces at work that aren’t going away. And they point to an ongoing slide in the demand for electricity in the US regardless of the economy.

First, demographics. For many years, electricity production has closely followed the population growth of the United States. With gains in efficiency especially, the slopes of those lines began to converge over the past few decades:

Today, however, the American population is barely growing, up just 0.71% in 2013, the lowest such number since 1937. And that follows growth rates of 0.75% in 2011 and 2012. People are having fewer children, and they’re having them later, even as the baby boom generation begins to age and die off. The fertility rate in the US in 2013 was 1.86 children per woman: not even close to the 2.1 level needed merely for replacement. If there were no immigration, the US would be losing population. This is a long-term development that shows no sign of reversing anytime soon.

Second, conservation. Energy efficiency has become the new normal whether we’re talking about residential construction, government buildings, manufacturing, or household appliances. Houses are built tighter and better insulated, to cut down on heating and air conditioning costs. All new federal government buildings must meet strict Department of Energy standards that cover the building envelope, HVAC, water heating, power, lighting, and other equipment for different climate zones. Developers of high-rise apartment complexes and office buildings strive to meet ENERGY STAR guidelines. Private dwellings are increasingly integrated into the Internet of Things, where computers monitor everything electric to maximize savings. Even the lowly incandescent lightbulb is now illegal to import and sell in the US, in favor of much more energy efficient CFL and LED bulbs.

Third, the Smart Grid. This is an extension of conservation. The electric grid in the US is undergoing an elemental and profound makeover. As we’ve always known it, the grid was thrown together chaotically, a hodgepodge of overlapping companies, aging generating plants, and creaky transmission lines. It’s a wasteful mess. According to former Federal Energy Regulatory Commission Chairman Jon Wellinghoff, “The United States loses more than 40 percent of the electricity it produces because of inefficient grid infrastructure.”

No thought was ever given to the most efficient ways of delivering product to the user, nor to making it function as a seamless whole. Formerly, we didn’t have the means. But we do now.

In electric grid 2.0, real-time electronic controls will replace the system’s existing electromechanical switchgear; integration of power and communications will create a dynamic, interactive feedback mechanism that supports the real-time exchange of power where needed; old analog metering systems will give way to digital two-way energy information systems that will not only remove inefficient manual labor from billing but allow price signals, market information, and buyer decisions to change and optimize consumption; distributed generation sources will improve system reliability and capacity; and ultimately, there will be a network of connected microgrids that will be able to automatically self-monitor and heal.

Construction of the Smart Grid has barely begun. But it’s going to have enormous effects on energy demand.

Fourth, the rise of renewables. Alternative energy sources aren’t the joke they were even 10 years ago. The cost of producing electricity from solar collectors, once prohibitive compared with fossil fuel plants, has dropped like a stone. A recent Deutsche Bank report looked at 60 countries globally and concluded that in about half of them—including the largest markets, from the US to Japan to Germany—the cost of solar power is already below the cost of retail electricity and rapidly approaching wholesale averages for fossil fuels.

Of course, utilities can, should, and will harness solar energy for their own purposes. However, the threat comes not from huge solar farms but from the blistering pace of solar installations. Home systems have been doubling every year, and businesses aren’t far behind, turning solar adoption up a steep curve that now resembles a truly disruptive technology.

The massive cost drop in solar has led to all kinds of interesting new projects which are driving the climb in installations. For example, large-scale housing developments in which all the homes are being deliberately designed to be energy self-sufficient are proliferating in the US. Many will be feeding excess electricity back into the grid, not taking it out.

Besides cost, solar energy’s biggest stumbling block has been storage. You have to be able to stockpile your energy supply for nighttime and cloudy days. This need has driven great advancements in both generation—such as molten salt solar cells that continue generating electricity for six hours after sunset—and in battery technology.

California has embarked on a massive project that mandates 1.3 gigawatts of solar storage by 2020. And storage on a smaller scale is proceeding at warp speed. In early February, entrepreneur Elon Musk announced that his latest project is mass production of 10-kilowatt-hour home-battery packs—designed by Tesla and manufactured at a giant “gigafactory” in Nevada—that will power a house for two full days without sun. 500 homes outfitted with these batteries are already proving up the tech in California. Musk expects them to go commercial in about six months.

They will be standard on all homes built by his company, Solar City, within five years. Solar City has been following a highly successful business model: install panels on people’s roofs, lease them for less than they’d be paying in energy bills, and sell surplus energy back to the local utility. Founded only in 2006, Solar City now has 168,000 customers and is the largest solar installer in the US by far.

In addition, Tesla batteries are increasingly used by businesses like Walmart, which store energy when it’s cheap and then tap reserves during peak load periods, when electricity costs more, in order to slash expenses—which utilities support, as it helps them prevent brownouts at inconvenient times, like a sweltering hot day with all those air conditioners running. The savings involved are so great that demand for collector/battery systems like this from stores, schools, hospitals, and so on, is essentially unlimited.

Nor is the alternative energy revolution confined to solar. For example, Iowa generated only 4% of its electricity from the wind in 2005; today the figure is 28%. At the household level, wind power is still in its infancy. But efficient, frictionless turbines that utilize mag-lev technology are on the way. They will be cylindrical, rather than today’s more common propeller designs, turning in very modest breezes. As costs come down, they’ll become practical for home usage, especially with battery storage for calm days.

Now add in one more evolving threat to the old fossil fuel utilities: possible liability lawsuits for environmental and property damage, along with the certainty of eventual government penalties slapped on them because of their alleged contribution to climate change.

All of these things place conventional utilities in an increasingly precarious position. The outlook is grim if they don’t transition gracefully to the new reality.

So should you divest yourself of those heirloom utility stocks you’re counting on to finance your retirement? Let’s just say you should take a long, hard look at them. They’re not quite portfolio bombs, but they’re ticking.

On the other hand, you can hedge your utilities by picking the best of the best stocks from the emerging alternative energy and smart grid players. No longer small-cap long shots, dependent on governmental largesse, the industry is rife with profitable multibillion-dollar companies vying for global share.

In Casey Extraordinary Technology, we follow the industry closely and have selected a handful of companies we believe are best positioned to rapidly grow profits while helping reshape world energy consumption. Sign up today for access to our full portfolio of game-changing technology stocks and see why we’ve beaten our index by a large margin every single year since we started publishing.