Investing in electric utilities

With the high price of gasoline, looking for a replacement transportation fuel is back in the thoughts of many, and one of the oldest solutions may be making a comeback: the electric car. GM, for example, plans to introduce the Chevy Volt in 2010 (1), and several other vehicle manufacturers have plans as well (2). There are many different ways one who believes in an electric car future could invest to profit. But because all of these vehicles will need to be recharged, perhaps one of the most direct investments would be electric utilities.

In fact, the electric car could be better for utilities than you might think. A study by the Electric Power Research Institute and the Natural Resources Defense Council predicts an 8% rise in electricity consumption by 2050 if 60% of the light vehicles in America become electric. Only 8% you say? That’s because the vehicles could be recharged overnight, during off peak hours when the utilities have power to spare that they are generating anyways. What this means is more efficient utilities (3).

Harder to determine is which utilities are likely to benefit the most. One of the problems that has plagued electric vehicles in the past is a small driving range before they need recharged. The GM Volt is expected to only have a 40 mile range on a single charge. (It also has an on board gasoline engine to charge the battery (4).) For this reason you might expect them to first become popular in more urban areas where long voyages are less common perhaps along the coasts of the United States.

Some example companies you might consider include Dominion Resources (D), which has operations in eastern Virginia and North Carolina. CH Energy Group (CHG) serves customers in 8 counties of New York’s Mid-Hudson River Valley, and of course there is always Hawaiian Electric Industries (HE). (I’m going to guess that Hawaiians don’t drive too far.) Dominion also runs several nuclear power plants, a form of energy likely to become even more popular in the future because of its low cost and environmental friendliness. You could also look for states to offer incentives for the purchase of electric vehicles, although I’m skeptical of their long term effect. Economics will likely ultimately determine the success or failure of the electric car.

Whatever happens, electric utilities tend to be relatively safe investments as they are essential, well established companies, and pay good dividends. For example, at the time of writing, CHG has a dividend yield of 5.4%, D of 3.6%, and HE of 4.7%.

(1)”GM Teams With Dozens Of Utilities on Plug-In Cars.” Wall Street Journal. Rebecca Smith and John Stoll. July 22, 2008.
(2)”Who’ll Make a Killing On the Electric Car?” SmartMoney. Jack Hough. September, 2008.
(3)”Utilities, Plug-In Cars: Near Collision?” Wall Street Journal. Rebecca Smith. May 2, 2008.
(4)”About GM-Volt.”