By Rick Lear, Lear Investment Management
Grateful Dead
This month brought more trouble for our nation’s most populous state. No, we aren’t talking about the plummeting valuations of technology unicorns – instead, the widespread power outages in California. The 1978 tune Fire on the Mountain made famous by California’s own Grateful Dead is a prophetic tale of the current situation and obvious choice for this topic.
More than one million Californians experienced blackouts this month. How can citizens of this economic superpower not have access to a basic need like power in our modern world? The reason is not an economic limitation – the GDP of The Golden State is $3 trillion, making it greater than India, France, Italy, and Canada. California, the fifth largest economy in the world, is experiencing power issues usually associated with third world economies.
This week we explore the problem in three areas:
The Situation: The recent Santa Ana winds in Northern and Central California prompted utility companies to initiate blackouts to millions of residents due to fear of power lines blowing over and causing significant wildfires. According to the Wall Street Journal: “The state’s three big investor-owned utilities now have regulatory permission to cut off power to parts of their service territories during strong winds to reduce the risk of their electric lines causing wildfires, after at least 21 blazes linked to utility equipment killed more than 100 people and burned tens of thousands of homes in recent years.”
In addition to displacing many residents, the power outages are economically harmful to businesses in the area. Imagine running a business in 2019 without access to power for a day. Investment firms need electricity for their computers. Restaurants need electricity to keep food from perishing. Construction companies need electricity for their machinery. This is an issue that touches nearly every single industry within the state.
The Causes: The cause of the wildfires is attributed to extreme weather conditions, and one can make the case the conditions are related to global warming. Regardless of your stance on global warming, the weather conditions appear to be getting worse, making wildfires more common. Thus, we believe the state will be forced to take other measures to reestablish a sense of normalcy to the power infrastructure.
To further complicate the situation, the state’s largest utility provider, PG&E, was forced to file for Chapter 11 bankruptcy this past January due to liabilities resulting from wildfires in 2018. Building new power infrastructure will be difficult given their restrictions on PG&E and their navigation of bankruptcy.
A Possible Solution: With the traditional power provider in bankruptcy and failing to supply power during certain weather conditions, the state will be forced to look for alternatives. The increased sale of generators and the increased focus on solar and wind is a natural logical leap. Further, the increased focus on getting power “off the grid” has emerged as the current electricity infrastructure becomes increasingly unreliable.
Imagine a solution to power your own home with a seamless combination between solar, generator, and electricity provider. A smart technology system can monitor a home’s electricity usage and optimize the source of electricity based on the time of day – toggling between solar, generator and traditional grid. This could lower costs while increasing reliability and let homeowners become less dependable on outdated grids. The current challenge is storage of the renewable energy. Therefore, batteries become the golden ticket to the future.
As mentioned in previous SOTW’s, renewable energy is a theme we believe will be one of the most important opportunities in the next decade. The world must look for a more modern source of electricity as the old infrastructure continues to crumble and becomes less effective and less sustainable. Also, government mandates in concert with lowering costs of renewables makes this investment theme even more attractive.
Rick Lear is the Founder and Chief Investment Officer of Lear Investment Management. Lear is a pure investment firm founded in 2015 with focus on generating returns with measured risk. With over two decades of experience, his ability to identify global investment trends has resulted in superior outcomes for clients.
The Lear Global Vigilance Strategy is rated 5 Stars by Morningstar and ranks in the 5th percentile of managers in the Tactical Allocation category.
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