AES Finding Smart Grid Sweet Spot

Apr.23.13 | About: The AES (AES)

AES, the parent of Indianapolis Power & Light, or IPALCO, is not the kind of stock you usually look at in terms of renewable energy.

But they have found a sweet spot in the market.

The key is a unit called AES Energy Storage, which works on grid-level storage projects. Among them is a 32 Mwatt lithium-ion battery project in West Virginia, at Laurel Mountain, which serves a large wind project and PJM, another utility company.

Storage is a sweet spot in the market because renewable projects deliver more intermittent "dirty" power at the same time computerized businesses demand more reliable, "cleaner" power. Imre Gyuk, program manager for energy storage with the Department of Energy, estimates $79 billion is lost each year to power outages, in a market worth $250 billion.

Another reason AES is in the sweet spot is because it's not a technology provider, merely a project manager. Other companies may produce a variety of storage systems, and the DoE's Energy Storage Database lists over 100 storage projects in North America alone, using a variety of technologies. The total amount of power under management has nearly doubled in the la

The West Virginia project happens to use lithium-ion batteries, but if cheaper, more reliable or more efficient technologies become available, AES is in position to put them to work. It also has enough financial heft, as an operating utility, to deal with the technical hiccups a new market is bound to create.

How much financial heft? AES had revenues last year of $18.1 billion, against $13.1 billion in 2009. It had a huge hiccup in 2012 as its appetite for wind got away from it, forcing it to disgorge its Chinese assets and posting a huge third-quarter loss that resulted in a loss for the year. Despite this, AES launched a four cent quarterly dividend and, after refocusing on energy storage rather than production, seems poised for new domestic growth.

One reason for that is FERC 890, a new Department of Energy rule which could effectively double the value of energy storage, according to Gyuk.

All this means that AES can be agnostic about storage technologies, that it has a leading position in putting projects together, and that it has a viable business model with which to profit from that expertise. Take out that bad third quarter and you can easily see a return to the profitability it enjoyed until 2011, when it reported net income of almost $2.3 billion.

If it can even do half that in net this year, AES is a bargain at its current price. If you're looking for a renewable energy speculation, AES is a good bet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.