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The Lone Star State is known for going big. It’s the largest state in the lower 48. It has enormous ranches, lots of oil and gas wells, and a booming economy. This past August, it also had big temperatures. Texas endured one of the most severe heat waves on record. It lasted the entire month, and set numerous all-time high temperature records across the entire state.

In Dallas, temperatures were well above 100 degrees on most days, and hit 110 degrees on August 2 and 3. On the two days in August when the high dropped below 100, it was 99…

And these scorching temperatures… they caused big electrical problems.

Now Texas is looking to one huge power project in order to increase supply and fight off rolling blackouts. And investors should get to know one company that stands to benefit when Texas, once again, goes big on the Tres Amigas Super-Substation project.

Utilities Faced With Record Power Demands

Electric utilities saw record-breaking demand for electricity far outstripping their expectations. Things got so bad that on a few days, demand actually exceeded their ability to supply enough power.

That triggered load shedding, and rolling blackouts. The bigger problem was the increased cost to the Electric Reliability Council of Texas (ERCOT), the wholesale power market operator for most of the state.

Take a look at the graph below, courtesy of the Energy Information Administration (EIA). August day-ahead on-peak prices spiked to levels far exceeding rates that normally are in the $125-per-megawatt-hour (MWh) range.

As a result of these high rates, if you live in Texas, you’ll be paying higher electric bills to your utility. You see, unlike other areas of the country, Texas mandates that nearly all of its retail customers choose a competitive electricity supplier.

This eliminates the cost-of-service regulatory process that utilities in the rest of the country have to go through in order to recover excess costs from customers.

Why is Texas a unique case? As you can see from the graph below, courtesy of the National Electric Reliability Council (NERC), Texas is more or less its own electrical entity, at least as far as power grids are concerned.

The Real Power Problem

Here in America – unlike most developed countries – we have a fragmented power grid system. The continental United States has three main, distinct power grids: the Eastern Interconnect, the Western Interconnect, and the Texas Interconnect. You can see what grid serves your area by looking at the map below.

Both the Eastern and Western Interconnects have strong ties to Canadian grids. In addition, both the Western and Texas interconnects have ties to Mexican power grids. Ironically, the three grid systems have very limited connections with each other.

This type of connection would have essentially eliminated Texas high peak power costs during its recent heat wave. It could have simply purchased cheaper power from other operators anywhere in the United States.

This three-way interconnect is a problem that’s been begging for a solution for some time. The good news is, it’s one that’s finally about to get underway.

Tres Amigas Super-Substation: The Three-Way Solution

Back in October 2008, New Mexico Governor Bill Richardson announced that the town of Clovis, New Mexico was going to be the home of the Tres Amigas Super-Substation. Its purpose? To unite America’s three power grids.

New Mexico was chosen for a good reason: In a study undertaken by the Western Governor’s Association, the “Land of Enchantment” was ranked No. 1 in the country for renewable energy production potential.

The state could produce as much as 70,573 gigawatt-hours of renewable energy annually. That’s enough to power 6.6 million households.

But the most important factor in the New Mexico site was its proximity to all three of the major power grids.

After numerous delays, groundbreaking is set to get under way this fall. When completed in 2014 at a cost of $4 billion, Tres Amigas will be the largest – and most important – power substation ever built in the United States.

It will unite and revolutionize the nation’s power grid, and make problems like the one that occurred in Texas and the most recent blackout in San Diego things of the past.

More importantly, it will create the nation’s first energy trading “hub,” similar to Oklahoma’s Henry Hub for natural gas.

Utilizing the latest in power grid technology, a redundant, triangular “power pathway” (similar to a traffic circle) will be created, opening the door to efficient transmission of green, renewable energy throughout the country.

Tres Amigas will utilize state-of-the-art super-conducting DC power cables developed by the Los Alamos National Laboratory, and the latest energy storage system technology. Tres Amigas will also help to provide a more open market for green power producers who want to sell their power to an increasingly green conscious public.

When fully operational, each of its giant high-voltage DC power converters can direct as much as five gigawatts of power to any of the other two grids. The system is designed to take that number higher as New Mexico’s renewable energy generation expands.

Who’s the big winner in Tres Amigas? There’s no question that many companies will be providing services and equipment to build Tres Amigas.

But the biggest winner could be American Superconductor Corporation (Nasdaq: AMSC). It makes the superconducting cables that are a critical part of the Tres Amigas project.

The company has indicated that the Tres Amigas project could be worth as much as $1 billion in business.

The stock is way off its highs, having dropped 80 percent since the beginning of the year. Management changes and problems with several customers paying on time has led to restatement of earnings for the last quarter and the last fiscal year.

But once Tres Amigas gets under way this fall, the company could see its fortunes reversed, and along with it, the reversal in the steep slide in its share price. Investors who want to participate in the possible resurgence of American Superconductor might want to consider a small, speculative position.

Disclosure: None

Source: American Superconductor: Going Big On The Texas Power Problem