Electricity Transmission Constraints Pose a Formidable Challenge to Policymakers and Significant Opportunity and Risk for Investors

In August of 2006, the United States Department of Energy (DOE) released a study detailing electric transmission congestion in the United States. The report, which is titled the “National Electric Transmission Congestion Study,” identifies several areas of the country that are either affected by or will be affected by in the near future, unless remedial action is taken, severe congestion in the transmission of electricity. The DOE identifies the cause of such congestion as being due to either inadequate transmission capacity, inadequate base load power generation, or both. According to the DOE, the costs of high levels of congestion can be extremely high, in terms of basic costs for electricity and power outages (both localized and regional) caused by grid failure.

The two areas of the country, which are identified as “Critical Congestion Areas,” by the report, are:

• The Atlantic Coastal Area from Metropolitan New York southward through Northern Virginia, and

• Southern California

“Critical Congestion Areas” are areas of the country where it is critically important to remedy existing or growing congestion problems because the current and/or projected effects of the congestion are severe. As stated, the DOE has identified two such areas, each of which is large, densely populated, and economically vital to the Nation.

The four areas of the country, which are identified as “Congestion Areas of Concern,” by the report, are:

• New England

• The Phoenix - Tuscan Area

• The Seattle – Portland Area

• The San Francisco Bay Area

“Congestion Areas of Concern” are areas where a large-scale congestion problem exists or may be emerging, but more information and analysis appear to be needed to determine the magnitude of the problem and the likely relevance of transmission expansion and other solutions.

Several areas of the country have been identified as “Conditional Congestion Areas,” by the report. The following is a representative sample of these areas:

• Montana-Wyoming (coal and wind)

• Dakotas-Minnesota (wind)

• Kansas-Oklahoma (wind)

• Illinois, Indiana and Upper Appalachia (coal)

• The Southeast (nuclear)

These are areas where there is some transmission congestion at present, but significant congestion would result if large amounts of new generation resources were to be developed without simultaneous development of associated transmission capacity. According to the DOE, these areas are potential locations for large-scale development of wind, coal and nuclear generation capacity to serve distant load centers.

To address these concerns, the DOE is calling for further deregulation of the power industry to foster inter connectivity between regions, advancements in power generation and transmission technology, conservation, and greater decentralization within the overall power infrastructure. Investors should take notice of these growing problems for they represent phenomenal investment opportunity and phenomenal risk if the problem is not addressed.

High Temperature Superconducting technology is, according to the DOE, a key and vital cornerstone of any long term solution to our nations energy woes. Furthermore, the DOE predicts that widespread adoption of the technology is only a few years out. This is significant for several reasons. One, current grid losses have grown to more than 10% of all electricity generated, and transmission limitations have recently caused widespread blackouts in the United States. Second, the DOE estimates that 2,200 miles of underground transmission cables are quickly becoming outdated and could be replaced with HTS lines that may carry two to five times the power within the same duct size. The DOE has partnered with numerous corporations and university labs to develop HTS grid applications.

The DOE, also, is conducting three large scale projects concerning energy storage and has partnered with numerous university labs and corporations to develop advanced energy storage technology. These projects includes the largest Battery Energy Storage System in the world with an output capacity of 20MW and 14 MWh of stored energy.

The DOE has also funded numerous research and development activities related to distributed energy, control systems security, and advanced electric distribution.

In my opinion, investors wishing to reap the proceeds from these developments should focus on emerging micro-cap, small, and smaller mid-cap companies with quality balance sheets, strong management, realistic plans for profitability if not already profitable, and leadership in their respective market niche in relation to the firms' technology.

Companies that fit this mold are, in my opinion, American Superconductor (AMSC), Zoltek (ZOLT), Itron (ITRI), and SunPower Corporation (SPWR).

For purposes of disclosure, I do not own any shares in the above companies.

For those investors wishing to read a complete copy of the DOE report on grid congestion go to the DOE website at www.energy.gov