Q1 2001

Power Problems, Power Opportunities

California, the state known globally for leading edge mindset, finds itself in a distressing bind over the available supply of mundane electricity that the rest of us take for granted. Her utility companies are near bankruptcy, while aluminum smelters in the Northwest are stopping production because they can make more money reselling their power. There are several explanations: A botched job of deregulation, poor planning, and a failure to build any new major power plants in two decades. These have all been brought forth and examined by the mainstream media. But there is another primary factor that has been largely overlooked in the crisis: The voracious appetite for power of the "new economy". This is this part of California's power story that holds the most important implications for investors over the next decade.

Power Quantity: An estimated 13% of all power in the United States is consumed by the IT (information technology) and communications infrastructure. As the global epicenter for IT, California has seen demand for power increase 5% annually through the last decade, easily outpacing population growth rates. That power demand, rather than slowing to the expected condition of glacial stasis that would lend itself to central management, is instead speeding up at rates that can only be described as white hot. In Silicon Valley alone, enough applications for new power have been filed with the local municipal utility to translate into a doubling of existing capacity over the next 18 months. This is commensurate with the previous 15 years of power demand growth combined. Today Sun Microsystems and Intel suck as much energy from California's power grid as an old-economy style steel mill.

This surge in power requirements is due to the growing ubiquity of the integrated circuit. Moving information in the digital world necessitates moving electrons. Bits are, after all, merely encoded electrons. This immutable fact explains the new economy's appetite for more power to move an ever-increasing amount of encoded bits. Already the power consumption of new integrated circuitry vastly outweighs the power requirements of all new lighting applications. The installed base for illumination is still more demanding in its overall appetite for power, but the integrated circuit consumes a higher proportion of new power demand. Factoid: Your cell phone puts as much pressure on the power grid, by the time transmission towers and base stations are accounted for, as does your refrigerator. As a culture, we ask for more power to drive our cell phones, play stations, computers, routers and servers, and we ask that the duty times for these devices be 24-7, allowing us to back up our servers, send late night emails and conduct portfolio status checks. Remember, one visit to a website usually requires 15-20 separate digital trips between your computer and far away data hosting centers. That is 15-20 separate transmissions of electrons charged by the power grid. A midnight trip to your refrigerator turns on one light bulb while a midnight visit to your online chat forum may turn on fifteen.

Power Quality: In addition to the burden of more devices moving ever more bits, either from voice communications or chip-to-chip digital communications, California's power crisis serves as a 21st century canary-in-the-coal-mine warning of another phenomenon imposing pressure on the grid. It is the Concept of Nines, the fact that we not only need more energy, we need vastly more reliable energy. A grid that can give us 99.999% reliability õ Five 9's õ would supply power all but 2 minutes out of the year, an impressive feat by almost all traditional metrics. But those two minutes of outage may come in the form of 240 half-second outages, and each half-second outage is enough to bring down all of an enterprise's servers, routers, data storage centers, and manufacturing processes. Recovery times for full system crashes can easily be measured in hours, sometimes days. So a power company that sees Five 9's as two minutes in outages may translate to 240 hours or more of non-productive down time for the enterprise. Unreliable power from the grid is far more expensive in the long run than is new, expensive, but far more reliable systems of power generation and delivery. Enterprises therefore understandably are seeking - and paying for Nine 9's or even higher, reliability levels the current grid is incapable of delivering.

Power Opportunity: In just the last few years, Silicon-based technologies have developed the capacity to control voltage and currencies in microseconds. This has placed the economy on the cusp of deploying silicon to move atoms as well as electrons. For example, entrepreneurial companies are already radically overhauling the design of the automobile. In these new designs, electrical power will obviate the far less efficient requirement of translating combustive power into mechanical power. As a result, the next car you buy will still have an internal combustion engine, but it may not be burdened with moving heavy steel to drive belts, gears, hydraulics, transmissions and shafts. Instead, the engine's power will be immediately converted to electricity. Thin strands of copper and an array of powerful silicon chips will power the wheels, brakes, steering and suspension systems. The result will be less loss of power, fewer moving parts, less weight, better fuel economy and greater reliability. The electric world will drive the world of mass and electrical power will push its way into the world of motion. Already the average car has more dollars in silicon than it does in steel. Yet we are still in the early stages of the migration of the microprocessor into the automobile. Over the next 10 years, the electrical power requirements of the automobile are predicted to more than double. That power will be far more efficient, and it will be electrical in nature.

The power crisis in California is a wake up call for the U.S. economy and its need for a dynamic and evolving power industry. While challenges will continue to tax the power grid, technology is already being deployed to solve problems like those that California is experiencing. As a culture, we inexorably will continue to not only demand power on a dizzyingly more rapid pace, we will demand power that is clean, efficient, and far more reliable. California, Silicon Valley, and the new economy, have proven beyond a doubt that the existing 20th century power grid will need to be redefined into a new, 21st century infrastructure, every bit as wondrous in its elegant complexity as the current grid became as it emerged from the halls of Thomas Edison's Menlo Park laboratories over one hundred years ago. The current confluence of technological necessity and technological capability present one of the most compelling opportunities for capital investment in memory for investors willing to look past the headlines in today's papers to the opportunities beyond.

Vector Money Management

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