Thursday, May 25, 2006

The "real" aftermath of Enron

The electricity side of the energy investment cycle is cranking back up again. People are telling me all the time that there is so much money chasing so few good opportunities in energy, and this runs the gamut from alt-energy, energy-tech, and traditional power station projects.

I am wondering if TXU is the next Enron. It has been Wall Street's darling for almost two years. Nothing but high praise has been heard for its recently announced plan to build 11,000 MW of new plants, some in Texas, but throughout the country. 11,000 MW? The last company to make statements this bold was, well, Enron. I have no doubt that the message was heard by other utilities: Build new power plants, whether in rate base or private, and your predictable returns on investment will be rewarded by the Street. Warren Buffet believes in electric utilities, so why shouldn't everyone else?

In 2001, there was a rumor going around Houston. The big Wall Street "trading" firms didn't think that energy trading should be headquartered in Houston. Commodities trading belonged with the New York firms. Don't look now, but most of the energy trading has now been acquired and is now operating out of New York. If I were to draw a connection between this outcome and the downfall of Enron and the other big energy trading firms (Dynegy, Williams, El Paso, etc), some would label me a conspiracy theorist. I'm not making a connection, just an observation.

New energy investment funds are starting up. Venture capital is looking for opportunities. When a respected VC like Vinod Khosla publishes white papers on ethanol, you know others are going to follow. I met a number of new energy investors at a recent biodiesel conference I presented at. They are eager for new ideas. They have little real capability to separate a bad idea from a good one, or a technology that works from a technology that can create a market, or how long it takes to cultivate an energy system for project, from inception to kilowatts or Btus out the other side. They have little awareness of just how slow this business changes, or that it tends to cycle, rather than change.

Thus, I find it almost the height of irony that the last vestiges of the Enron scandal are dribbling out of the courtroom and into the papers, while the energy investment machine is cranking up full force once again. Last time, it was the digital economy, a liberalizing global economy seeking market-driven solutions, and Y2K creating a need for new electric generating capacity. This time, it is the high price of natural gas, the need for national energy security, and a need to protect (or even close) our borders that is driving the business. We were opening up the world' economy as a "free-market" (I don't believe there is any such thing, but that's another point) leader. Now we are figuring out how to run an economy with China and India as the emerging "big dogs."

Well, maybe the aftermath is really just the beginning.