The new rule eliminates some of the uncertainty related to grid improvements and clears the way for what could be the beginning of a concerted effort to put the US grid on a path to becoming a smart grid. Potential beneficiaries are large transmission and connection construction firms like General Electric Co. (NYSE: GE), ABB Ltd. (NYSE: ABB), and Siemens AG (NYSE: SI). Component suppliers like American Superconductor Corp. (NASDAQ: AMSC), Satcon Technology Corp. (NASDAQ: SATC), and Power-One Inc. (NASDAQ: PWER).

The primary beneficiaries of the FERC ruling will be wind and solar projects that are typically located in remote areas far from existing transmission lines. Large solar developers like First Solar Inc. (NASDAQ: FSLR) and MEMC Electronic Materials Inc. (NYSE: WFR) should also benefit from the new rules because it will make it easier for them to sell new power generation.

Also Read: Expanded SunCoke IPO Unlocks Sunoco’s Value

The rule requires that transmission operators include regional planning, consider public policy requirements, and consult with neighboring transmission operators to ensure the cost-effectiveness of new transmission lines. The tricky bit was always the question of who pays for the development, and the new rule answers that as well.

The FERC ruling now levies the cost of building new transmission more directly on the utility customers who benefit from the additional supply. New electricity generation in Montana, for example, does not serve the people of Montana, but rather those who live in Las Vegas and Southern California. Yet under the old rules Montana customers paid for the transmission lines to carry the electricity to points south.

While the rule applies specifically to public utilities, it will also benefit merchant power suppliers that have already have access to the grid, but are often crowded out by public utilities. Under the new rule, new grid capacity is virtually guaranteed because if the regional operators fail to come up with a plan for new transmission, then the FERC will.

Like most FERC rules, there is little sex appeal in this one. But its impact is relatively long-term and, as always, the devil is in the details. In any event, a more efficient, effective, and robust US electricity grid got a much-needed boost yesterday.

Paul Ausick

The Wall Street Journal noted Merkel’s need of 10 to 20 gigawatts of fossil capacity need to be built over the next decade.   Those 20 gigawatts are essentially equal to the amount of electricity Germany currently generates from its 17 nuclear plants. And these 20 gigawatts will be built in addition to another 10 gigawatts already under development and set to be completed by 2013.

Whether Germany builds new fossil fuel plants or new solar or wind plants, the country’s electricity grid needs to be upgraded. Germany is expected to spend at least 9.7 billion euros to build more than 2,200 miles of cables to connect new generation capacity with consumers. This project is a real boon to infrastructure providers like ABB Ltd. (NYSE: ABB), Siemens AG (NYSE: SI), Schneider Electric S.A. (OTC: SBGSY), Alstom SA (OTC: ALSMY) and General Electric.

Other companies that could benefit from Germany’s need for an improved grid is American Superconducter Corp. (NASDAQ: AMSC), which makes high-efficiency superconducting wire used for electricity transmission, and General Cable Corp. (NYSE: BGC).

There are also two relatively small ETFs that offer a investment opportunity in the buildout of the global energy grid. The larger of the two is First Trust NASDAQ Clean Edge Green Energy Index Fund (NASDAQ: QCLN), which tracks the NASDAQ Clean Edge Green Energy Index. The fund’s largest five holdings are National Semiconductor Corp. (NYSE: NSM), Linear Technology Corp. (NASDAQ: LLTC), First Solar, ON Semiconductor Corp. (NASDAQ: ONNN), and Cree, Inc. (NASDAQ: CREE). QCLN’s net assets total $37.2 million, and it’s year-to-date return is negative, at -2%. Since its creation in February 2007, the fund’s NAV has declined by -4.01%. Shares are lightly traded and opened today at $14.85, within a 52-week range of $12.93-$18.39.

The even smaller grid fund is the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (NASDAQ: GRID). The fund’s five largest holdings are Red Electrica Corp. S.A., NGK Insulators Ltd., Prysmian SpA, Schneider Electric, and Quanta Services, Inc. (NYSE: PWR). The fund seeks returns equal to the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index before expenses. The fund was created in November 2009 and its lifetime NAV is 12.66%. The fund’s net assets total just $27 million, and like QCLN, it is very lightly traded. The shares opened today at $32.06, within a 52-week range of $26.84-$35.82.

Building out the global grid is likely to cost $500 billion.  And much of the work hasn’t even started yet. Germany’s shift away from nukes forces the country to upgrade its grid, whether it wants to or not. This is definitely something worth watching.

Paul Ausick

And that’s what these players have been doing, using their stacks of cash to acquire strategic components of the smart grid. Telvent, for example, offers real-time monitoring services for utilities to help balance electricity load. Doesn’t sound like a big deal, but the amount of electricity flowing to the grid is now calculated, not measured. Monitoring equipment like that from Telvent will give a utility a more accurate picture of load, and enable more efficient generation. Better monitoring will also help avoid costly blackouts and brownouts.

The First Trust NASDAQ Clean Edge Smart Grid Infrastructure (NASDAQ: GRID) ETF is too thinly traded to even matter for most investors.  What does matter here in this ETF is that any or almost all of the fund’s small and mid-sized weighting components could find themselves under fire from an acquirer if they can be quickly integrated and then scaled for broader distribution.

ABB paid $3.1 billion in Janurary to acquire precision motor maker Baldor Electric and GE spent $3.2 billion to get 90% of French automation equipment firm Converteam. Siemens is looking to spend up to $4.3 billion on “bolt-on” acquisitions this year. Siemens has not yet participated in the buying spree, but it will likely have to do a deal or two if it wants to stay in the smart grid game.

These companies understand the stakes in the smart grid game and they also understand the utilities. Big utilities are wary of buying technology from start-ups and other small companies, but are willing to buy the same thing from ABB, GE, Schneider, or Siemens because these companies have a history and a track record. The risk that a company like GE will fold is very small, which means that it will be around to maintain and upgrade any systems it installs.

When it comes to M&A in the smart grid, the questions should probably point to “when” rather than “if” more deals are coming.

PAUL AUSICK

ABB Ltd. (NYSE: ABB) Raised to Outperform at Credit Suisse; Raised to Buy at Deutsche Bank.
Bank of America Corp. (NYSE: BAC) Maintained Underperform as Bear of the Day at Zacks.
The Bank of New York Mellon Corporation (NYSE: BK) Cut to Equal Weight at Morgan Stanley.
Barrick Gold Corporation (NYSE: ABX) Raised to Buy at Stifel Nicolaus.
Chevron Corp. (NYSE: CVX) Started as Buy at Jefferies.
The Children’s Place Retail Stores, Inc. (NASDAQ: PLCE) Cut to Neutral at JPMorgan.
Coca-Cola Femsa (NYSE: KOF) Raised to Buy at BofA/ML.
ConocoPhillips (NYSE: COP) Cut to Hold at Deutsche Bank; Raised to Buy at S&P Equity Research.
eBay Inc. (NASDAQ: EBAY) Raised to Buy at Stifel Nicolaus.
Evergreen Solar Inc. (NASDAQ: ESLR) Cut to Sell at Wunderlich.
EI DuPont de Nemours & Co. (NYSE: DD) Maintained Outperform as Bull of the Day at Zacks.
Hess Corporation (NYSE: HES) Raised to Outperform at Credit Suisse.
Intel Corporation (NASDAQ: INTC) Maintained as Strong Buy and Value at Zacks.
Itron, Inc. (NASDAQ: ITRI) Cut to Sell at Wunderlich.
Juniper Networks Inc. (NYSE: JNPR) Reiterated Buy and $49 target at Argus.
LM Ericsson Telephone Co. (NASDAQ: ERIC) Raised to Buy at Deutsche Bank.
National Oilwell Varco, Inc. (NYSE: NOV) Raised to Buy at Citigroup.
Patterson-UTI Energy Inc. (NASDAQ: PTEN) Raised to Neutral at Goldman Sachs.
Urban Outfitters Inc. (NASDAQ: URBN) Cut to Market Perform at William Blair.
Yum! Brands Inc. (NYSE: YUM) Reiterated Buy and Raised target to $62 at Argus.

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JON C. OGG

Not everyone agrees. Bloomberg New Energy Finance believes that solar panel installations could grow by nearly 50% in 2011.  The company has raised the top end of its estimate for 2011 from 21,500 megawatts to 28,000 megawatts, up from about 18,500 megawatts installed in 2010. Bloomberg New Energy Finance cites both JA Solar Holdings Co., Ltd. (NASDAQ: JASO) and First Solar Inc. (NASDAQ: FSLR) as being the low-cost leaders this year.

The analysts also believe that MEMC Electronic Materials Inc. (NYSE: WFR), makers of silicon wafers for solar PV cells, is well-positioned for profit growth in 2011. Total industry output of polysilicon is about 24,000 megawatts, meaning that MEMC’s products will be in high demand. First Solar, which does not use polysilicon wafers, could also make up any difference if the demand exceeds the total polysilicon available.

China slowed down its aggressive plans to develop 100,000 megawatts of nuclear power capacity by 2020 after the damage at Japan’s Fukushima Daiichi plant. The country had planned to have about 43,000 megawatts online by 2015, up from about 11,000 megawatts at the end of 2010. But an official of the state electricity council does not believe that target will be met, and the 2020 target could drop to 90,000 megawatts.

This is not good news for developers of nuclear plants. General Electric Co. (NYSE: GE), Toshiba/Westinghouse, and France’s Areva CIP (OTC: ARVCY) held high hopes for a burst of nuclear plant-building in China. Areva’s contract to build six plants in India could also be in jeopardy due to a corruption scandal in the country.

And speaking of GE, the company has announced the purchase of a 90% stake in French electrification and automation equipment firm Converteam for $3.2 billion. GE will purchase the remaining 10% of the company from Converteam’s senior managers for no more than $480 million over the next two to five years.

This deal is likely a counter-move to Swiss-based ABB Ltd.’s (NYSE: ABB) acquisition of Baldor Electric Co. that was completed in January 2011. ABB paid $3.1 billion for Baldor and assumed $1.1 billion in Baldor’s debt. Both Converteam and Baldor make and sell precision electric motors that are essential in all sorts of industrial automation projects. The two companies’ motors are also heavily used in alternative energy projects related to solar, wind, and the smart grid.

Paul Ausick

ABB Ltd. (NYSE: ABB) Raised to Buy at Stern Agee.
Akamai Technologies Inc. (NASDAQ: AKAM) Started as Market Perform at Wells Fargo.
Amgen Inc. (NASDAQ: AMGN) Maintained Underperform with $56 target at BofA/ML.
Carnival Corporation (NYSE: CCL) Raised to Buy at S&P Equity Research (likely late-Tuesday call).
GOL Linhas Aereas Inteligentes S.A. (NYSE: GOL) Cut to Hold at Argus.
Red Hat Inc. (NYSE: RHT) Reiterated Buy and $53 target at BofA/ML.
Sunoco Inc. (NYSE: SUN) Reiterated Sell at Argus.
SuperValu Inc. (NYSE: SVU) Raised to Buy at Hapoalim.
Tenet Healthcare Corp. (NYSE: THC) Cut to Market Perform at Wells Fargo.
TIBCO Software Inc. (NASDAQ: TIBX) Maintained as Underperform at BofA/ML.
Trina Solar Ltd. (NYSE: TSL) Maintained Neutral but target raised to $26 from $17 at Credit Suisse.
UnitedHealth Group, Inc. (NYSE: UNH) Reiterated Outperform and target raised to to $48 at Credit Suisse.
Yingli Green Energy Holding Co. Ltd. (NYSE: YGE) Started as Neutral with $12 target at Credit Suisse.
YRC Worldwide. Inc. (NASDAQ: YRCW) Maintained Underperform at Credit Suisse.

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JON C. OGG

ABB Ltd. (NYSE: ABB) and Baldor announced a pact where ABB would acquire Baldor for $63.50 per share.  The overall transaction value is listed as $4.2 billion, if you include the net debt of $1.1 billion.  The current market cap after a 40% pop is right at $3 billion.

We wanted to see if this has had any impact on Baldor’s peers.  Baldor Electric Company markets, designs and manufactures industrial electric motors, mechanical power transmission products, drives and generators.  The company employs close to 7,000 people. ABB employs about 117,000 worldwide.

A.O. Smith Corp. (NYSE: AOS) also has exposure in electric motors for the residential, commercial, and industrial markets.  It is no shock that it is higher and shares are up almost 7% at $39.64.  The 52-week trading range is $27.39 to $40.24 and its market cap is listed as $1.8 billion.

Regal Beloit Corporation (NYSE: RBC) is also higher as it makes and sells electrical and mechanical products to original equipment manufacturers, distributors, and end users. Its shares are up 5.3% at $61.39, its 52-week trading range is $45.61 to $67.32, and its market cap is currently $2.37 billion.

AMETEK, Inc. (NYSE: AME) is probably considered more indirect than Regal Beloit and than A.O. Smith.  It manufactures and sells electronic instruments and electromechanical devices in two segments: Electronic Instruments Group and Electromechanical Group.  AMETEK is up 2.0% at $59.26 and it hit a new 52-week high.  The 52-week range is $35.64 to $59.37.  One other issue to consider is its larger market cap, listed as $6.3 billion.

JON C. OGG

To make this determination, we’ve looked at a number of characteristics we think will play an important role in shaping the industry’s future. First, we chose companies we think are market leaders based on their market capitalization, revenues, and technology leadership.

Second, we tried to assess the longer-term opportunities a company has based on its current influence, the strength of its competitors, how much influence government policy will have on its success, and how likely it is and how quickly the company’s products can be implemented at a reasonable scale.

Third, we tried to assess a company’s access to capital. Some of the questions we asked were: Is it publicly traded or privately held, how strong is its balance sheet, and, perhaps most important, how much support can it expect from government?

Fourth, we looked at a company’s customers, their size, and their influence in their own industries. Finally, we tried to assess how high the barriers are to competitors entering the same sector. Likewise, how well can a company fight off competition that’s already in the sector?

Not every company has a top rating in each category, but the ones we’ve picked have a good many of them.

In addition to looking at the companies, we’ve also identified a few issues that are going to provide the context for alt energy companies in the years ahead. Perhaps the most important of these, from a commercial standpoint, is what policies China and the US will adopt. China plans to spend aggressively on its own domestic alt energy initiatives, and it is pouring enormous amounts of money into the coffers of several of the country’s manufacturers.

Other areas that bear watching are consumer acceptance for electric vehicles and plans for infrastructure investments in the electricity grid and in smart-grid technology.

Solar Photovoltaic

There are dozens of companies developing products to tap into the solar PV market. The issues in that market come down to volume and cost compared with efficient conversion of sunlight into electricity. Thin-film technology has emerged as the cost leader, and, because it is somewhat easier to manufacture, the volume leader as well. Crystalline silicon technology has been more costly to produce, but the higher conversion rates have helped keep the costs reasonably comparable to thin-film cells.

The ‘holy grail’ of solar PV makers is cost parity with fossil fuel-generated electricity, like coal-burning power plants. The race to parity is the next great competition. The first company to cross the finish line will need to get a lot of help from the makers of all the equipment that goes into finishing and installing solar panels, of whatever technology. Solar PV makers need to ramp production, lower costs, and win big contracts for utility-scale projects.

1. First Solar Inc. (NASDAQ:FSLR) was until recently the volume leader in the solar PV industry. It’s thin-film products offer a significant price advantage over the mono- and multi-crystalline products offered by its competitors. From 2009 to 2010, First Solar reduced its cost by 14% to $0.76/watt. No other solar technology is even close. Combined with a market cap of around $12 billion, a solid European customer base (which could erode if government subsidies are cut substantially or eliminated), a solid balance sheet and its own installation pipeline, First Solar is in a very good position to prosper.

The company also has a joint venture in the works with a Chinese partner to build a 2,000 megawatt solar PV project in Inner Mongolia. First Solar’s contract for the deal is being challenged by some Chinese solar PV makers. If the company loses the deal it would be a big blow to its plans. However, losing the deal may not be the worst thing that could happen.  That is because it would prevent First Solar from having to share its technology with the Chinese, which is a condition of the original contract award. Keeping the crown jewels in the vault may be worth more than the few billion that the Mongolian project will generate.

Also Read: New Study On Broadband Quality Ranks US 15th

2. SunPower Corp. (NASDAQ:SPWR) currently boasts the highest conversion rate of sunlight to electricity of all the solar PV makers. The company’s components business accounted for 61% of all its revenues in 2009, up from 40% in 2007. The company’s components include solar panels and inverters. SunPower’s systems business declined from 60% in 2007 to 39% in 2009. To turn that back around, SunPower has acquired a downstream company with a good project pipeline. That acquisition should start the turn-around in 2010, and continue to improve in 2011.

SunPower’s international business accounted for 71% of its 2009 sales, and it has a strong position in Germany, which is expected to install about 6,700 megawatts of solar PV in 2010. One megawatt generates enough electricity to power 800 households for an entire year. SunPower, however, is not among the low-cost providers and must depend on its superior (for now) conversion rate to differentiate itself from its competitors. For SunPower to live up to its place on our Top 25, it needs to maintain its technological leadership and become more competitive on downstream projects.

The project uses 140 turbines from Siemens AG (NYSE:SI), of which Fluor has installed 53 to date. When the Greater Gabbard project is completed it will be the largest offshore wind farm in the world. But probably not for long as the UK has issued licenses for nine additional North Sea wind farms ranging in size from 600 megawatts up to a staggering 9,000 megawatts. Siemens, General Electric Co. (NYSE:GE), and other turbine makers have committed to locating plants in the UK to build the thousands of turbines that will be needed for this effort.

Fluor attributed $163 million charge to “a variety of execution challenges.” These included material and equipment deliveries related mostly to installing generators and cabling. The charge comprises “substantial costs” for additional marine vessels and related subcontractor costs, equipment repairs, and an estimated charge for “schedule impact”. The company says it “has taken a number of remedial actions to mitigate further cost escalation and delays to the schedule.”

As more and more offshore wind is developed, especially in the North Sea, competition for the sea-going vessels required to build the platforms and install the turbines will increase, as will competition for materials like cables to connect to the several turbines in a project to a central platform and then to the onshore grid. Governments will want to work from fixed-price contracts and construction companies will seek cost-plus contracts in an effort to prevent the cost overruns and delays that just hit Fluor.

Turbine makers like Siemens, GE, Vestas, and, very likely, Chinese companies like China Longyuan Power Group and Xinjiang Goldwind that are quickly ramping up manufacturing capability and technological expertise will all compete for these projects. Wire providers like American Superconductor Corp. (NASDAQ:AMSC) and General Cable Corp. (NYSE:BGC) and construction companies like Fluor and ABB Ltd. (NYSE:ABB) with experience in grid connections will also be in big demand.

Fluor’s shares have lost more than 5% this morning on very heavy volume.

Paul Ausick

ABB Ltd. (NYSE: ABB) Cut to Sell at Societe Generale.
Actuate Corporation (NASDAQ: ACTU) Raised to Buy at Roth Capital.
BP plc (NYSE: BP) Maintained Buy at Citigroup.
Cummins Inc. (NYSE: CMI) Added to Conviction Buy List at Goldman Sachs.
Dr. Reddy’s Lab (NYSE: RDY) Raised to Overweight at Morgan Stanley.
Exxon Mobil Corp. (NYSE: XOM) Cut to Hold at Deutsche Bank.
LM Ericsson Telephone (NASDAQ: ERIC) Raised to Equal-Weight at Barclays.
3M Co. (NYSE: MMM) Removed from Conviction Buy List at Goldman Sachs.
Melco Crown Entertainment (NASDAQ: MPEL) Started as Hold at Daiwa Securities.
Microsoft Corporation (NASDAQ: MSFT) Started as Buy at Standpoint.
Neostem Inc. (AMEX: NBS) Cut to Hold at Roth Capital.
Nokia Corporation (NASDAQ: NOK) Raised to Overweight at Barclays.
Research in Motion Limited (NASDAQ: RIMM) Cut to Negative at Susquehanna.
Werner Enterprises (NASDAQ: WERN) Raised to Outperform at Wells Fargo.
Western Digital Corporation (NYSE: WDC) Cut to Neutral at Robert W. Baird.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG