The Blackout Opportunity
On April 28th, the Iberian Peninsula went dark, with millions of customers without power for most of the day and night. If you’ve ever lived through an extended blackout, you know what goes on: no heat, no a/c, hot water, lights, internet, phones, computer networks, refrigeration, etc., etc. As someone who once lived through an outage for a week during the dead of winter, believe me, it gets very old, very fast.
In this case, the Iberian blackout and what it suggests about the future of power production and distribution may present an opportunity in the energy sector that isn’t obvious and shouldn’t be overlooked.
By way of background, the Iberian Peninsula (Spain and Portugal) has been at the forefront of renewable power generation (wind and solar). At the time of the blackout, solar was providing 59% and wind 11%; the balance was from nuclear and natural gas. Everything was normal.
Immediately after the blackout, rumors circulated that a cyber-attack had occurred. After these were disproved (grid operations are disconnected from the internet), it became apparent that a technical failure had occurred. What happened? Although the final diagnosis has not been determined, it’s very likely that the grid failed due to poor management. It gets very technical, but suffice it to say that there was an initial shock to supply, and the grid could not adapt quickly enough, i.e., by either importing power from other countries or through generation with sufficient inertia to buffer the loss. Inertia is the characteristic of certain generating units to maintain stable output; they don’t switch on or off quickly. It comes from units powered by nuclear or natural gas, those with giant, rotating turbines; renewables, such as solar, have near zero inertia. Their role in maintaining grid stability is therefore problematic.
Although the outage was relatively short, power companies and regulators worldwide took notice. Whether the blackout was primarily due to the region’s reliance on renewables or not, the perception is that they contributed to the situation, somehow, and that there must now be renewed emphasis on reliability. If renewables are going to be a major part of supply, then conventional nuclear or gas-fired generation must be included in the mix to maintain grid stability. Even politicians dedicated to net-zero goals have noticed. When the lights go out, voters tend to get upset.
Which finally brings me to an old favorite of mine, Cheniere Energy (LNG), the largest exporter of liquified natural gas in the US and the second largest producer in the world. Unlike regular natural gas that can only be delivered via pipeline, liquified natural gas can be transported via specially-outfitted tankers to anywhere in the world. All it takes are receiving terminals in which the LNG can be converted back to gaseous form. Natural gas then takes on an international role, and Cheniere takes center stage.
For power grids that are anxious to expand the natural gas portion of their supply to increase grid reliability, but might be limited due to pipeline constraints or restrictions, LNG is the obvious answer. We saw this during the 2022 European energy crisis, when Germany imported LNG in reaction to the curtailment of Russian gas.
For Cheniere options traders, the most recent moves in price and implied volatility are encouraging. After a significant bump-up due to the tariff panic in early April, LNG implied volatility has come off sharply and is now over 27 percentage points, or 51%, lower! All things being held equal, that’s more than a half-off sale!
