Often, investors who want to play energy would simply look at energy shares or ETFs. But the institutional approach is to look around for the cheapest way to get this exposure. For example, explains Steven M. Sears for Barron’s, if they’re looking to buy energy, they’d check out commodities, bonds, stocks, options and even credit default swaps.

This is why, if you’re looking at an energy play, Sears says you might consider a utility sector ETF such as the Utilities Select Sector SPDR (NYSEArca: XLU) because it offers a cost-effective way to get your portfolio in place if an increase in natural gas prices comes along.

Why? Utilities are increasingly using coal and natural gas to generate power, and electricity prices are set on the basis of consumer demand as well as the supply of natural gas and coal. Therefore, Sears says, XLU is showing a higher correlation to energy prices.

The biggest risk to utility ETFs and shares is the government legislation on greenhouse gases, which could increase their costs over time. Such legislation could force utilities to purchase CO2 pollution allowances, which could cut into earnings, says The Motley Fool. (Read more about what climate change legislation means for utilities).

Utility stocks typically lag during strong bull markets as investors chase higher growth prospects, but they do not tend to decline much during a bear market, Fool notes. Be sure to approach your investments with a strategy in place, such as by using the 200 day-moving-average. (Read about trend following here).

For more stores about utilities, visit our utility category.

• iShares Dow Jones U.S. Utilities (NYSEArca: IDU): up 3.5% year-to-date

• Select Sector SPDR Utilities (NYSEArca: XLU): up 2.3% yer-to-date

One thing to note is that all of these companies are in the “essential services” sector, such as consumer staples, energy, health care and utilities, states Greg Donaldson of Seeking Alpha.  Some of these companies include Coca Cola (KO), which raised its dividend 8%; Colgate (CL), which raised its dividend 10%; Kinder Morgan Energy Partners (KMP), which saw an 11% hike; Abbott Labs (ABT), which raised its dividend by a whopping 11%; and FPL Group (FPL), which shot off a 6% increase in its dividend.

In general, these companies are raising their dividends for the following reasons:

• Their earnings are growing and they are confident that prosperity is in their future, despite the economic downturn
• They have a history and track record of sharing their financial success with their shareholders by increasing their dividends
• They are in solid businesses that produce positive cash flows from which dividends can be paid

If these companies continue to be financially successful and are willing to share this success with their shareholders, the ETFs that contain them will become more attractive and could generate a higher ROI, with dividend payments included, than a run-of-the-mill index; but remember to watch the trendlines if considering to get into an ETF that holds these companies.

If you do want to grab exposure check these out:

• WisdomTree LargeCap Dividend Fund (DLN): down 27.1% year to date; KO is 1.66%; ABT is 1.2%

• PowerShares Dynamic Consumer Staples Fund (PSL): down 15.5% year-to-date; CL is 2.6%; KO is 2.4%

• Utilities HOLDRs (UTH): down 18% year to date; FPL is 8.9%

Second-quarter profits rose 20% after the price in electricity has gone up, in the Southeast and Midwestern United States. Jim Polson for Bloomberg reports that net income climbed $351 million, or 28 cents per share, and total revenue up 8.9%. Duke’s utilities are up because of higher rates, as the company is building new power plants and reducing air pollution.

The United States has an aging power grid that could be brought into modern times by 2010, if a planned $17 billion is spent by power providers to do so.

Duke supplies power to about 4 million homes in the Carolinas, Indiana, Kentucky and Ohio. The average cost of electricity in those states ranges from as high as 7.53 cents per Kilowatthour (North Carolina) to 5.43 cents (Kentucky). In New York, the average price per killowatt hour is 15.27 cents, according to the Energy Information Administration.

Meanwhile, the Midwest seems to continue to feel pain from a rough storm season. At least 288,000 homes and businesses are affected in the two states, but according to Exelon Corp.’s Edison CommonWealth Unit, the number of customers who were in the dark has been as high as 427,000, reports Scott DeSavino for Reuters. It is estimated to take several days before the power is restored.

Related ETFs include:

• Merrill Lynch Utilities HOLDRs (UTH): down 12.2% year-to-date; 19.5% Exelon
• Utilities Select Sector SPDR (XLU): down 11.6% year-to-date; 5.2% Duke; 12.9% Exelon
• iShares Dow Jones Utilities Sector Index Fund (IDU): down 11.8% year-to-date; 3.5% Duke; 9.4% Exelon

The target is for electric power providers to spend $17 billion on upgrades by 2010, reports Steve Gelsi for MarketWatch. The alternative, if the industry doesn’t start making improvements, is increased blackouts and power-quality problems.

Utility providers are stuck, though, between the effects of an economic slowdown and uncertainty about climate legislation. Even so, while the power industry has often been criticized for its pokiness, it has stepped up efforts to go high-tech. But some still fault the industry for only stepping up their efforts after a crisis.

For example, the summer 2003 power outage that affected much of the Northeast. First Energy’s (FE) territory in Ohio was found to be the cause.

Dominion (D) has been offering “smart meters” to homes in Virginia that allows users to tell them how much energy they’re consuming and what it costs. But many of these improvements aren’t coming for free. Florida’s provider, FPL (FPL), got the go-ahead to raise monthly bills by 8% from August through December to offset rising fuel costs.

But even with all the problems of high cost and a creaky system, energy demand continues to rise. Kevin Law, CEO of the Long Island Power Authority, says that on Long Island alone, yearly demand is going up 2% in Nassau and Suffolk counties, and 7% on the eastern end of the island.

Will high-tech translate into high returns for utility ETFs?

• Utilities Select Sector SPDR (XLU): down 2.7% year-to-date; Dominion is 5.7%; FPL is 6.2%; First Energy is 5.3%
• iShares Dow Jones US Utilities (IDU): down 3.3% year-to-date; Dominion is 4.3%; FPL is 4.1%; First Energy is 3.9%
• Vanguard Utilities (VPU): down 3.5% year-to-date; Dominion is 4.3%; FPL is 4.4%; First Energy is 3.8%
• Utilities HOLDRs (UTH): down 1.6% year-to-date; Dominion is 7.5%; FPL is 7.9%; First Energy is 5.8%