Welcome to the New World of the Smart Grid

Perhaps ironically, it took one of the worst financial and economic crises of the past three decades to bring "the grid" into investor focus. To be sure, certain alt energy aficionados such as Tom Konrad have been on this topic for a long time (Tom is actually the one who introduced me to the grid as an investment theme). However, it is fair to say that most investors, including alt energy investors, have not historically paid the grid a huge deal of attention.

That is because most people outside of alt energy and VC circles held, until recently, the Old World view of the grid. In the Old World, the grid was a collection of transmission and distribution systems (i.e. transmission towers, utility posts and wires) connected together by the odd utility sub-station. In the Old World, investments into the grid mostly took the form of maintenance capex by utilities, and there was little growth, at least in North America, beyond what was needed to keep up with economic and demographic expansion (2-3% per annum often offset by efficiency gains). Though antiquated and inefficient, the system mostly 'did the job' and the lack of coordination between various actors meant that no one would take the lead on massive investments required to upgrade the old infrastructure. In the Old World, the grid was nothing to write home about from an investment perspective.

Enter the New World, the world of the smart grid, where the electric grid doesn't stop at the connection with your house or office building, but can potentially extend all the way into nearly every electric device you use - if it can be plugged in, it can be made 'smart'. In the New World, IT capabilities are leveraged to optimize grid management. In effect, energy management, which used to rely on a closed system approach, is now integrated with the grid, opening a whole New World of possibilities. (I am admittedly not an expert in the technological ramifications of the smart grid and this post is not about the tech side. I find SmartGridNews.com to be a great source of info. I liked their reviews of various smart grid technologies.)

The New World has actually been with us for some time. Smart grid pure plays such as Comverge (COMV), RuggedCom (RUGGF.PK) and EnerNOC (ENOC) all IPOed in Q2 2007, raising the profile of New World investment opportunities. However, in the broad world of alt energy investing, smart grid plays were often overshadowed by the mightier solar sector, in part because growth rates were far higher and in part because the smart grid business model is a bit arcane.

Fast forward to the 2008 U.S. presidential run-off, where the leading candidate, Barack Obama, spoke repeatedly of the need to invest massively into the U.S. power grid to make it smarter and more efficient. Most people probably can't remember the last time they heard a presidential candidate make the electric grid a central pillar of his / her energy policy. Nearly immediately following the election, the new President pumped, as part of his American Recovery and Reinvestment Act, $4.3 billion into mostly New World grid opportunities.

While this may seem small in comparison to the total size of the investment required to upgrade the grid (Old and New World) over the next couple of decades (The Brattle Group estimates that around $880 billion in transmission and distribution investment will be made by 2030), this amount is over 15x the combined 2008E sales of Comverge, RuggedCom and EnerNOC. Throw in Itron (ITRI), a $2 billion company that provides a number of utility products and services beyond smart meters, and the final package is still over 2.2x the combined 2008E revenue of all four companies. In other words, for this emerging sector, this is a fair chunk of change.

Besides the revenue that will flow in as a result of direct government expenditures, the impact of the American Recovery and Reinvestment Act will be felt for years to come as it jump-starts the industry. And the U.S. isn't alone: the Canadian province of Ontario established a Smart Grid Forum that recently recommended spending C$1.6 billion over the next five years on smartening the grid there. Smart grid opportunities are also attracting large firms with no energy management background but expertise in complementary areas that can be leveraged.

Where does that leave investors? With the very real possibility that smart grid stocks will outperform the broader alt energy space over the next 12 months. Like other areas of alt energy, there are a growing number of ways to play the smart grid as larger cap firms with diversified revenue sources enter the space. The table below lists out some of the main publicly-traded plays on the smart grid.

Smart Grid Stocks
Name	Ticker	Exposure to SG	Mkt Cap ($mm)	PE
RuggedCom	RUGGF.PK	Very High	252	23.44
Comverge	COMV	Very High	103	n/a
EnerNOC	ENOC	Very High	225	n/a
Itron	ITRI	Very High	1,810	66.39
Echelon Corp	ELON	Very High	287	n/a
Digi International	DGII	High	192	20.19
IBM	IBM	Medium	123,260	10.24
Cisco	CSCO	Medium	90,878	12.12
Google	GOOG	Low	110,110	26.24

To be sure, I am a little late on this one. Although I did discuss the potential for the smart grid to receive some focus in Obama's economic stimulus package in December, I initially believed that the Old World grid would receive as much if not more than the New World grid. In the end, Old World got next to nothing, which somewhat surprised me given its state of disrepair.

While I don't expect the smart grid to move the needle for the companies whose exposure is categorized as "medium" and "low" in the table above, my sense is that the "very highs" and the "high" will outperform alt energy stocks in general over the next 12 months. We will check again then!

DISCLOSURE: Charles Morand does not have a position in any of the stocks discussed above.

Comments

[donzelion:]

The main problem with the grid is that it's been "Enronifed." Everyone is afraid of putting money into the next "smartest guys in the room." That'll pass, as memory fades.

The second problem seems to me that "smart grid" concepts have lousy business cases, but wonderful moral or social cases. In those few cases where it's obvious that implementation will save money over the long-term, the money has mostly already been spent - the low hanging fruit here is already plucked, and it'll take hard work to get things off the ground.

Which actually shouldn't be a problem. I love one of the smart grid concepts of "micro-generation" - household installations that make their own energy, and sell excess capacity back into the grid (e.g., install your own windmill or solar panels). If the commodities to pull it off become less expensive, and if most of the work is labor (but not intensive labor, like farming - just occasional maintenance), then this sort of a route could generate a new, modest revenue stream for a lot of semi-retirees. And THAT would work wonders...

Feb 19 06:55 AM

[KKOR:]

what about ESE; shouldn't they benefit too?
The Utility Solutions Group develops advanced metering
infrastructure (AMI) products and services for the electric, natural gas, and water utilities.

Feb 19 07:39 AM

[KKOR:]

what about ESE? The Utility Solutions Group develops advanced metering
infrastructure (AMI) products and services for the electric, natural gas, and water utilities.

Feb 19 07:43 AM

[john s. gordon:]

donz - how about your own fuel cell?
makes hot water for you, sell any excess electricuty to the utility company.
> jack

Feb 19 08:13 AM

[William Taylor:]

Wondering if BCON plays a role in your thoughts.

Feb 19 10:21 AM

[Altiminister:]

WHAT ABOUT ALTAIRNANO (ALTI). DEVELOPED, TESTED BY KEMA, A 2 MGW. STORAGE AND DISTRIBUTION BATTERY .. LITHIUN-ION /NANO TITANATE. FANTASTIC TEST RESULTS LAST SUMMER. PRESENTLY BEING UTILIZED IN THE PA. AREA GRID INSTALLED BY AES CORP. BATTERY IS EXCELLENT STORAGE FOR SOLAR AND WIND FARMS.

Feb 19 10:31 AM

[HEYJOSE01915:]

Is there an etf that covers the smart grid concepts?

Feb 19 10:38 AM

[koolsool:]

Obama's pre-election promises of making the energy grid, energy policy & energy independence a priority appear to be just all talk. There needs to be a huge investment to update the electric grid to be able to use wind & solar as alternative to coal fired utilities. There needs to be a much larger investment in smart grid & energy conservation. He missed the mark by a mile in the stimulus package, not even close.

Feb 19 11:35 AM

[sieraromero:]

koolsool- agree 100%. It is the one stimulas that would solve so many problems(both current and future) It would provide immediate stimulas to the economy. It would reduce future oil price increases which will go back up if and when the economy gets better. This in turn will better protect our international rep. while at the same time reduce military spending and provide for a better national defense. It is the only hope for our countries future!

Feb 19 12:03 PM

[Jesse Berst:]

Charles - Thanks for the kind words about SmartGridNews.com. I think you will find that the Stimulus bill contains numerous pots of money that could be (and will be) applied in part to the smart grid, including some that are labeled as transmission or as energy efficiency.

What's more, the additional attention and effort brought about by the inclusion will have a strong multiplier effect. It has legitimized the category as the next big thing. As we speak, teams are forming to pursue smart grid projects, entrepreneurs are adapting their products to the smart grid and utilities are jumping on board with enthusiasm.

Jesse Berst

Feb 19 12:46 PM

[TinyTim:]

As I've commented before, the smartgrid is mostly hype. Although there are some excellent references linked in this article, a detailed reading reveals nothing more than basic growth of the grid. Until about 1975, the grid grew about 10% per year like clockwork. For the last 30 years, it's been about 2%. What happened? Overbuilding, then barely nothing. Cheap combustion turbines and oil/gas steam plants near urban points of use kept up with peak loads. With these fuels purportedly past their peak, the transmission part of the grid needs to change to access more remote energy sources (including renewable and alternate). The only play here is the major aluminum companies that move metal through their wire and cable divisions or possibly General Cable. It's more related to energy independence than smartgrid.

While the DOE has a specious description of the smartgrid, it really boils down to smart meters and the extent to which consumers can be incentivized to control demand thru more information and rate structures. Smart meters will primarily reduce meter reading costs.

Right now, all the hype due to free Federal money and "the additional attention and effort brought about by the inclusion will have a strong multiplier effect. It has legitimized the category as the next big thing." Without the Feds, this would be pure pump and dump stuff.

For example: "Enter the New World, the world of the smart grid, where the electric grid doesn't stop at the connection with your house or office building, but can potentially extend all the way into nearly every electric device you use - if it can be plugged in, it can be made 'smart'."

I believe this has been tried before. It's called a Smart Home and has been trying to get off the ground for decades. There are industry standards, appliance mfr alliances and annual CES dog & pony shows.

I'm not trying to rain on anyone's parade. The electric power top end infrastructure (Gen / T&D) needs to change and smart meters may help, but marginally. Load leveling on the supply side (storage) or demand side (recharging EV's, rooftop PV) could eliminate a major use of oil & gas.

An unintended consequence of "the next big thing" may be broadband internet over powerline for SCADA. For residential broadband, especially in remote areas, this could add another revenue stream for electric utilities in line with BHO's other initiatives.

Feb 19 11:55 PM

[frflyer:]

There are many startups that bear watching that are related to this space. Like SmartSpark Energy and Enphase Energy, both of whom make microinverters for converting the DC power from solar panels on your roof to AC power, in conjunction with monitoring systems.
By startups, I mean venture capital stage.

koolsool

There would have been more green in the stimulus bill, but Republicans had to get their tax cuts that amount to 36% of the bill.
All in all, considering the politics of global warming and special interests, it's not bad.
Many feel that Obama offered them too much to start with in an attempt to be bipartisan. Then they accuse him of not being bipartisan because they didn't have to fight for what they got. They were probably right that the Dems had too much pork in it, but the huge loan guarantees they wanted for nuclear were their own pork, which fortunately were cut also. That's what happens when about 75% of Republicans thing they are smarter than the 97%-99% of climate scientists who actually study the climate.

Not that I think nuclear won't play a part, but it isn't ready, and we need to focus on what we can build now that reduces emissions and gives some energy independence. I think we could easily have 100 gigawatts of solar and wind installed by the time the first new nuke goes online with 1 gigawatt. The same huge loan guarantees for solar thermal with heat storage, for instance, would create new power much faster, cleaner and cheaper. And it too can be base load power and run day and night.
More jobs too. Plus nuclear has already been subsidized for 50 years. Which isn't so bad I guess, when you consider that oil has been subsidized for 90 years.

Feb 20 02:15 AM

[sg-neophyte:]

i discoevered the "smart grid" only recently, and did just a little research in this space as an investor.

"smart grid" sounds just wonderful, except, as pointed out, that the government support is 99% rhetoric and whatever monetary. the other issue, which was not pointed out here but was reported in the press is standards issue a la "vhs vs. beta-max." the original language in the stimulus bill was for open protocols, whereas the established companies in the space, such as itron which has been working with utility companies for quite awhile, have proprietary protocols which have proven track records and which they are intent on protecting.

so one is not only betting on the technological superiority of protocols, one is also placing a highly politicized bet.

caveat emptor stills rules.

Feb 20 11:25 AM

[Cobra 1:]

ELEAVATOR PITCH: The electric grid in America was build in the 50's and 60's. Since that time, growth has been 6% consistently while decommissioning is averaging -2%. With the expected new consumption coming on line with more people being at home and business shifting to different operating parameters, those numbers are going to increase in an inverse scale.

We need solar, but, solar operates during the day, not much help for peak loads that are being commissioned at a 2% and greater rate. We need to reduce peak demand and increase the efficiency of what is being used.

That my friends is the nut we need to crack. The new stimulus measure will help, but by a very small amount.

For real reduction, we need the smart grid (IE real time consumption data) to understand the essence of the smart grid. You need to understand how its being used before you can possibly control that use! JMHO

Feb 23 10:01 PM