Investing in the Smart Grid

With the likely passage of the “Cap and Trade” bill, many investors are jumping on the renewable energy bandwagon. And why not? With the government about to mandate a cap-and-trade program that will drive up the cost of electricity, there are many new opportunities to capitalize on the flow of investment dollars from public and private sources. They also are looking for investment opportunities through stocks of smart grid companies.

This headlong push into alternative power generation is causing investors to take a new look at the old electrical grid system. While there have been attempts to move to a market based power generation system, most of these efforts have failed to achieve their original goals.

Moreover, the electricity transmission and distribution system remains much the same and is a big problem. For example, T. Boone Pickens has announced he is curtailing his plans to build the world’s largest wind farm in West Texas. Part of the reason is the lack of adequate transmission lines to carry electricity from the remote wind sites to cities. This is where a smart grid investment program makes sense for investors.

Investing in the Smart Grid

This old electrical grid system is designed to distribute power from consistent generation facilities that are close by. Building large wind farms in West Texas requires a way to move that power to urban areas that need it. Moreover, what happens if the wind stops blowing during the hottest days of the summer?

Our current electrical grid system is ill suited to handle the variability of new sources of electrical power. Solving the transition to new power sources is only half the battle. After generating the power, you need to distribute it to where it is needed at the right time, in the right amounts and at a lower cost.

You can make an interesting comparison with the current electrical grid and communications network. If Alexander Graham Bell, the inventor of the telephone, were to come back today, he would not recognize the modern day communication system with digital based internet and wireless networks with their cell phones, Web 2.0, YouTube and Twitter.

On the other hand, if Thomas Edison were to return, he would readily recognize our electrical transmission and distribution scheme, as he was one of the grid’s earliest architects. While it has grown significantly, the basic design remains the same.

The smart grid is the conceptual answer to the vast changes needed to adapt the current electrical system to one that is more efficient, adaptable, and capable of handling the variability of the sources of power while helping customers use electricity more efficiently. Like the evolution of the internet and the dotcom boom and bust, this is a huge opportunity with many unknown risks.

The Opportunity

According to Cisco (CSCO), the smart grid offers major investment opportunities that are bigger than the internet for those prepared to take advantage of them. Jeff Immelt, CEO of GE (GE) believes the smart grid will be the biggest investment of the first half of the 21^st century. President Obama is counting on investments by the government and companies in the smart grid to help the United States release it from its dependence on foreign oil.

According to a 2009 report by the American Society of Civil Engineers, $2 trillion will need to be invested in our electric infrastructure by 2030. The Brattle Group estimates that it will take $1.5 trillion to between 2010 and 2030 to pay for the upgrades necessary for the additional infrastructure for tomorrow’s electrical system.

These investments will take place throughout the electrical grid, in the home, in buildings, on campuses, neighborhoods in cities and across continents. Already we are seeing a few of these improvements. Some homes have smart meters that track electricity use in detail, providing the information to utilities.

Eventually, homeowners will be able to access this data so they can make adjustments in their power consumption. The cost of these meters is quite high and is passed on to consumers. The hope is that once consumers have access to the information on their electricity usage, they will take steps to cut their consumption of electricity offsetting the cost.

The Risks of Investing in the Smart Grid

This raises the question whether there is a cost-benefit trade off from many of the investments to achieve the goal of a smart grid. Many people equate the smart grid to the growth of the internet. Much like the investment that came with the growth of the internet, there were some that provided valuable benefits. Others never paid off.

I suspect we will see many smart grid investments experience the same fate. For example, as reported by the WSJ on APRIL 27, 2009, the home smart meters cost $250 to $500 per installed device. At this price, it is not clear if the meters will provide sufficient benefit to cover their costs.

The parallel to investing in the internet is an interesting analogy. The big winners were able to attach themselves to the “killer application” that drove business to them. However, there were many losers who failed to achieve their promise. Finally, those who provide many of the components and installed the infrastructure did well, even if they were not big winners.

OK, what is the killer application of the smart grid? The best definition I found for a killer app comes from NetReturn.com:

A new good or service that establishes an entirely new category and by being first dominates it creating an enormous return on the initial investment.

Some people believe the smart grid killer app will be the electric plug in car. Not sure, that meets the definition very well.

Anyone remember the smart home? It has been trying to get off the ground for a number of years. This was another idea some put forward that has not received much success, as the payoff has been hard to generate.

Smart Grid Companies and Stocks

There is a number of start-up and established smart grid companies creating products for this market. Smart grid stock pure plays such as Comverge (COMV)), RuggedCom (RCM.TO) and EnerNOC (ENOC) all became public in the second quarter of 2007. Some very large companies like GE, Honeywell (HON), Cisco, and Google (GOOG) have smart grid offerings. Keep in mind, the size of their smart grid services is relatively small when compared to their total sales.

Companies that provide and install many of the components of a smart grid should offer good returns; much like the companies who sold picks and shovels to the miners. Stocks of smart grid companies like ABB Ltd (ABB), Siemens A.G., and GE are likely to benefit as electric utilities build the new infrastructure for the smart grid.

One way to approach this market is through an ETF that holds stocks in a smart grid fund. The Cleantech Index CTIUS, created by The Cleantech Group LLC is the basis for exchange-traded funds (ETFs) that hold smart grid stocks in the PowerShares Cleantech Portfolio ETF (AMEX: PZD) and the KSM Cleantech ETF in Israel. The index includes large companies like ABB and Siemens as well as smaller firms like Vestas Wind systems (VWS.CO), Itron (ITRI), Trimble Navigation (TRMB) and RuggedCom [RCM.TO]. These ETFs hold stocks of companies that focus on clean technology, not just smart grid companies.

Investing in smart grid stocks will offer exceptional opportunities. It will also create substantial losses for those who do not tread carefully. While it is tempting to bet on what will be the killer app for the smart grid, a more conservative strategy is to focus on the companies that can show real cost benefit from their products or services and who generate positive cash flow.

Comments

[AirBoss:]

ELON Echelon?

Jul 12 08:51 AM

[William Taylor:]

My long shot bet is on BCON, Beacon Power.

New Technology, low carbon footprint, saves utilities money, makes money for company. I have been to the company, see their system work and am optimistic about their efforts.

Jul 12 09:34 AM

[Ferdinand E...:]

Pie in the sky is an appropriate name for the Smart Grid right now.
The cost is going to be tremendous, and although the government should play a big part in such a project, they have other things to think about. Moreover, that expression 'smart grid' seems to have a large number of people who arn't sure as to what a grid is.

Jul 12 09:46 AM

[jerrydd:]

While the smart grid will make lots of money, for many others it will lose money on investing so be very careful.

EV's by having a 50-200kw inverter already that can easily put power back into the grid when needed, V2G, has been done for 20 yrs now, at least the EV part. This has great potential to handle demand peaks which are so costly in equipment, powerlines it could be worth charging the EV for free.

Much RE can be a positive to the grid stability like solar which happens most when demand is highest. Others like solar thermal, CHP, biomass can be callable and run on other fuels like wood pellets to put more power as needed.

As for smart meters they can pay for themselves just in meter reading savings.

While we will need more long distance grids, it won't be as much as many think as the low cost RE will be in home, small business units where because of high prices they pay and no land, powerline costs have a payback in 1/2 the time a distant wind, solar farm might once in mass production.

Then a home could for under $10k/1500sq' could have the RE equipment to make it's own power for it's lifetime with things like Solar thermal and wind and soon even PV as it's, their price is falling while fossil fuels are rising.

Facts are fossil fuels are quickly pricing themselves out of the market only saved short term by the recession. Good investment I think is in quality RE equipment and selling the energy for 50+ yrs they live.

Jul 12 10:18 AM

[La Marque:]

The smart grid is the foot-in-the-door for variable electricity pricing. In the parts of the country that run air conditioners 7 or 8 months a year, the residential consumer is going to be priced out. EV's are going to have to be affordable and very efficient, something they are not now.

Jul 12 11:17 AM

[unclemike7849:]

If you would have defined "EV", "RE", etc., your comment may have made some sort of sense.


On Jul 12 10:18 AM jerrydd wrote:

>
> While the smart grid will make lots of money, for many others it
> will lose money on investing so be very careful.
>
> EV's by having a 50-200kw inverter already that can easily put power
> back into the grid when needed, V2G, has been done for 20 yrs now,
> at least the EV part. This has great potential to handle demand peaks
> which are so costly in equipment, powerlines it could be worth charging
> the EV for free.
>
> Much RE can be a positive to the grid stability like solar which
> happens most when demand is highest. Others like solar thermal, CHP,
> biomass can be callable and run on other fuels like wood pellets
> to put more power as needed.
>
> As for smart meters they can pay for themselves just in meter reading
> savings.
>
> While we will need more long distance grids, it won't be as much
> as many think as the low cost RE will be in home, small business
> units where because of high prices they pay and no land, powerline
> costs have a payback in 1/2 the time a distant wind, solar farm might
> once in mass production.
>
> Then a home could for under $10k/1500sq' could have the RE equipment
> to make it's own power for it's lifetime with things like Solar thermal
> and wind and soon even PV as it's, their price is falling while fossil
> fuels are rising.
>
> Facts are fossil fuels are quickly pricing themselves out of the
> market only saved short term by the recession. Good investment I
> think is in quality RE equipment and selling the energy for 50+ yrs
> they live.

Jul 12 11:38 AM

[optionsgirl:]

I like ABB. Almost $5 Bil in cash, over 40% of sales in emerging markets, a new deal worth $170 million to provide Bahrain's Electricity and Water Authority with 11 electricity substations. ABB is well capitalized and profitable, with growth in emerging markets-that sounds good to me.

Jul 12 12:11 PM

[rrbatch:]

"Smart Grid" is mostly Washington hype. Some aspects of "smart grid" have been around for years: I built a house in Maine in 1986 that used off-peak power to store heat in a large, well-insulated water heater, and to heat silica bricks in space heaters. Central Maine Power installed two meters, one for daytime load and one for off-peak, and charged half the rate for off-peak. The system worked like a champ and paid back quickly when compared to a conventional hot water or forced hot air heating system.

I left the house in Maine to work for the Babcock and Wilcox Co. (subsid of McDermott Intl.) in Virrginia, developing a Superconducting Magnet Energy Storage (SMES) system before retiring in 2000. Our SMES (funded by DoE to the tune of $25 million) was much bigger than the flywheel energy stores made by the likes of Beacon (BCON) designed to replace a battery UPS - it could store 100 MJ and discharge at 100 MW. The objective was to stabilize a transmission grid's voltage and frequency in the event of a malfunction like a sagging line shorting into a tree (happens all the time). We tried hard to find a utility customer willing to install and operate a free SMES, to no avail. The bones of the magnet were eventually delivered to the National High Magnetic Field Lab in Tallahassee, FL, where they still sit.

A "smart grid" will do nothing to reduce our dependence on foreign oil; next to zero oil is burned to generate power, >80% is used for transportation and there is no viable alternative to that use yet. The main purpose of a "smart grid" is to maintain grid voltage and frequency stability, which will be increasingly important as the load shifts between intermittent generation (wind and solar) and base generation (coal, gas, or nuclear). In fact without sophisticated instrumentation and control, intermittent generation will be next to useless in a high-power grid. Massive (>100 MW) "power flow controllers" have been built by the former Westinghouse Transmission and Distribution Group, now owned by Siemens. The biggies in this field will continue to be ABB, GE, and Siemens, supplied with high-power components by outfits like Infineon, ST Micro, and Cree.

Jul 12 02:33 PM

[Alan Young:]

The author is right about all the fundamentals, and about the risks.

If the figure of "$2 trillion by 2030" is right, that's $100 billion per year, ON AVERAGE. But having tried this investment thesis starting over a year ago, I realized that one can go broke waiting for an "average" year. The real question becomes, when will all this growth actually start?

Jul 12 03:41 PM

[trexia:]

~Ambient (ABTG) Smart Grid™ !!! "In 2008, Ambient received purchase orders from Duke Energy to purchase its X2000 and X-3000 communications nodes, license its AmbientNMS™, and acquire engineering support in building out an intelligent grid/intelligent-metering platform, which generated $12.6 million in revenues in the year."

www.ambientcorp.com/sm...

Jul 12 09:38 PM

[c300man:]

I agree with rrbatch. Smart Grid is mostly hype. Progressive electric companies have long had variable rates through a variety of programs that let people benefit from lower electric rates when they can (and want to) shift their power use. My daughter and son-in-law live in northern Wisconsin and use electric resistance heat at night (4 pm to 7 am) at very low rates. They use NG heat in the daytime. That is all good and there are many additional steps that can be done. It is more 'energy management in the home' than 'smart grid'.

One factor that is missing from the discussion is the cost and energy required to transmit electrical energy long distances. That is the reason generation facilities need to be located as close as practical to where the energy is used. Otherwise much energy is lost in the long-distance transmission. The idea of generating a lot of solar energy in the southwest or wind energy in the countries mid-section and sending that energy long distances is wasteful. The 'smart grid' doesn't address this fundamental aspect of electrical energy transmission. Of course research is underway (and long has been) to improve this transmission efficiency but nothing practical is available yet.

Jul 13 12:19 PM

[Road Runner:]

C300man said, “One factor that is missing from the discussion is the cost and energy required to transmit electrical energy long distances. That is the reason generation facilities need to be located as close as practical to where the energy is used. Otherwise much energy is lost in the long-distance transmission.”.

This is not accurate. HVDC (high voltage direct current) transmission lines are very efficient over very long distance. They are an established technology in use today. As stated below, a cable of 360 miles can have a loss of only 4%.

Here is a cut-and-paste of my post from another blog.

The solution for moving the power of remote wind (and solar) farms to the cities is high voltage direct current (HVDC) transmission. en.wikipedia.org/wiki/... . The established HVDC technology is more efficient than high voltage alternating current (HVAC) at distances of over 600km (373 miles). This is because the HVDC transmission line cost is lower than HVAC, but the convertor (AC to DC) and inverter (DC to AC) costs of HVDC are high but fixed. However, the new HVDC Lite from ABB and HVDC Plus from Siemens has reduced this efficiency crossover distance dramatically by using advanced and cheaper electronics in the convertors and invertors.

Another advantage of HVDC is the cables can be buried along highways. renewableenergywor... . Gone are the ugly towers and the “not in my backyard” problem.

As noted in the article linked above, there is a HVDC line running today that carries electricity from Utah to Los Angeles, about 500 miles. There is a proposal to extend it into southern Wyoming for wind farms.

The NorNed HVDC link, an underwater power cable from Norway to the Netherlands, just came online in May of 2008, and is proving to be a big success.

pepei.pennnet.com/disp...

Here are some highlights about the cable.

The NorNed HVDC link has a maximum capacity of 700 MW and an operating current of 824 A. It transfer cheap hydroelectric power from Norway to the Netherlands. The loss for the length of the cable is 4%. NorNed project is said to have cost in the region of €600 million ($760 million), and took ten years of planning and a further three years of construction. At 580 km (360 miles), the NorNed link is the longest high-voltage submarine power transmission line in the world. The FMI cable has a novel design in that it comprises two independent cable cores made of braided copper stands, each rated 450 kV DC, placed side by side into a common steel wire armour.

Here is a link that shows proposed HVDC links for Australia and southeast Asia.
desertec-australia...

The map of the planned Chinese HVDC links, desertec-australia... , is just another thing that scares me about China. China’s government is investing in the future is a very big way. Even their stimulus package was infrastructure oriented. Because of this, in my opinion, the size of their economy will catch up to the US in a much shorter period than forecast.

Thus, there is a solution today for getting energy of remote wind and solar farms to where the energy is used.

Jul 13 03:28 PM

[Road Runner:]

Here's the fixed links for my post above.

en.wikipedia.org/wiki/...

www.renewableenergywor...

pepei.pennnet.com/disp...

www.desertec-australia...

www.desertec-australia...

Jul 13 03:35 PM

[Road Runner:]

optionsgirl, I like ABB too. It is heavily involved in HVDC (high voltage direct current). This is the technology that I talked about above.

Jul 13 04:29 PM

[optionsgirl:]

thanks for sharing your links and analysis.


On Jul 13 03:28 PM Road Runner wrote:

> C300man said, “One factor that is missing from the discussion is
> the cost and energy required to transmit electrical energy long distances.
> That is the reason generation facilities need to be located as close
> as practical to where the energy is used. Otherwise much energy is
> lost in the long-distance transmission.”.
>
> This is not accurate. HVDC (high voltage direct current) transmission
> lines are very efficient over very long distance. They are an established
> technology in use today. As stated below, a cable of 360 miles can
> have a loss of only 4%.
>
> Here is a cut-and-paste of my post from another blog.
>
> The solution for moving the power of remote wind (and solar) farms
> to the cities is high voltage direct current (seekingalpha.com/symbo...)
> transmission. en.wikipedia.org/wiki/... . The established HVDC technology
> is more efficient than high voltage alternating current (seekingalpha.com/symbo...)
> at distances of over 600km (373 miles). This is because the HVDC
> transmission line cost is lower than HVAC, but the convertor (AC
> to DC) and inverter (DC to AC) costs of HVDC are high but fixed.
> However, the new HVDC Lite from ABB and HVDC Plus from Siemens has
> reduced this efficiency crossover distance dramatically by using
> advanced and cheaper electronics in the convertors and invertors.
>
>
> Another advantage of HVDC is the cables can be buried along highways.
> renewableenergywor... . Gone are the ugly towers and the “not
> in my backyard” problem.
>
> As noted in the article linked above, there is a HVDC line running
> today that carries electricity from Utah to Los Angeles, about 500
> miles. There is a proposal to extend it into southern Wyoming for
> wind farms.
>
> The NorNed HVDC link, an underwater power cable from Norway to the
> Netherlands, just came online in May of 2008, and is proving to be
> a big success.
>
> pepei.pennnet.com/disp...
>
> Here are some highlights about the cable.
>
> The NorNed HVDC link has a maximum capacity of 700 MW and an operating
> current of 824 A. It transfer cheap hydroelectric power from Norway
> to the Netherlands. The loss for the length of the cable is 4%. NorNed
> project is said to have cost in the region of €600 million ($760
> million), and took ten years of planning and a further three years
> of construction. At 580 km (360 miles), the NorNed link is the longest
> high-voltage submarine power transmission line in the world. The
> FMI cable has a novel design in that it comprises two independent
> cable cores made of braided copper stands, each rated 450 kV DC,
> placed side by side into a common steel wire armour.
>
> Here is a link that shows proposed HVDC links for Australia and southeast
> Asia.
> desertec-australia...
>
> The map of the planned Chinese HVDC links, desertec-australia...
> , is just another thing that scares me about China. China’s government
> is investing in the future is a very big way. Even their stimulus
> package was infrastructure oriented. Because of this, in my opinion,
> the size of their economy will catch up to the US in a much shorter
> period than forecast.
>
> Thus, there is a solution today for getting energy of remote wind
> and solar farms to where the energy is used.
>

Jul 14 09:05 AM

[TATyszka:]

It's a common practice by many commenters, presumably because tossing about acronyms and lingo as if everyone should know them will make the commenters appear to be more knowledgeable than they in fact are.

On Jul 12 11:38 AM unclemike7849 wrote:

> If you would have defined "EV", "RE", etc., your comment may have
> made some sort of sense.

Aug 08 09:44 AM