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Much of what's charging the Smart Grid investment discussion these days centers on software and devices that convey graphic information to consumers on their energy usage. Like jamming your foot on the accelerator of a new Fusion Hybrid from Ford and watching the green vine on its digital dashboard wilt and shed leaves, the visual feedback on smart meters from running your air conditioner during peak hours can lead to educated behavior modification.
Lovely Rita, meter maid
But the Smart Grid is more than just gee-whiz technology. While Itron (Nasdaq: ITRI ) , General Electric (NYSE: GE ) , and even Google (Nasdaq: GOOG ) are giving consumers the tools to make better energy choices, just like the Fusion's digital display, there are other equally promising areas not getting the same attention as the meter maids.
To a certain extent, that's the nature of this emerging industry trend. Where solar, ethanol, or similar alt-energy platforms require substantial investments to build out the industry, the Smart Grid allows start-ups to develop software tools and networking devices to collect and organize the data on consumption to become the 10-baggers of the next decade.
Besides, investing in Google means you're also investing in its search-engine prowess. Buying GE also buys you a piece of its lighting, technology, finance, and health-care businesses. These might not be bad plays, but we're looking for Smart Grid investments.
The electric slide
Before we look at what else is out there, maybe we need to back up a bit and define what it is we're talking about.
Right now, the country's electric grid isn't all that smart. In fact, it's really pretty dumb. It was designed to do one thing: send electricity from the utilities into our homes. That was good enough for Grandma, but the U.S. consumes 100 quadrillion BTUs of energy each year, with much of it going to waste.
The promise of the Smart Grid is the development of a two-way communication system enabling utilities and grid operators to better manage and monitor the flow of electricity usage and channel it to where it's most needed. At the same time, consumers can take matters into their own hands -- through smart meters or appliances and electronic devices that can communicate with the grid -- to save money and make better energy decisions.
Between these two endpoints are plenty of opportunities for investors to profit.
- Utilities and Grid Operators. The first pieces in the puzzle are the utilities and grid operators. Pacific Gas & Electric is one utility with an ambitious program to install 10.3 million smart meters across its entire grid by 2011. Duke Energy (NYSE: DUK ) and Sempra Energy are also implementing programs to meter up their customers.
- Smart Grid Networks. You don't need to clog up the Internet or even rebuild it to get the data flowing from one end of the transmission line to the other. Privately held Trilliant and Silver Spring Networks are two companies doing the backhaul work of collecting the data from the smart meter and sending it to the utilities. They're using small communities of communication equipment called mesh networks to send the data back and forth.
Look out, though, because they might find themselves bumping up against Cisco (Nasdaq: CSCO ) , which is offering end-to-end, secure communications for the Smart Grid. It promises improved reliability, reduced costs, and lower risk for utilities, and could allow Cisco to emerge as a major contender for attention, even if it is partnering with Silver Spring in Miami.
- Demand Response Aggregators. Paying companies not to use energy during peak periods is a novel approach to scarcity management. Demand response aggregators assist consumers and businesses in remotely reducing their electrical consumption during peak demand periods. In return, utilities and grid operators pay them for the lower demands they place on the system. Two of the larger demand response aggregators are Comverge (Nasdaq: COMV ) and EnerNOC (Nasdaq: ENOC ) , though several privately held companies like C-Power and EnergyConnect also act as intermediary agents, enrolling customers and taking responsibility for delivering the financial rewards to them.
Until recently, going after the residential customer didn't offer the same bang for the buck as getting large commercial and industrial clients on board, since individuals aren't as financially motivated to monitor and manage their energy usage. According to a 2008 Nielsen Claritas study, consumers are more likely to enroll in an online bill payment system than to participate in more "complicated online services." Real-time pricing, load management, and time-of-use rates all have very low adoptions rates. Yet as a critical mass of devices and opportunities develop, expect to see the residential user included in more demand response programs.
- Energy Management Software. Whether it's the smart meter or the smart appliance, it's being run by software that establishes communication between the device and the grid operator. Echelon (Nasdaq: ELON ) , for example, provides homes and businesses with energy-aware devices that can react in real time to conditions existing on the grid.
A smart idea
The Smart Grid encompasses a variety of developing technologies, disciplines, and industries that seem confusing at first blush, but make a lot of sense as you dig further into them. Investors can leverage the public's nascent interest in green tech by plugging into these and other Smart Grid companies. It not only makes sense; it's smart, too.