Get Smart About the Grid

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The smart grid is, like, so 2009. Investors are over that story, and have moved on to newer, sexier things. Fair enough -- the smart grid theme didn't exactly make everybody rich overnight. Financial analysts got really excited, and then the whole thing kind of stalled out. Like a one-hit wonder, people seem to have forgotten its very name.

That's why we should be interested. These important and practically inevitable investments could make you a lot of money.

Why a smart grid?
The smart grid is complicated. If you're going to play it as an investment theme, it's worth taking the time to understand it. The following is a primer to get you started.

First of all, the smart grid is a concept, not a thing. It's not a single product, and no individual company makes a smart grid. It's an idea, and it's a good one. It's a response to the sorry state of our modern electrical grid. Consider that today's grid was invented in the age of Edison, designed in the age of Eisenhower, and installed in the age of Nixon. Can you imagine if the same were true for phones, airplanes, or computers? While other industries have modernized, our energy infrastructure -- on which all other industries depend -- has not.

Reinvestment in electric utilities has lagged significantly behind all other sectors. If current trends continue, experts anticipate an infrastructure funding gap of $107 billion by 2020.

There are further problems with the grid as we know it. It remains largely unadaptable to renewable energy inputs. It's prone to increasing blackouts. It's vulnerable to attack. And it cannot meet growing demand at current capacity.

Considering that more than 60% of U.S. GDP is dependent on electricity -- up from 20% in 1950 -- things look grim.

How does the current grid work?
Electricity's lifecycle falls into one of three basic categories: generation, transmission, and distribution. Generation is the creation of electricity from other forms of energy. Transmission is the bulk transfer of electrical power from source to destination. Distribution is the final stage of electricity delivery to end users.

Before deregulation in the 1990s, most utilities operated along the entire lifecycle. Today, many producers sell power all across the country over transmission lines they don't own. Massive transfers are flowing over lines that were built decades ago for local use, and this creates congestion and bottlenecks.

The current transmission grid actually prevents broader adoption of renewables, as the lines simply don't go where the energy is generated. For instance, according to the American Wind Energy Association, a backlog of 197 GW of wind projects is currently waiting in line for connection to the grid because of inadequate transmission capacity! This is an improvement from the 310 GW backlog that existed at the end of 2009, thanks to tighter regulation, but there is still much further to go.

So what is the smart grid, really?
The simplest way to think about the smart grid is to envision a melding of the existing electric infrastructure with the evolving information infrastructure. The result will support our modern economy in a more efficient and effective manner. In all scenarios, the smart grid must:

  • Heal itself
  • Motivate consumers to participate actively in operations of the grid
  • Resist attack
  • Provide higher quality power that will save money wasted from outages
  • Accommodate all generation and storage options
  • Enable electricity markets to flourish
  • Run more efficiently

Power grid of the future
A variety of technologies will contribute to achieving the above attributes, most notably:

  1. Transmission expansion: Upgrading and extending the electricity transmission infrastructure will allow further integration of renewable resources, reduce bottlenecks, and support least-cost electricity generation. ITC Holdings (NYSE: ITC  ) works in this area.
  2. Advanced metering infrastructure (AMI): Sophisticated metering technology will provide greater information to customers and utilities, thereby improving their ability to manage consumption and cost. Oracle (Nasdaq: ORCL  ) offers AMI solutions.
  3. Demand response: Helps manage customers' electricity consumption in response to supply conditions. Honeywell (NYSE: HON  ) is expanding its demand response presence.
  4. Energy storage: Allows increased efficiency of grid operations and greater adoption of renewables. ABB (NYSE: ABB  ) is a major player here.
  5. Distribution monitoring and control: Automates control of end-user building systems to optimize efficiency. IBM (NYSE: IBM  ) is active in this space.
  6. Distributed automation: Extends control of grid functions to the distribution level, promoting the grid's capacity to "heal" itself in times of disruption. RuggedCom provides automation solutions.

I will explain each of the above technologies in future articles, so watch this space if you want to learn more.

Smart grid, redux
The smart grid is not a product or service. It's a concept that, when applied to existing technologies and infrastructures, can yield significant benefits. In providing solutions to the many challenges society will face in the decades to come, some of the companies involved will be great investments. We will explore these issues in detail in the coming weeks. 

Armed with this knowledge, you could make a nice pile of cash investing in a space that can only keep growing. However, If you're interested in other big technology up-and-comers that are currently expanding at a great clip, you would surely love our free report, "3 Stocks to Own for the New Industrial Revolution." Make sure to check this report now -- it won't be available for long.

Fool contributor Sara E. Wright owns no shares in the above stocks, but does appreciate having electricity in her home. The Motley Fool owns shares of International Business Machines and Oracle. Motley Fool newsletter services have recommended buying shares of ITC Holdings. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2012, at 2:59 PM, wolfman225 wrote:

    My biggest problem with the proposed Smart Grid solutions is the huge potential for invasion of individual privacy and for control of energy availability. The so-called Smart Meters now being pushed by proponents of the Smart Grid eliminate the need for technicians to "read" the meters. Instead, they will send the information electronically to the utility itself or wirelessly to the reader in a passing vehicle.

    There is little or no guarantee of the information being secure. Potential criminals could gain access to information about electricity usage to determine whether someone is home, or away on vacation (they already do something similar with garage door scanners and devices that can capture your cell phone number, as well as gadgets that can "read" your credit card while it's in your wallet). States, also, will have access to this information. I don't like the possibility of some state agency sending me a notice that I'm using too much energy, urging/threatening me to conserve.

    One thing missing is the provision for improving the capacity of the grid to provide increased baseload power. If you have the capability to "monitor the grid" and to "manage" distribution, but the grid itself isn't improved to handle sustained, increased loads, you set up the potential for the rationing of energy availability by a central agency.

    As it is, large urban cities such as LA and NYC often see black- and brown-outs during high demand periods in the dog days of Autumn. The most likely way for the Smart Grid operators to address this issue is by reducing energy availability to "non-essential" areas, in favor of critical infrastructure. You want to keep your home or apartment a comfortable 68 in August? Sorry. Have laundry that needs to be done? It'll have to wait until "non-peak" usage hours.

    Before we get all excited about investment in new technologies, we should be concerned with an aging and increasingly vulnerable physical infrastructure. A lack of energy isn't as much a problem as is the inability to get that energy to the consumer.

    I'd much prefer, as opposed to the increasing integration of regional grids into a Smart Grid, that the system be further segmented (in a way, going back to the systems pre-deregulation). With the ever-increasing sophistication of hackers worldwide, and the exponential increase in "cyber attacks", having everything tied together is a huge vulnerability. One virus or worm introduced into the system would be all it takes to bring the entire country to a screeching halt.

    I think I'll invest a few 10's of thousands of dollars and install my own private generating station. Just in case.

  • Report this Comment On June 04, 2012, at 11:43 PM, DonkeyJunk wrote:

    I think many of the issues addressed here would be solved by more efficient use of electricity, which is the goal of the smart grid. Rerouting power during peak usage may prevent people from doing their laundry, but so would a brown-out. Also, a smart grid may seem more vulnerable to cyber attack if we assume the grid is controlled by a single supercomputer--those developing the components of the grid are surely not foolish enough to create a system that could simply be shut down from one point.

    There are certainly concerns with the notion of a grid that are valid, but these concerns likely also apply to the existing, and far more fragile system currently in place. Certainly cars and trucks are more dangerous than horses and carriages, electric light is potentially more dangerous than goat-fat candles, splitting the atom is more dangerous than burning coal, but the benefits certainly far outweigh the detriments, especially if they are handled correctly. We seem to have done all right with the others. Why not this as well?

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