Exelon Expansion Roars Ahead

There has been much recent activity in the smart grid space, with Exelon (NYSE: EXC  ) announcing significant investment plans in smart grid infrastructure at this month's Edison Electric Institute Financial Conference. Itron (Nasdaq: ITRI  ) and Cisco (Nasdaq: CSCO  ) won a bid for a new pilot project in Hong Kong. PPL (NYSE: PPL  ) will conduct upgrades in 2013, including many smart grid elements, after seeing how such features improved power recovery time in the wake of Hurricane Sandy. All this growth spells opportunity for investors, assuming the naysayers don't prevail.

I've been running a series of articles related to the investment opportunities in smart grid development. If you're not fully up to speed on the basics, start with our smart grid primer. Then c'mon back here.

Hurricane Sandy, resilience, and the smart grid
Following Hurricane Sandy, hundreds of thousands of electric utility customers lost power, in many cases for days on end. It was bad – but not nearly as bad as it might have been. It turns out that many smart grid technologies had the effect of allowing utilities to restore power more quickly. Utilities are increasingly thinking in terms of resilience, or the ability to recover quickly from storms and other adverse events, and that approach dovetails nicely with smart grid expansion.

Commonwealth Edison (ComEd), an Exelon subsidiary, plans to spend $2.6 billion over the next decade on system hardening and smart grid expansion, according to COO Terry Donnelly. At the recent Edison Electric Institute conference, Exelon laid out ComEd's plan to spend about half of that money on:

  • Installing almost 4 million smart meters
  • Installing distribution automation devices and substation modernization upgrades
  • Providing a "test bed" for smart grid technologies in a utility-scale environment through ComEd's Innovation Corridor

ComEd will recover its investment through its distribution formula rate. Exelon's Paul Elsberg, manager of media relations, points out that recent smart grid technology upgrades at ComEd have prevented about 1 million customer power outages, which suggests clear value in such investments.

Exelon subsidiary PECO will invest up to $650 million through 2014 in the installation of more than 1.8 million smart meters, which it began in the first quarter of 2012. PECO plans to file a request with the Pennsylvania Public Utility Commission to accelerate deployment completion by 2014. PECO is offsetting the cost to customers with a $200 million award under the DOE's Smart Grid Investment Grant (SGIG) Program. PECO will recover the remaining $450 million through a surcharge mechanism with a 10% ROE. Exelon's Elsberg said, "[On] a preliminary review of the response to Hurricane Sandy, PECO found that the pinging capability of its AMI systems prevented approximately 6,100 truck rolls and accelerated its restoration efforts by two to three days."

Exelon subsidiary Baltimore Gas & Electric (BGE) will invest up to $500 million through 2015 in 2 million smart electric and gas meters, a customer web portal, and dynamic pricing (Peak Time Rebate) as the default tariff. BGE also received a $200 million award under the DOE's SGIG Program. Its approach to recovering the remaining $300 million depends on whether the project proves cost effective at the end of deployment.

Meanwhile, Itron and Cisco – a dynamic duo in the smart grid arena – landed a 4,500 advanced meter pilot project with CLP Power Hong Kong. Sitting as they are on the doorstep of the enormous Chinese market, Itron and Cisco must be giddy at the opportunity. This is just the latest win for the Itron-Cisco team, which already counts such major players as Duke Energy (NYSE: DUK  ) among its smart grid customers.

PPL will include smart switches in its upgrade of 16 substations in the Pocono Mountains. This area has the longest duration of outages in PPL's system, and the utility aims to use smart grid technologies to improve the Poconos' resilience to weather disturbances.

Smart grid skepticism
Not everyone is on board the smart grid train. The National Institute for Science, Law & Public Policy in Washington, D.C., released a report on Monday entitled "Getting Smarter About the Smart Grid." The report makes some strong claims, including the following:

  • Smart meters do not contribute to a more reliable grid;
  • The president's National Science and Technology Council doesn't understand electricity and energy;
  • Investor-owned utilities cannot survive; and
  • Beneficiaries of the conventional utility business model have intentionally deceived congress and the public about the benefits of smart meters. 

In the following statement, Exelon's Paul Elsberg pushed back against the report's findings:

Exelon's utilities have invested substantially in smart grid technology and projects that will reduce operating costs, improve reliability for customers and give consumers more control over their energy use and utility bills. These investments include, but go well beyond, smart meters to include enhancements that will greatly improve our ability to manage the grid efficiently, reliably and securely. While consumer-facing technologies will yield direct customer benefits through greater access to usage and cost data, and additional product and service choices, they represent only a piece of the value generated by our investments in smart grid technology.

I will be analyzing the report and its impact on relevant companies in more detail in the coming days. For now, though, it's safe to say that in the wake of powerful storms, customers are deriving real value from smart grid expansion, and such initiatives are here to stay for the foreseeable future. The form and substance of the smart grid concept is fluid and open to modification, but its broader adoption is a virtual certainty. Companies like Exelon will continue to benefit.

As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. This increased focus on renewable energy, combined with the company's recent merger with Constellation, places Exelon and its best-in-class dividend on a short list of top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


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