As the energy industry changes, it's important for investors to look at where the market is headed and what will lead the way. In electricity, one major market development is something known as a microgrid.
In essence, a microgrid is just a smaller version of an electricity grid that's powered by local energy sources that match power with local demand. For example, if your home loses power after a natural disaster and you use a generator for power, you have a microgrid in your home.
What's changing about energy today is the viability of microgrids on a larger scale than just a single home. Small towns all over the world, remote mining operations, and cell phone towers are just a few examples of places where microgrids are becoming a reality. Here's what you should watch for.
Components that make the microgrid possible
What's changed the discussion about microgrids in recent years is the improved financial viability of small-scale energy generation. Wind, solar, and fuel cells are three generation sources that are now competitive with traditional large-scale fossil fuel plants, making it easier to think about energy on a smaller scale.
Energy storage has also come down in cost, with companies like Tesla Motors making multibillion-dollar investments that will create the capacity needed for microgrid storage. It's this storage that makes wind and solar, in particular, viable energy producers for the microgrid, which is key in remote locations.
The other major component is smart devices, and their ability to respond to demand. For a microgrid to be truly successful, it will have to be good at matching energy demand with supply. That means things like automatically telling the consumer's dishwasher to wash dishes when solar energy is being created or telling their HVAC to turn down the air conditioning when energy is most scarce. Without this back-and-forth communication, the advantage of the microgrid falls apart.
The power players are the ones to watch
To build all of this infrastructure, you can't simply be an innovative company with an interesting microgrid product. Companies have to have the infrastructure needed to build microgrids and operate them efficiently.
For this reason, utilities are going to play a big role in microgrids, at least domestically. Exelon Corporation (NYSE:EXC) is using its grid-operating expertise to pilot a microgrid program in Pennsylvania. Its subsidiary, PECO Energy, will build one or more microgrids for $50 million to $100 million between 2017 and 2020. Southern California Edison, the utility subsidiary of Edison International (NYSE:EIX), is using microgrid concepts to defer investments in new capital. The utility recently put out a 100-megawatt request for offer for distributed renewable resources that will be designed to reduce load and defer the need to build new natural gas plants. These are just two examples of utilities investing in microgrids, and given the way the grid is structured today, utilities will likely need to play a role in microgrids in the U.S.
To build microgrids, we'll also see a lot of the big names that dominate electric products today. Component makers like Siemens (NASDAQOTH:SIEGY) and General Electric (NYSE:GE) are making plays for the space by leveraging their position as major suppliers to the electric grid today. GE has launched a product called Grid IQ Microgrid Control System, which is designed to speak with supply and demand on the microgrid. Whether the energy source is solar, fuel cells, energy storage, or generators, the product will optimize energy generation and load to keep the lights on.
Siemens offers a line of controllers, planning resources, wind turbines, and other products to make the microgrid possible. As the company is a major supplier of grid components, the microgrid is a huge opportunity for growth at Siemens.
It may seem as though innovative companies like Tesla Motors will take a bite out of the microgrid market, but these structures really demand the expertise held in larger companies like utilities and electric infrastructure suppliers. They may buy products like energy storage and solar power systems from someone else, but the big players have a key role in this burgeoning market.
Microgrids are an international business
What's maybe most exciting about microgrids is that they could bring energy to 1.3 billion people around the world who don't currently have electricity. India alone has as many as 400 million people without electricity, partly because of the dysfunction surrounding the design of its electric grid.
When you think about the growth opportunities for the companies involved in microgrids, this is the exciting stat to look at. In the U.S., microgrids may move revenue from the utility to a different entity or maybe give control to more local businesses, but they don't fundamentally change the size of the market.
A market potential of 1.3 billion people around the world who don't have electricity from centralized power is a massive opportunity for growth in the $2 trillion electricity market.
Microgrid concepts will play a role everywhere
The microgrid can be thought of as either a stand-alone product, like in sub-Saharan Africa, or as a way to augment the central grid, as in the East Coast of the U.S., where states are looking at it as a way to prevent blackouts. But no matter how you look at it, the microgrid has a lot of potential for disruption in the electric industry -- and it may change the way the grid looks forever.
Travis Hoium owns shares of General Electric Company. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.