Two Ways to Profit as Smart Grid Technology Takes Off
Larry Fisher spends all his time lately designing new ways to conserve electricity.
As the research director of NextGen – the division of private, New York City-based ABI Research that tracks smart grids worldwide – he has more and more on his plate these days. That’s because the wave of new investment is beginning.
NextGen also serves as an incubator for brand-new approaches in electronics and smart grid technology. As Larry will tell you, over the past several years, the groundwork for smart grids has emerged in a number of countries. However, now the rates of both investment and implementation are increasing.
In a report released this week, Larry’s research team estimates that we will spend some $45 billion worldwide between now and 2015 on smart grid-related transmission and distribution (T&D) infrastructure, implementation of related components at the level of utility companies distributing the power to consumers, and smart meters. (These last ingredients allow you to measure usage and redistribute power on your own.)
When compared to the trillions spent on generation and transmission, $45 billion may seem like a pittance.
But it certainly does indicate that a change is approaching… and for certain companies that find themselves in the middle of this significant energy revolution, it’s going to mean lots of profits.
The New Energy Buzzword
Smart grids are an advancement I have been hawking for several years now.
The move into new possibilities in alternative energy sources is steadily accelerating. And as we set about considering what the emerging power grid will look like, the intelligent use of electricity becomes a mandatory area of focus.
That’s because the amount of electricity lost in transmission, combined with its often wasteful use, the inability to store it, and the pronounced changes in load during different times of the day, demands a much more efficient system.
And that’s where "smart" comes in.
A smart grid is a fully integrated power generation, transmission, and distribution system. Basic to its design is a two-way communication channel that allows for greater evaluation, control, and direction – by both the utility and the consumer. The system is "smart" because it allows for real-time monitoring of an entire network’s operational status, while providing a quick, often automatic, response to changes in conditions and usage.
Current versions of residential smart meters can reduce household electricity usage by better than 40%. Those coming down the pipeline will perform even better – because they will be hooked up to improved systems for the generation and distribution of electricity.
The real advantage, however, may be much broader than simple energy conservation.
"Smart" here means "efficient." These grids save electricity and save people money at the same time. By automating usage patterns and allowing for the transfer of power as needed, a smart grid provides for a genuine redistribution of loads. That makes more effective use of electricity during the low-peak (and less expensive) periods of the day and reduces the draw on the system during times of high usage.
Smart grids are going to revolutionize how we live our lives.
They will afford us greater personal control over our residences and workplaces; provide power to our electric cars during low-cost overnight hours; compensate for heating and cooling in buildings based on actual needs (rather than on the limitations of older systems); and even allow us to sell power we don’t use back to the grid.
As efficiency becomes the buzzword in the next wave of energy conservation, there will be a huge need for smart systems. Most of the global power infrastructure is decades old, some dating back 80 years or more.
Replacing it with the new systems will take time and money.
But it is going to happen.
Three New-Generation Companies Will Advance the Smart Grid
Major infrastructure applications will remain the province of the big boys – the likes of General Electric Co. (NYSE:GE), Siemens (NYSE:SI), and Philips (Koninklijke Philips Electronics; NYSE:PHG).
Yet there will also be an explosion in demand for secondary providers, service companies, and equipment manufacturers. In addition, these intermediaries will introduce a range of applications for alternative and renewable energy sources, as well as increasing the overall efficiency of the electricity produced. They will, therefore, be right in the center of a significant energy revolution.
It is with the new generation of companies that the average investor can get in early.
Now, this does require a considerable amount of care. Those technological advances of greatest benefit to the end user are likely to arise from R&D companies – thinly capitalized, and having great ideas but suspect management. In short, not that much different from every other technical breakthrough era the market has experienced. I have lost count of the great inventions I have witnessed over the years brought forth by small companies led by brilliant scientific minds… who drove them into the ground for want of business sense.
Well, we are going to separate the wheat from the chaff, in two ways.
First, a new exchange-traded fund (ETF) was introduced in November – the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (NasdaqGM:GRID). Eight months later, it has finally reached sufficient liquidity to begin serving as our barometer for the smart energy sector as a whole. The holdings cut across the main segments in grid system needs and also include some of the foreign players likely to have early impact. Breakthroughs in smart technology are hardly under a U.S. monopoly; neither are developments in electricity production from renewables – such as solar power (Japanese) or wind power (Danish) – certain to figure into approaches to the new grid.
Second, the average investor can begin individual equity buys with companies that already have gained a successful track record in smart technology or application. Here I would suggest those providers of focused applications in areas needed to advance the smart grid as a whole.
On my initial list would be Prysmian S.P.A. Milano (OTC:PRYMF), an Italian cable maker with in-roads into smart applications for wind power farms; Quanta Services Inc. (NYSE:PWR), a Houston-based power transmission and distribution engineering service specializing in high-power transmission line smart applications; and EnerNOC Inc. (NasdaqGM:ENOC), a leading provider of smart energy management applications and services.
Just note that these companies can be subject to thin trading… and that merely heightens volatility in such a rapidly developing sector.