smart grid infohttps://www.alternativeenergynewswire.com/welcome-to-the-new-world
WELCOME TO THE NEW WORLD, (Feb 18, 2009)
Perhaps ironically, it took one of the worst financial and economic crises of
the past three decades to bring "the
grid" into investor focus. To be sure, certain alt energy aficionados such
as Tom have been on this topic
for a long time
(Tom is actually the one who introduced me to the grid as an investment theme).
However, it is fair to say that most investors, including alt energy investors,
have not historically paid the grid a huge deal of attention.
That is because most people outside of alt energy and VC circles held, until
recently, the Old World view of the grid. In the Old World, the grid was a
collection of transmission and distribution systems (i.e. transmission towers,
utility posts and wires) connected together by the odd utility sub-station.
In the Old World, investments into the grid mostly took the form of
maintenance capex by utilities, and
there was little growth, at least in North America, beyond what was needed to
keep up with economic and demographic expansion (2-3% per annum often offset by
efficiency gains). Though antiquated and inefficient, the system mostly ‘did the
job’ and the lack of coordination between various actors meant that no one would
take the lead on massive investments required to upgrade the old infrastructure.
In the Old World, the grid was nothing to write home about from an investment
perspective.
Enter the New World, the world of the
smart grid, where the
electric grid doesn’t stop at the connection with your house or office building,
but can potentially extend all the way into nearly every electric device you use
- if it can be plugged in, it can be made ’smart’. In the New World, IT
capabilities are leveraged to optimize grid management. In effect, energy
management, which used to rely on a closed system approach, is now integrated
with the grid, opening a whole New World of possibilities. (I am admittedly not
an expert in the technological ramifications of the smart grid and this post is
not about the tech side. I find
SmartGridNews.com to be a
great source of info. I liked their
reviews
of various smart grid technologies)
The New World has actually been with us for some time. Smart grid pure plays
such as Comverge (COMV),
RuggedCom (RUGGF.PK)
and EnerNOC (ENOC)
all IPOed in Q2 2007, raising the profile of New World investment opportunities.
However, in the broad world of alt energy investing, smart grid plays were often
overshadowed by the mightier solar sector, in part because growth rates were far
higher and in part because the smart grid business model is a bit arcane.
Fast forward to the 2008 US presidential run-off, where the leading
candidate, Barak Obama, spoke repeatedly of the need to invest massively into
the US power grid to make it smarter and more efficient. Most people probably
can’t remember the last time they heard a presidential candidate make the
electric grid a central pillar of his/her energy policy. Nearly immediately
following the election, the new President pumped, as part of his
American Recovery and Reinvestment Act,
$4.3 billion into mostly New World grid opportunities.
While this may seem small in comparison to the total size of the investment
required to upgrade the grid (Old and New World) over the next couple of decades
(The Brattle Group estimates that around
$880 billion in transmission and distribution investment will be made by 2030),
this amount is over 15x the combined 2008E sales of Comverge, RuggedCom and
EnerNOC. Throw in Itron (ITRI),
a $2 billion company that provides a number of utility products and services
beyond smart meters, and the final package is still over 2.2x the combined 2008E
revenue of all four companies. In other words, for this emerging sector, this is
a fair chunk of change.
Besides the revenue that will flow in as a result of direct government
expenditures, the impact of the American Recovery and Reinvestment Act will be
felt for years to come as it jump-starts the industry. And the US isn’t alone:
the Canadian province of Ontario established a Smart Grid Forum that
recently recommended spending C$1.6 billion over the next five years on
smartening the grid there. Smart grid opportunities are also attracting large
firms with
no energy management background but expertise in complementary areas that can be
leveraged.
Where does that leave investors? With the very real possibility that
smart grid stocks will outperform the broader alt energy space over the next
12 months. Like other areas of alt energy, there are a growing number of ways to
play the smart grid as larger cap firms with diversified revenue sources enter
the space. The table below lists out some of the main publicly-traded plays on
the smart grid.
To be sure, I am a little late on this one. Although I did discuss the
potential for the smart grid to receive some focus in Obama’s economic stimulus
package
in December, I initially believed that the
Old World grid would receive as much if not more than the New World grid. In
the end, Old World got next to nothing, which somewhat surprised me given its
state of disrepair.
While I don’t expect the smart grid to move the needle for the companies
whose exposure is categorized as "medium" and "low" in the table above, my sense
is that the "very highs" and the "high" will outperform alt energy stocks in
general over the next 12 months. We will check again then!