One of the biggest hurdles to implementing alternative and renewable energy sources is that of our energy grid. While adding new electricity production capacity has been at the forefront of capital spending, very little of that new energy ever gets to its destinations. The current inefficient and dated means of transmitting energy is in need of major facelift. These modernization efforts will allow for wind energy from the plains to reach congested areas in the North East, while providing efficiencies and preventing black outs. Implementing a smarter grid could be the "biggest opportunity in over 50 years" and investors have many ways to win.
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The U.S. Department of Energy defines the smart grid as making the transmission network more reliable, efficient and secure. Analysts estimate that these upgrades have the potential to cost nearly $1.5 trillion in over the next decade. Companies that manufacture power distribution equipment and other electrical hardware will be beneficiaries of this spending. However, adding the "smart" to the smart grid will also require software solutions, energy storage, monitoring equipment and other IT products. The First Trust NASDAQ Clean Edge Smart Grid Infrastructure (Nasdaq:GRID) is a great way to play the theme of the transmission grid upgrade. Other opportunities exist within the subsectors of the grid build-out.
The current grid works like a one-way street. The current electricity meter on the side of you house is still based on 1920s technology. However, the birth of smart-metering technology will enable consumers and utilities to communicate back and forth. This communication link can bring dynamic real time pricing, outage information, demand response functions as well as help utilities match consumption with demand. According to analysts at research firm Berg Insights, there will be approximately 302.5 million smart meters installed throughout the world by 2015. Throughout the next five years the market for smart meters will grow about 50% in the United States and Europe, and 25% in Asia. The market for software solutions to monitor all this data will expand from $54 million in 2009 to $221 million by 2014.
The Economic Recovery Act allocated $3.4 billion to various smart-grid projects and the potential long-term spending in this area is staggering. General Electric (NYSE:GE) estimates that smart meters could generate nearly $12 billion in annual sales within the next five years. Networking giant Cisco's (Nasdaq:CSCO) recent purchase of smart networker Arch Rock highlights the fervor many companies have for entering this market. Investors can do well long term by placing their bets with some of the companies involved with smart-metering technologies. Here are a few picks:
Partnering recently with Cisco to develop network architecture, Itron (NASDAQ:ITRI) is the 800 lb gorilla in the room with regards to smart meters. The recent stimulus plan, as well as mandates in Europe for increased smart-meter usage, should help Itron pad its bottom line. Analysts predict that the company could see a 14% increase in revenue and nearly 30% in EBITDA growth over the next few years as sales of electricity, gas and water meters gain steam.
Echelon's (Nasdaq:ELON) NES System is one of the only software-driven smart-metering solutions in the sector allowing for advanced metering. Utility Duke Energy (NYSE:DUK), which is in the process of spending nearly $400 million to upgrade to a smart grid in key market areas, recently chose Echelon as its metering partner.
Providing the hardware and software links that connect smart meters to utilities, Digi International (NASDAQ:DGII) can be seen as a play on that necessary linkage. In addition, Digi is a leader in providing machine to machine networking, which allows for the implementation of demand-response transactions.
Finally, Badger Meter (NYSE:BMI) is adding new "smart" features to it meters, creating the basis for a smart water grid. The nation's water grid is experiencing many of the same hardships as our electrical one. The World Bank estimates that 25-30% of all the water flowing through our complex water infrastructure is lost due to leaking pipes, values and joints. (For related reading, take a look at The Other Grid Below Our Feet.)
With our aging electric grid in need of a major overhaul, billions will need to be spent in order to make the grid more efficient. Companies that are involved with this build out will see outsized gains for years to come as more money is spent on the problem. One of the more interesting aspects of the new smart grid, is in how utilities can communicate and process demand data with end users. The smart-meter makers are in a unique position to profit from this need. (For additional reading, check out Clean Or Green Technology Investing.)
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