How to make a play in the smart electrical grid: executives

PALM SPRINGS, Calif Thu Jan 21, 2010 9:30am EST

PALM SPRINGS, Calif (Reuters) - Investors in clean technology see the expected upgrade to a smart electrical grid in the United States as a massive opportunity, but finding the right investments will require patience.

The sector includes high-flying start-ups and heavily regulated utilities. Technology giants like Google Inc and Microsoft also are moving to the area.

"This is changing. It's going to take some time ... It's the first inning and we got to make sure these early projects are really flawless," said Scott Lang, president and chief executive at Silver Spring Networks, speaking at the Clean-tech Investor Summit being held this week in Palm Springs.

The privately-held Silver Spring Networks is smart grid networking company and is often cited as a candidate for an initial public offering.

The smart grid will allow two-way communications between utilities and their customers. Analysts have said it will marry clean power, electric vehicles, advanced meters, and power storage into a seamless network, modernizing thousands of miles of outdated power lines and allowing for more efficient energy use.

Increased momentum for smart grid technology helped push power storage and energy efficiency stocks to perform the best on the WilderHill New Energy Global Innovation Index in 2009, which tracks the performance of 86 global clean energy stocks.

The sector also has seen a boost from the Obama administration, which announced a $3.4 billion package in 2009 to help build a smart electric grid meant to trim utility bills, reduce blackouts and carry power generated by solar and wind energy.

"The scale is even bigger than the Internet ... but the speed of adoption is still going to be slow," said Adrian Tuck, chief executive at Tendril, a Boulder, Colorado-based smart grid company that GE recently acquired a stake in.

Yet risk-averse utilities and still emerging technologies pose challenges to the smart grid, often likened to the Internetization of how energy is moved and managed.

"There is very little tolerance for problems in this industry and I think that's what distinguishes it from the telecom industry," said Anne Pramaggiore, president and COO at Exelon Corp's ComEd.

Pramaggiore explained that in the early days of cellphones consumers tolerated dropped calls, but consumers of electricity might not be so tolerant of problems with new smart grid technology.

MAKING A PLAY

Bank of America Merrill Lynch analyst Steve Milunovich views the sector in layers much like the Internet industry: hardware in new advanced meters and transmission upgrades; networking; and applications for the network infrastructure.

That analogy can give investors a sense of timing, and a play book, Milunovich said, noting the smart grid finds itself where the PC industry was in the 1980s.

"That's why we first see the opportunity in smart meters," Milunovich said, citing advanced meter maker Itron. A smart meter can provide electric use information to a utility as often as every 15 minutes.

With technology still evolving, Milunovich recommends buying a broad portfolio and waiting for the sector to mature.

Investors can make a pure-play with companies like EnerNOC Inc and Comverge Inc, called demand response for their role in limiting electricity use during peak demand.

"Demand response is the killer application in this market, at least the first killer app," said Robert W Baird analyst Michael Horowitz.

"These guys already have built fairly good business momentum over the last couple of years, as consumers and utilities alike are looking for better ways to manage delivering electrons," he added.

While bigger players are moving into the sector, they may not be the fastest way to profit from the smart grid. Google has invested in smart grid player Silver Spring Networks while Cisco and Microsoft are seeking to leverage their existing networking and software expertise in the emerging sector.

"Our view is the pure play companies are going to give a lot more bang. This is going to be very small to incremental for a company like Cisco and Microsoft," said RBC Capital Markets analyst Stuart Bush.

(Reporting by Laura Isensee; editing by Carol Bishopric)

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