The Next Industry The Internet Is Changing Forever

Name one technology that is almost exactly the same today as it was in 1964, five decades ago. How about one that has hardly changed since 1934?

If you’re looking for the answer, check the plug connected to the computer you’re reading this on.

Since the passage of the Public Utility Holding Company Act in the US in 1934, the basic structure of an electrical utility has barely changed. In that regard the regulation did what it intended to, recognizing electrical utilities as a public good and thus providing them with the types of rights and rules that would allow them to be stable for decades to come. Since then, they’ve kept the lights on and the meters spinning with hardly a blip.

Until recently, of course. Now we find ourselves in the age of digital technology, a growing global middle class, and massive growth in the demand for electricity. That has stretched the electrical grid to its limits, and the traditionally protected class of utility companies has been jolted awake by a rolling series of problem around the world—from brownouts in the California heat to the East Coast’s great blackout a decade ago, cracks in the system have started to show.

On top of it, mounting pressure from environmentalists and power hungry businesses like the Internet giants seeking to reduce their costs have put enormous effort into improving energy efficiency. Now the government is in the game too, pushing legislation to accelerate that effort.

That means changes in everything from your light socket to the generating plant that makes your bulb glow. And while LED bulbs can certainly put a dent in our electricity appetite, real change has to come at the core. It’s time for the power grid itself to get a little brighter and start responding automatically to changes in demand and supply, and problems that arise.

“Smart grid” is a term you may have already heard. If not, you’re going to… beginning here.

With government’s regulatory impulses, national security considerations, and private industry’s self-interest leading the way, we’re rapidly moving into the age of a smarter, more adaptive electrical grid. But it’s not been easy convincing the purveyors of power to buy in, as it means a wholesale rethinking of many longstanding business models.

Over the years, computer power has doubled and redoubled, over and over; the Model T has morphed into the Ferrari; the Wright Brothers’ rickety dune jumper has become the Boeing Dreamliner; the Net has joined Denver with Jakarta; men have mocked gravity, left the planet, and walked on the moon.

At the same time, our electrical networks have remained, in essence, just ever-expanding collections of dumb wires.

The Model That Failed

Here’s the model that prevailed for the better part of a century: most states granted a single utility a monopoly, covering all rights involved in the provision of power to its citizens. These utilities owned the generating plants, the transmission lines that moved electrons to the substations, and the wires that eventually distributed power to the end users. When demand grew and more juice was needed, they simply built another plant and spliced it into their existing grid. If a neighboring grid in another state was loosely connected, it was mostly for backup. In this era, electricity was inexpensive and abundant, and the provision of it spread to every corner of the land. Our amazing system was the envy of the world.

It worked well… for a while.

As the years passed, the grid grew. And grew. Until today, when we have about 9,200 generators pushing electricity through some 300,000 miles of aging power lines.

Image: Nick Anderson, the Cartoonist Group

Concurrently, the grid became more and more inefficient. For one thing, it couldn’t have been put together in a more slapdash manner. For another, in the golden era, the utilities were riding high. They had an utterly captive market and unlimited access to cheap fossil fuels. What incentive did they have to upgrade their creaky plants and decaying transmission facilities?

Still, there were few complaints. Energy remained relatively cheap, it was plentiful, and it was pretty darn reliable. Oh, and clean. No one had yet started to total up the environmental cost of burning all that coal.

But it all began to unravel in the late 1970s. Congress decided to hack away at the utilities’ monopolies by demanding that they buy electricity from independent generation companies that met certain efficiency standards. And by the early ’90s, the government had completely rewritten the rules, ordering the utilities to open their transmission lines to one and all.

The idea seemed beneficent enough. More competition equals better deals for consumers, right? No surprise, though: the law of unintended consequences kicked in with a vengeance. Many utilities simply opted out of the generation business and became electricity vendors. It was far better for business to shop around for the cheapest power—scarfing it up from areas with lower production costs and/or more limited environmental regulations—and then transport it hundreds or even thousands of miles back to their local customers, marking up the cost along the way.

Confronting the Problems

The net physical effects of this sea change were serious. Links between grids got very stressed. Designed originally only for emergency backup, they were now being asked to accommodate a continuous stream of extremely heavy traffic. The overlapping also caused the grids of distant states to become codependent. As one meshed with the next, a previously local problem could have far-flung consequences, like the infamous Northeast blackout of 2003.

Image: NASA

Concurrently, utilities have remained ill-equipped to diagnose and fix problems when they arise, despite the fact that the incidence of outages, many from preventable causes, has been rising steadily for years—more than doubling since the early ’90s, according to a University of Minnesota study. Blackouts in the US affect about half a million people every day. They cost the American economy anywhere from $80 million to $188 billion a year, depending on who’s doing the estimate.

Yet utilities have been slow to upgrade their systems, largely because they are disincentivized. No one wants to spend money on grid improvement that will potentially benefit plants owned by a rival. And states that export cheap energy are averse to costly new transmission projects, which would lead to undesirable rate hikes. Moreover, there’s a regulatory morass that’s all but impossible to navigate.

Thus, inertia prevails. Today, utilities allocate barely 2% of revenues to research and development. “For God’s sake, we contribute less to R&D than the pet food industry does,” says Jeffrey Byron of the California Energy Commission.

While utilities may be loath themselves to invest in change, other segments of the private sector are jumping in, creating the hardware and software that will drive the future and selling it to the utilities. Navigant Research estimates the value of the smart-grid market at $33 billion globally in 2012, and projects growth to $73 billion by 2020, with cumulative revenues of $461 billion in the interim.

So what is a smart grid, anyway?

For a working definition, we turn to author Clark Gellings, who wrote in his 2009 book, The Smart Grid:

“In brief, a smart grid is the use of sensors, communications, computational ability, and control in some form to enhance the overall functionality of the electric power delivery system. A dumb system becomes smart by sensing, communicating, applying intelligence, exercising control, and, through feedback, continually adjusting. For a power system, this permits several functions, which allow optimization—in combination—of the use of bulk generation and storage, transmission, distribution, distributed resources, and consumer end uses toward goals, which ensure reliability and optimize or minimize the use of energy, mitigate environmental impact, manage assets, and contain cost.”

And Now, How Do We Do That?

In 2003, the Electric Power Research Institute (EPRI) released Electricity Sector Framework for the Future, a report that set forth the Institute’s technological vision for a smart grid. Granted, EPRI put a 20- to 25-year time frame on implementing its recommendations—but none is beyond reach with the technology currently available to us. Among them:

• Digital network control: Real-time, electronic controls would replace the system’s existing electromechanical switchgear, enabling faster and more seamless control of the network.

• Integrated power and communications: Merging the power grid with communications networks would create a “dynamic, interactive power system” that would support the real-time exchange of information and power.

• Enhanced meters: Replacing the old metering system with real-time, two-way energy information systems would allow price signals, market information, and buyer decisions to flow freely.

• Distributed resources: Incorporating distributed generation sources would improve system reliability and capacity.

• End-use efficiency: Technology advances would raise the efficiency of end-use devices, and improve utilities’ ability to control those devices.

Rendered graphically, a sample smart grid might look like this:

Basically, the overarching idea is to get modern, real-time feedback mechanisms into the system that allow for much closer monitoring of what’s happening at any given moment, and that have the added ability to immediately pinpoint malfunctions—and in some cases, repair them.

Further, it means: integrating the output from a number of generation sources; providing superior storage capacity in off-peak hours and releasing power only as needed, so that wastage is curtailed; creating microgrids that tie into the larger grid, but that can also be isolated from it in the event of serious problems, thereby minimizing the spread of trouble; enhancing protection from natural disasters or terrorist attacks; and bringing the grid fully into the computer age, from the point of view of the energy provider and of the user, with both businesses and homeowners called on to smarten up.

The Tools

In order to accomplish all this, technology must come up with the appropriate tools. Some of this is a done deal and some is still in R&D, but eventually everything here is expected to come online.

Domestic smart meters: This is the one with which the average citizen is most familiar. All it means is that the old-fashioned, analogue, one-way electric meter for the home is replaced by digital meters that record usage in real time. These also establish a communication path from generation plants to smart electrical sockets and other smart-grid-enabled devices. The customer can choose to shut down such devices during times of peak demand, thereby helping promote grid stability while saving money at the same time.

Sensors and meters: Back at the generating plant, a network of intelligent sensors should be installed to evaluate congestion and grid stability, monitor equipment health, deter energy theft, and support control strategies. Operators should have the ability to deal with all of these in real time. In addition, outdated analogue switches are being replaced by digital ones. And progress is being made on placing advanced metering infrastructure (AMI) more deeply into the grid, particularly for use in distribution automation applications, including outage management, restoration verification, load monitoring and profiling, asset and condition monitoring, and the integration of distributed generation assets.

Integrated communications: Advanced sensors and meters are of limited use without an advanced communications system by which information can be relayed at lightning speed. Smart grids have internal communications, either through the Internet or an offline LAN, that keep the data flowing.

Smart power generation: The first generating plants are now being constructed that will provide dynamic generation capacity to meet sudden shifts in demand. This particular approach involves building two or more identical generators that can start, stop, and operate efficiently at a chosen load independently of the others, thus making them suitable for both base load and peak power generation.

Software: The gathering of large amounts of data must be distilled down into something meaningful to a human operator. Otherwise, the increasing number of variables streaming in can be overwhelming and the new tools’ effectiveness will be lost. Software has been designed that can present information in a readily understood format; that can detail available options in an easy-to-follow, step-by-step manner; and that can provide new operators with realistically simulated training. Artificial intelligence will play an increasing role, with generating plants of the future largely run by software that is rapidly able to accurately calculate and execute control strategies.

The Companies and Investment Opportunities

A lot of companies are jumping on the smart grid bandwagon. GTM Research has done extensive evaluation of the subject, identifying some of the leading players worldwide:

Among this increasingly competitive pack of upstarts and giants vying for a new line of business, there are bound to be big changes, huge winners, and equally spectacular failures. 

With so much at stake, investment has been increasingly dramatically around the world, in everything from the computer chips to detect problems, smarter power relay stations that can adjust their output, generation stations that come online exactly when needed with barely a human hand needed to help, smart meters that adjust usage to reduce cost or prevent failures, and of course all of the glue to string these systems together.

The question before us, of course, is: Which technology, and which company, is the best investment to take advantage of the sea change that will come from the smart grid? Our research tells us it’s not in the companies providing the physical components, nor is it in the behemoths like Cisco and Fujitsu, for which this represents just a small part of their overall revenues.

The best investment is in a company that is bringing a complete solution to the job—including hardware, software, and services. Our pick in this sector focuses exclusively on the smart grid, making it a pure play on the trend.

It’s not hyperbole to say it could make the leap from largely unknown to a household name in a few years, making early investors a bundle in the process. Exactly what company we believe will bring home the biggest smart grid prize for investors is, however, exclusively available to subscribers of Casey Extraordinary Technology. Not one yet? Sign up here for instant access to our top smart-grid pick, as well as reams of research on the best technology investments the world has to offer—all with a completely risk-free trial.

Just today, we published our extensive annual portfolio review, with a complete review of every stock in in the portfolio and what’s a Buy, Sell, and Hold right now… as well as a review of results to date:

• Of our 18 closed or free-riding positions since the beginning of 2013, we booked 15 winners and just three losers, for an average gain per closed recommendation of 75.2%.
   
• If we look at the performance of CET closed positions since the beginning (we published our first issue in July 2009), we’ve realized gains on 39 of 50 closed positions and generated an average gain per recommendation of 47.4%.

While our 78% success rate and 47.4% average gain per closed recommendation puts us in the top of the competitive crop of newsletters (and hedge funds) for our sector, all that matters today is what we will do going forward, with new opportunities as well as what we have in our portfolio today. We believe that our smart-grid pick—one of 12 current Buys in our recommendation list today—will help us best that 75.2% return again next year. Sign up for Casey Extraordinary Technology today, and see for yourself how we’re able to make such big returns on the companies changing our world.