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Investment Opportunities in the Smart Meter Sector

By Dave Zgodzinski | Tue, 05 February 2013 22:47 | 0

You realise what a great job electricity networks do on the rare occasions when they break down. Most of the conveniences of modern life are sustained by that wire to your house. These functions are fed power without you having to go to the store to buy it or having a truck deliver it – the power is just there whenever you need it.

All you have to do is pay the bill.

Electricity networks, many of which are over 100 years old, were built for centralized, one way distribution from big power sources like hydro dams or coal-fired plants, to a mass of end-users. Power distribution networks have done that job well. Now after a century of proven effectiveness, there are some geriatric issues.

Massive quantities of distribution equipment are getting old and have to be replaced. What’s more, the whole modus operandi – the MO, of the electric grid is being re-examined. We are accustomed to other networks now. We're used to connecting with networks and sending as well as receiving information. Electricity networks are functional but they are not interactive. Not yet. Eventually networks will monitor all types of information from the end-user and feed that information back to the utility. Customers will be able to receive information as well.

The network is not just a one-way street for power any more. Electricity can be produced by solar installations on warehouse roofs, for example, and uploaded to the grid.  Power needs be transported both ways and this can cause complications.

All of this re-creation of the electricity distribution network is lumped under the heading of the “Smart Grid.”

Like Facebook, a truly smart grid is a bit of a scary concept. Do you really want your utility to be able to monitor everything that has to do with electricity in your home? What appliances you use, and when? What time the lights go out? You can turn your computer off if you don’t want it to snoop on you. You can’t turn the grid off.

Then there are security issues. Smart grids will presumably be targets for hackers. What kind of chaos will they create?

But Big Brother complications are for the future. For now, getting Smart is absolutely the new requirement for power networks. Utilities and end users want the facts as well as the electrons. Renewable energy generation is particularly in need of a smart grid because renewable power is irregular. The wind blows intermittently and clouds block the sun sometimes. This irregularity of generation is a factor to which utilities and their current grid are not fully adapted. It will take a much more sophisticated distribution system to cope with all the new means of production.

The smart grid ends (or begins) with the electric meter. The essential service of smart meters, the reason that utilities crave them, is automated billing. Smart meters do not have to drive up to your house in the company vehicle, and punch in the numbers for your bill. Smart meters don’t take lunches and they don’t have unions.

Utilities want smart meters so they can get rid of the meter readers. That’s the big payoff to start. But the billing information – the actual kilowatt-hours used, is just one bit of information. There is a lot more useful information that can be detected from the electricity network and then relayed back to HQ by the smart grid. There are power quality measurements, outage detection, theft detection, blackout and brownout detection, real-time direct load control etc. etc.

Meters currently measure only usage but they can be made to monitor much more.

Itron Inc.

Itron Inc. is the big gorilla in the smart meter business. Itron has sold its products and services to thousands of utilities in over 100 countries around the world.  The company has been in the metering business for over 100 years and has been instrumental in the creation and evolution of the business. They have been making dumb meters for many years.

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Itron Advanced Residential Meter
Itron Advanced Residential Meter

Today, Itron manufactures smart metering equipment for residential and commercial use. They make metering and instrumentation transformers and communications equipment as well, all to bring intelligence and communication capabilities to the electrical network. 
Itron sells wireless communications equipment to link all this smart metering equipment and transmit the information back to HQ. The company has formed a partnership with Cisco Systems to increase the communications networking capabilities of utilities.

There is no indication that Itron is working on a shoe phone for utility linemen, but if there is a need for one, they could probably make it.

Besides products for the electricity network, Itron also manufactures equipment for gas and water utilities. Itron, through subsidiaries that the company has acquired, has been making water and gas utility equipment for a century.

All of these activities bring in a lot of money. In the nine months ending Sept. 30, Itron had $1.65 billion in revenues and net income of $93.7 million or $2.31 a share. The company has a strong balance sheet with working capital about $50 million less than its long term debt as of last September.

At Friday’s closing price of $46.48 the stock is not selling in the bargain basement – it has been rallying since a low in June. But Itron was selling at almost twice the current price back in 2010 when there was more focus on updating the power grid. The stock traded  over $100 back in 2008.

Echelon Corp.

A smaller gorilla in the smart meter business is Echelon Corp. This company manufactures smart meters as well. Echelon’s products use Internet Protocol – the language of the Internet. They can be managed through a web-based interface. Echelon products detect breakdowns, theft of electricity, and predict future line failures.

The company makes meters and control nodes . Echelon also makes network interfaces, gateways and routers to allow utilities to communicate with their meters and vice versa. Echelon makes equipment and software to control street light networks and power use in individual buildings. The company sees the smart grid extending from buildings to the grid, to whole cities.

Echelon manufactures meters that measure power going both ways – from the utility to the end user, and power sent to the grid from end-users that generate their own power using solar panels or wind turbines.

The company partners with re-sellers and utilities supplying software, components, equipment – whatever the partner needs. One of their partners is EnerNOC, which uses Echelon equipment to monitor power use in smart buildings (see EnerNOC below).

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Echelon sees growth coming from the emerging markets like Brazil, where the company is working on a smart grid pilot project with the country’s largest utility. But last year, revenues shrank and Echelon lost money.

Echelon 52 Week Chart
Echelon 52 Week Chart: Source - Bigcharts.com

Revenues of $107.4 million were down 5% from the same period of 2011. The company blames overall softness in the smart grid equipment market last year for these shortfalls. Itron’s revenues were also down last year. But it is a competitive market and Echelon is much smaller than Itron.

Still, Echelon has been a public company for 14 years. The stock has seen better days. It closed Friday at $2.51 But it traded over $30 in 2007. The company has a healthy balance sheet,  about $1.70 a share in working capital as of last Sept. 30.

The company is losing money but spending quite a bit on product development. Echelon has the funds to weather this slower period and hopefully will have the products that utilities want in a future renewal of interest in smart grid upgrades. Echelon, like Itron, will announce earnings next week.

EnerNOC Inc.

EnerNOC  has a number of energy monitoring tools and services for power measurement, software and systems to interpret the information, and an interesting business model to capitalise on these. The company’s principal money maker is a service called Demandsmart.

This is a demand response service. Clients of the company – large power consumers - reduce power consumption when asked and get money for complying. EnerNOC provides the hardware and software to enable large power using organizations to benefit when they react to information and alerts.

There are different types of demand response events. A capacity market demand response occurs when utilities ask clients to reduce use rather than having to put more capacity online. Price based demand response occurs when clients cut power use when prices rise. Then there are peak demand responses – cutting use when the utilities charge extra for peak demand use.

EnerNOC doesn’t charge clients to get hooked up to the Demandsmart system. EnerNOC supplies equipment, software and monitoring to the customer. In exchange, EnerNOC receives part of the money that the client gets back from the utilities for complying to reduce consumption at specific times, or saves by cutting use at times when power is expensive.

EnerNOC has over 8,500 customers with 13,500 sites in its Demandsmart network – representing over $1.75 billion of annual energy spending.. The company is expanding overseas, with operations in Australia, Canada, England and New Zealand. EnerNOC is also selling other sophisticated systems, besides demand response,  that measure power usage and provide customers with interpretive tools to help them save energy and money. These other products represent a small but growing portion of EnerNOC’s revenues.

Saving money through more intelligent power consumption is a big business for EnerNOC. The company had $236 million in revenues for the nine months ending September 30. Profits were $3.5 million or 13 cents a share – considerably less than the same period in 2011.

Part of the reason the company had lower revenues and profits was the lower cost of electricity on the market. The company is directly affected by these prices because its revenues are a function of the amount of money it saves its clients. When electricity is cheaper, less money is saved. And vice versa.

The company had about $4.58 in working capital per share at the end of September last year – a safe balance sheet. The stock closed Friday at $15.62

EnerNOC’s customer base keeps growing and the company continues to innovate. In the first 9 months of 2012 the company added 900 customers to its demand response network.

By. Dave Zgodzinski

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