Investing in the New Electricity Economy—A Primer
There’s a revolution coming in electric power. Passive, one-way power distribution will become a marketplace with real-time transactions. Centralized will become networked. Demand will become supply. And large-scale energy storage will finally become a reality. So what does all this mean for companies and investors?
That’s the topic of a 55-page white paper prepared by Jesse Berst and his team at GlobalSmartEnergy, a Redmond, WA-based research consultancy focusing on business opportunities in the emerging “smart energy” sector. The report was published last Friday by the Global Environment Fund, an international firm based in Chevy Chase, MD, that invests in cleantech and emerging markets.
Berst, an Xconomist, sat down with me a few weeks ago to discuss smart energy and the local state of cleantech companies. In his current report, entitled “The Electricity Economy,” Berst lays out an argument that goes something like this. First, the developed world is becoming more and more addicted to electricity without fully realizing it. Berst describes the phenomenon as “more people, more devices, more desire.” Because of this “accidental addiction,” he adds, we are highly vulnerable to natural disasters, terrorist attacks, and massive ripple effects from small problems (such as the Northeast blackout of 2003). Consider a few stats:
—The Energy Information Administration predicts that worldwide power generation will nearly double from 2004 to 2030. That is the equivalent of 25,000 additional 500-Megawatt coal-fired plants.
—In developed nations, demand for electrical appliances rose 48 percent in the 1990s.
—By the end of 2007, more than half of all U.S. households had at least one high-definition TV. A plasma TV uses two to three times as much energy as a standard TV.
—A 2002 study by the Electric Power Research Institute found that power outages and disturbances cost the U.S. a minimum of $119 billion annually.
At the same time, Berst writes, the electric power infrastructure is being rebuilt gradually, with distributed digital equipment replacing centralized electromechanical machinery. Berst is a strong proponent of the “smart grid,” an emerging set of technologies such as intelligent monitoring and communications devices whose goal is to make electricity distribution more efficient and reliable. His report goes into a lot of detail about the capabilities of these devices, comparing the evolution of the energy infrastructure to that of telecommunications and the Internet.
But what I found most intriguing was what Berst calls “electronomics”—the emerging business opportunities to be found in what he calls the electricity economy. According to the Brattle Group, North America alone will need nearly $1 trillion of investment in power transmission and distribution technologies between now and 2030. Here are some other stats from Berst’s report to put smart energy and cleantech on the funding map:
—In the past three years, at least 300 venture capital funds have entered the cleantech area.
—In the first half of 2008, more than 50 percent of the venture capital invested went into the smart grid space.
—Of the 28 IPOs from June 2007 to June 2008, 10 were in cleantech or smart-grid technology.
—An estimated $38 billion in various funds is now targeting cleantech, not counting private equity firms, regional angel groups, and utilities.
The bottom line? Berst’s report flags a few areas that he considers promising for investors. The power industry, he writes, is moving beyond traditional generation and into networked “microgrids,” beyond traditional distribution and into readable dashboards and intelligent control, and beyond traditional business models and into efficient new billing platforms. The early beneficiaries of these trends will be large construction and engineering firms, followed by companies that figure out how best to store and transport bulk renewable energy from wind farms and the like.
In terms of supplying home and business monitoring devices—such as smart meters and predictive software to anticipate the ebb and flow of power needs—keep an eye on cable companies (e.g., Comcast), software makers (Microsoft), network equipment makers (Cisco), and audio/video manufacturers (Sony). As for new business models, Berst writes, look for companies that offer better efficiency to utilities (e.g., Comverge, or Advantage IQ, a spinoff of Pacific Northwest utility Avista). In the future, customers will demand a choice in “power plans,” just as they have a choice in phone plans, features, and carriers.
“The nation’s power bill is more than twice the size of the nation’s phone bill,” Berst writes. “With so much money at stake, electricity customers will demand the same kind of choice and selection. And they will slowly get it, as technology improves and as regulators awaken to the consumer benefits of competition.”