Summer days are here and air conditioners are running full blast in much of the United States. Summer months tend to be periods of high electricity demand, particularly during bouts of intense heat waves. For example, the average home consumes 40% more electricity on a 103 degree Fahrenheit day compared to an average summer day of 83 degrees.
That means that utilities have to crank up electricity generation to meet demand, which can fluctuate wildly. With power plants running full tilt there is little room for error – blackouts are not uncommon when the grid is so stressed.
But the problem is compounded by the fact that the U.S. electricity grid is aging and increasingly showing signs of strain. The American power grid has over 450,000 miles of high-voltage transmission lines, fed by over 7,000 aging power plants. More to the point, over 70% of the nation’s transmission lines are over 25 years old, and the average power plant is over 30 years old.
As fragility of the grid has increased, so has the incidence of blackouts and weather-related power outages. The U.S. suffers $18 to $33 billion in costs each year from power outages related to severe weather alone. But the problem goes beyond weather – total costs for all outages reach as high as $150 billion a year across the country. And the problem has gotten worse over time. Power outages in the U.S. have skyrocketed by 285% since 1984.
And that should not come as a surprise considering…
Summer days are here and air conditioners are running full blast in much of the United States. Summer months tend to be periods of high electricity demand, particularly during bouts of intense heat waves. For example, the average home consumes 40% more electricity on a 103 degree Fahrenheit day compared to an average summer day of 83 degrees.
That means that utilities have to crank up electricity generation to meet demand, which can fluctuate wildly. With power plants running full tilt there is little room for error – blackouts are not uncommon when the grid is so stressed.
But the problem is compounded by the fact that the U.S. electricity grid is aging and increasingly showing signs of strain. The American power grid has over 450,000 miles of high-voltage transmission lines, fed by over 7,000 aging power plants. More to the point, over 70% of the nation’s transmission lines are over 25 years old, and the average power plant is over 30 years old.
As fragility of the grid has increased, so has the incidence of blackouts and weather-related power outages. The U.S. suffers $18 to $33 billion in costs each year from power outages related to severe weather alone. But the problem goes beyond weather – total costs for all outages reach as high as $150 billion a year across the country. And the problem has gotten worse over time. Power outages in the U.S. have skyrocketed by 285% since 1984.
And that should not come as a surprise considering the world’s largest economy is largely powered by a bunch of electrical wires strung up on wooden poles. In an era where so much data is provided to internet users instantaneously, it may be difficult to understand why the electrical grid is stuck in the past.
But in the coming years, the U.S. hopes to bring the early 20th century electrical system into the 21st century. Replacing and/or upgrading the grid, which is an estimated $876 billion asset, will mean an enormous business opportunity for companies in the smart grid arena.
The “smart grid” is an amorphous term that means different things to different people. But essentially, it refers to the array of technologies that allows electricity to be digitally based, provides immediate data on supply and demand, allows consumers to interact with the utility, provides real-time pricing information, and instantly notifies the utility of an outage.
There are a range of companies operating in this space, but here are a few that are poised for growth.
As mentioned above, smart thermostats will be a huge part of building out the smart grid, and could one day be in every modern home. Google (NASDAQ: GOOGL) recently purchased Nest, a leading maker of these web-connected smart thermostats. Starting at $250 a pop, the Nest Thermostat, according to the company, pays itself off in a matter of months through energy savings. It can controlled by smart phone, programs itself by learning the consumer’s energy patterns, and fluctuates heating and cooling depending on real-time pricing and weather. Google paid $3.2 billion for Nest in January 2014, making a big bet on smart thermostats and the smart grid.
A rival to Google’s Nest Thermostat comes from Honeywell (NYSE: HON), a major company that works in everything from education to pharmaceuticals to IT. Honeywell has been building thermostats for decades, but it formed a smart grid unit two years ago and is pushing hard to be a smart grid leader. What is the difference between the Nest and Honeywell Thermostat? The Nest thermostat learns a consumer’s behavior based on motion – it cycles up or down when people are in the house. The Honeywell version senses when a consumer’s smart phone is within range, which it says is a more accurate way to track people’s behavior. Beyond that, both thermostats promise to save big money for utilities and will see an explosion in business in the coming years.
Honeywell was also recently awarded a contract to build a microgrid at Fort Bragg, a military base in North Carolina. The U.S. Defense Department has been looking increasingly at how it can use less energy on its military bases, both to save money, but also to insulate their operations from a power outage. Honeywell won a $3.4 million contract to use their advanced IT controls to build a microgrid that works with multiple buildings and the base’s backup generators to save energy and build resiliency.
“Sites such as Fort Bragg present unique challenges due to the nature of their operations,” Paul Orzeske, president of Honeywell Building Solutions, said in a press release. “They can't lose power, but at the same time, they may be using too much power. Honeywell's expertise in managing energy supply and demand allows us to develop solutions that help address both issues.” While the contract is a small one, Honeywell has its foot in the door to DoD’s massive budget, so expect more of those government contracts in the future.
Perhaps the most exciting company profiting from the burgeoning smart grid is Opower (NYSE: OPWR), an Arlington, VA company that is a provider of cloud-based software to the utility industry. For example, utilities pay Opower for software and data services that allow them to interact with customers, notify them of peak electricity days, and manage their usage through smart thermostats. The beauty of the company’s software is that it allows utilities to shave off peak demand by encouraging consumers to shift energy usage to off peak hours.
This is important because procuring energy during peak hours is expensive. The utility can reduce peak loads, which saves money. OPower is growing rapidly, and just underwent a successful initial public offering in April of this year. Earlier this year Opower signed a deal with TEPCO, a massive utility in Japan, setting it up for future international expansion.
The losers of the smart grid revolution are going to be the utilities that refuse to acknowledge change. Big dinosaurs that cling to the old way of doing business will be run out of town. And utilities are getting hit from all sides. The rising penetration of solar is eroding their customer base. Environmental regulations will force many companies to shut down coal plants or pay for expensive upgrades.
In order to compete in the 21st century electricity sector, these utilities are going to need to offer their customers something new, some value-added services. A suite of smart grid applications could head off decline and allow them to switch to a new business model of offering services rather than trying to merely sell more kilowatt-hours. That means they will have to implement data management, software, smart thermostats, and the like – a huge opportunity for investors who know what is coming.
The U.S. electricity grid is aging and falling apart. That may be a drag on the U.S. economy, but as the grid gets an overhaul over the next 10 to 15 years, there will be a lot of money made for the companies fixing it up.