Wave Systems Corp. (fka WAVXQ)

[cliffdweller]

Smart Grid Article ... and a reminder that the smart grid end points need to be authenticated.

A Better Grid: Will It Juice Stocks?


http://www.smartmoney.com/Investing/Stocks/A-Better-Grid-Will-It-Juice-Stocks/?afl=yahoo

IN 1849, TENS OF THOUSANDS OF EASTERNERS joined a gold rush to California, lured to the new territory by the discovery the previous year of 23-karat flakes in the river by Sutter's Mill. Now, 160 years later, on the opposite coast there is a "Grid Rush."

Lobbyists for electrical utilities, their suppliers, and their consultants are descending on Washington in droves to pan for a share of the $11 billion that President Barack Obama initially wants to spend to help modernize our aging electrical-transmission system -- a web of 250,000 miles of power lines connecting millions of homes and businesses to 9,200 electric plants.

About $4.5 billion of that lucre would help utilities convert the low-voltage part of the system into a so-called smart-grid, introducing digital-age efficiencies into the system, reducing waste and negating the need for expensive and polluting new power plants. Similar upgrades are under way in world capitals from Brussels to Beijing as governments struggle to reduce greenhouse emissions and their dependence on Middle East oil.

The other $6.5 million is for repairing and maintaining existing wiring. A study by the Brattle Group estimates utilities will have to spend more that $1.5 trillion between 2010 and 2030 merely to maintain the level of today's service.

Obama's proposal might just be the start of years of big expenditures, because he was a big supporter of the smart-grid concept on the campaign trail and because, frankly, $4.5 billion is a drop in the bucket.

Some smart-grid proponents recommend spending $10 billion every year for at least five years, which they say would save utilities and business billions and create about a quarter of a million new jobs. That kind of money could lead to such things as electric meters that talk back to the utilities, allowing them to bill you without hiring a meter reader, and time-of-day pricing that allows you to reduce your bill by, say, running the dishwasher after midnight.

The real question here is whether the money in the stimulus is a one-time boost, or a down payment on a longer-term commitment. Investors thinking of snapping up grid-related stocks, such as the ones shown in the table above, should give some serious thought to the question.

The conventional wisdom is that Congress and Obama won't short-circuit the project. "I think there is a consensus that we need a stronger, smarter electrical-transmission system," says Peter Fox-Penner of the Brattle Group.

Proponents argue smart-grid spending will pay for itself over time and help reduce greenhouse emissions. The Department of Energy claims that a 5% improvement in grid efficiency would be the same as permanently eliminating harmful emissions from 53 million cars.

Other boosters claim smart-grid technology could reduce our overall energy usage by 15%, negating the need for about $100 billion of new power plants and transmission lines. But that is a claim without convincing evidence, extrapolated from the results at one small demonstration program.

This isn't to say there is no there there. Suedeen Kelly, a member of the Federal Energy regulatory Commission, says new digital capacitors being installed on lines in New York state at a cost of $80 million will reduce energy costs by $60 million per year. That represents a rather quick payback.

Investors clearly have taken an upbeat view of all this. The stocks of companies flogging smart-grid products and services have held up better than many other sectors. And the companies themselves are hardly discouraging the optimism.

F. Michael Valocchi, global energy and utility industry leader for the Global Business Services group of IBM (IBM: 91.66, +0.06, +0.06%) , claims that the smart grid is one of the fastest-growing business categories at his company. IBM gives utilities end-to-end support in upgrading their transmission systems, helping them set standards, develop software, and order the right components. Valocchi says he is now working with seven utilities around the globe.

Dozens of corporations are trying to move into the space, as evidenced by members of Gridwise.org. They range from giants like Lockheed Martin (LMT: 82.48, -0.04, -0.04%) to Microsoft (MSFT: 17.66, +0.03, +0.17%) to money-losing startups betting on a big surge in demand.

Stephen Sanders, a managing partner at securities firm Stevens Inc., says companies already making money in the sector should benefit from the proposed stimulus in 2010. He favors Itron (ITRI: 62.42, +2.41, +4.01%), a leader in advanced metering, because a 2007 acquisition gave it global reach. Sixty-five percent of its business is now outside North America.

Itron borrowed heavily to make the purchase, but Sanders says its cash flow is adequate to meet its debt obligation. He sees earnings per share rising to $3.85 in 2009 from $3.40 this year. His price target: about $70, up from the low $60s now.

Sanders also likes Esco Technologies (ESE: 35.74, +0.51, +1.44%), an engineering company that provides two-way communications gear between all sorts of utilities and their meters. Both Itron and Esco are investment-banking customers of Sanders.

The grid, which dates back to the early 1960s, is often described as the world's largest interconnected machine. Without it, electricity generated in one part of the country couldn't flow to other parts. Pleasures that we take for granted -- like flipping on a light at home or driving on illuminated streets in the night or sending an e-mail -- would be hit-or-miss occurrences if there were no grid to instantly provide extra juice when utilities close to home couldn't meet demand.

But the grid is far from a well-oiled machine. A sudden surge in demand from one region can cause overloads that result in blackouts. Earthquakes can disrupt flows to some states for long periods. There are about 12,500 electric substations serving the entire system, and if 500 of them were down at any one time, the system would experience a 60% drop in customer connectivity.

Smart-grid boosters say it is a prerequisite for bringing electricity generated by wind, solar and other intermittent, renewable sources to market and for allowing the mass production of plug-in electric cars.

Still, it remains unclear just how much of a jolt Obama's first stimulus will send through the grid. That is why we would wait until next budget season before connecting our investment dollars heavily to it. Investors could be in for a big shock unless the federal dollars start begin to flow more freely.


cliff