smart grid technologies transmission & distribution markets

114 Pages·2009·4.66 MB·English

S G T
MART RID ECHNOLOGIES
T D M
RANSMISSION & ISTRIBUTION ARKETS
CLEANTECH INDUSTRY REPORT | JANUARY 2009
Alex Kurtz
Vice President
Smart Grid Technologies
+1.415.568.3926
[email protected]
IP Technologies Driving
Utility Innovation
Demand Response
Substation Automation
Frequency Regulation
Transmission Technologies
INVESTMENT BANKING | RESEARCH | INSTITUTIONAL SERVICES | CORPORATE & EXECUTIVE SERVICES | ASSET MANAGEMENT | VENTURE SERVICES
Smart Grid Technologies
MERRIMAN
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Table of Contents
Executive Summary……………………………………………………………………………………………………………………………………….…… 1

Investment Themes …………………………………………………………………………………………………………………………………………… 4

Smart Grid Public Comp Table ………………………………………………………………………………………………………………………..… 8

Smart Grid Regulatory Overview ……………………………………………………………………………………………………………………… 9

Distribution & Demand Response Overview ……………………………………………………………………………………………………… 13

Top North American AMI Rollouts ………………………………………………………………………………………………………… 20

AMI Shipment Projections for North America ……………………………………………………………………………………… 20

Home Area Networks……………………………………………………………………………………………………………………………… 21

Transmission Market Overview……………………………………………………………………………………………………………………………22

Integrating Wind Power into Grid a Key Near-Term Challenge…………………………………………………………… 24

Substation Technologies ……………………………………………………………………………………………………………………… 28

Frequency Regulation …………………………………………………………………………………………………………………………… 30

CTC Cable Overview ……………………………………………………………………………………………………………………………… 32

Conclusion…………………………………………………………………………………………………………………………………………………………… 34

Appendix……………………………………………………………………………………………………………………………………………………………… 35

Distribution & Demand Response Company Profiles …………………………………………………………………………… 36

Transmission & Load Control Company Profiles ……………………………………………………………………………………75

Consulting Services Company Profiles ………………………………………………………………………………………………… 103

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Executive Summary
Smart Grid as an emerging investment opportunity. We believe the Smart Grid sector (with this report
focusing on North America) represents an attractive investment opportunity as the companies participating in
this space address key challenges such as 1) reducing utility operating expenses through the use of Ad-
vanced Metering Infrastructure (AMI) technology; 2) lessening C0 emissions over time with the use of De-
2
mand Response programs that, in turn, alleviate the need for additional power generation; 3) improving
overall grid reliability by better matching increasing demand to new supplies of power generation and 4) cre-
ating a two-way, networked electrical grid that provides utilities and consumers with increased data analyti-
cal capabilities around the consumption of power, enabling new, more efficient pricing models to emerge.
Two key subsectors in the Smart Grid marketplace. We believe investors should focus on the Smart
Grid opportunity as two separate but closely aligned subsectors. The first of these being the Transmission
subsector, where companies such as ABB, Areva, American Superconductor, Easton, GE, Siemens and
smaller vendors such as Beacon Power and Composite Technology are assisting utilities with upgrades to
transmission and substation assets and the second being the Distribution subsector, where companies such
as ESCO, Itron, Echelon, EnerNOC and Comverge are assisting utilities in upgrading to AMI. In total, we view
the North American Smart Grid opportunity as a $10 billion+ annual market, growing at a 9% CAGR. This
consists of approximately $2B for AMI and the remainder for Transmission infrastructure.
The landscape has changed for the energy market over the last few months as recessionary pres-
sures and tighter access to credit markets has forced utility companies to adjust their capital expenditure
levels to reflect the tougher macro environment. While we acknowledge the near-term impact of the eco-
nomic recession on the current direction of utility capital expenditures, we view it a the historical context as
having a short-term impact on the sector. As shown in Figure 1 on page 3, while recessions have had a mild
impact on electricity consumption, the overall trend has been a steady increase of 1-2% per year. In addi-
tion, utility capital expenditures have seen significant intra-year swings during the same period, but recent
commentary from many utility and grid operators suggests that dollars spent over the next several years will
be focused on technologies that provide near-term operational expense savings and reduced CO emissions,
2
favoring many Smart Grid related technologies, in our view.
An additional variable for the U.S. Smart Grid market opportunity is the potential impact of a
multi-year economic stimulus plan from the incoming Obama administration, with an upgraded electrical
grid as a critical piece of a new CleanTech policy. Some industry contacts are anticipating federal legislation
that could provide incentives such as extended accelerated deprecation rules, partial funding for AMI deploy-
ments and transmission assets as part of the reported $800 billion+ stimulus plan. While we don’t view this
as a standalone investment thesis for this sector, the content and potential passage of a stimulus plan has
already had an impact on many stocks in this sector and could be a significant tailwind for the publicly traded
companies in this space over the next several years.
We view this sector as a convergence of several advanced IP/Data Center technologies with tradi-
tional utility touch points, such as electrical and gas meters and meter data management systems (MDMS)
that will create new investment opportunities for traditional tech companies that can quickly adopt their plat-
forms and Go-To-Market strategies to meet the needs of the utility market. Key areas to focus on, in our
view, are data analytic tools integrating with MDMS platforms, storage/data warehousing (DW) and Wide
Area Networking (WAN) services and technologies, all of which will have some ability to participate in Smart
Grid buildouts. We believe the Smart Grid opportunity will eventually resemble a large, heavily trafficked
WAN that will entice large IT vendors such as Cisco, Hewlett Packard, Alcatel-Lucent and IBM to make direct
investments or acquisitions in technologies, startups or existing companies in this market. Oracle has already
started down this path with the acquisition of Loadstar, a provider of MDMS and C&I billing systems in 2007.
Investment thesis. Given the macro drivers behind the Smart Grid market, which we discuss further in the
next section, we believe there will be a significant investment opportunity for many publicly traded compa-
nies that have technologies and Go-To-Market strategies focused on the utility market (or soon moving to
this space), as well as smaller private companies that are focused on point solutions that address many of
the new data networking and analytical challenges that will arise over the coming years. The following page
highlights a handful of key data points that we see as important drivers of the Smart Grid market.
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Key Trends Driving Smart Grid Deployments

♦ Electricity consumption is expected to grow 1-2% over the next 20 years, but overall
capacity margins (delta between demand and supply within the grid) are set
to decline over that same period—creating stress on power generation, new black-
out threats and overall degradation in reliability of service. We believe many Smart
Grid technologies can help bridge this gap over the next several years. (North Ameri-
can Electric Reliability Corporation, Department of Energy)

♦ Generation from new sources of energy in North American and Canada is ex-
pected to grow at 2x the growth rate of transmission buildouts. New technolo-
gies and approaches to electrical transmission and distribution will be needed in order
maintain a highly available U.S. electrical grid, in our view. (North American Electric
Reliability Corporation).

♦ Demand Response (DR) technologies should begin to alleviate some peak electricity
demand over time. The consensus among industry contacts is that DR programs
can reduce peak demand by at least 10-15% and in turn alleviating transmis-
sion and distribution investments.

♦ Legislative acts such as the EPAct of 2005 and the EISA Act of 2007, along
with President-Elect Obama’s proposed stimulus plan, should help drive incre-
mental Smart Grid adoption over the next several years.

♦ Analysis by the Electric Power Research Institute (EPRI) suggests that Smart Grid
technologies could reduce C0 emissions by 136 million metric tons in 2030
2
(EPRI).

♦ Benefits from AMI deployments are expected to be significant as San Diego Gas
& Electric’s initial AMI proposal suggested approximately $630 million in benefits over
20 years. Of that amount, $227 million is associated with lessened Operating & Main-
tenance expenses and $213 million is in avoided generation growth (SDG&E).

♦ We estimate that a large, 5 million AMI meter unit installation will require ap-
proximately 19 TB in DW in the first several years of deployment. While this is
certainly not at the high end of a DW deal in size, contacts within the utility market
suggest new opportunities will exist to upgrade DW platforms for AMI projects, poten-
tially benefiting companies like Teradata, Oracle and Netezza.

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Figure 1: Demand for Power in the United States & Cap Ex Trends over the last 20 Years
U Consumption % Change
O
I Year Bil. (BTU) Y/Y
TU 45,000,000 Recessions 15% xp - 1987 27,123,591 4.5%
B E
y Generation- Billions 23345050,,,,000000000000,,,,000000000000 051%%0% mission & Distribution 1111111111999999999988999999998901234567 22333333338900012344,,,,,,,,,,395878344851293572214655891208,,,,,,,,,,439213562577699020316413283630 -4521313310..........5502662025%%%%%%%%%%
by Electricit 1250,,000000,,000000 -5% ction Trans 11222990009900089012 3333366778,,,,,189206863187396,,,,,062417892194821 -32221.....90919%%%%%
Consumption 105,,000000,,000000 --1150%% nge in Constru 22222000000000034567 3333488990,,,,,087556699574633,,,,,567015661427898 -02220.....11445%%%%%
a 20 Year CAGR 2.0%
0 -20% Ch
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Y/Y
Source: Edison Electric Institute, Department of Energy, Merriman Curhan Ford
The following images are of a handful of enabling Smart Grid technologies that will be discussed further in
this report. We would note that many of the advances that will be made in the utility markets over the next
several years are in large part being driven by IP enabled technologies. As mentioned earlier, we believe tra-
ditional data networking vendors over the next several years will view Smart Grid as a new, expansive mar-
ket opportunity and we would expect some companies to make acquisitions or partnerships with vendors al-
ready focused on this area. As an example, Cisco recently announced in October that it will be funding a
team to develop new technologies around power management and the grid.
Figure 2: Smart Grid Components—IP Enabled Technologies Meet the Utility Market

Itron Solid State AMI Meter Comverge SuperStat Thermostat

ABB Utility Control Center

Source: Itron
Source: Comverge
Netezza & Teradata
Data Warehouse Appliances GE Intelligent

Source: ABB Electronic Device
Substation Automation

Moxa IEC 61850 Certified Ethernet Switch
Substation WAN/LAN Connectivity

Source: Netezza, Teradata
Source: Moxa Source: GE Power
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Investment Themes: Key Macro Drivers for the Deployment of Smart Grid Technologies
New sources of demand are emerging as total electric consumption is expected grow at approximately 1-
2% annually—putting new stresses on generation assets as well as the transmission and distribution assets
to match overall growth. We believe this will cause utilities and grid operators to revaluate the efficiencies of
transmission and distribution infrastructures and lead to new investments in the forms of Demand Response
technologies and self healing transmission equipment, as well as services that alleviate demand and supply
discrepancies within the grid. As an example of the growing disparity of demand and supply within the elec-
tricity market, the chart below depicts the capacity margins for North America over the next 10 years, as
projected by NERC, which are set to steadily decline by 2017/18. While recessionary pressures will likely al-
ter the near-term direction of utility capital expenditures (and potentially end user demand), the long-term
view of the market suggests new technologies will be needed to contend with a growing population that is
requiring more power in North America.
Figure 3: Capacity Margin Projection Set to Decline
Requiring Smart Grid Technologies to Fill the Gap
35%
30%
25%
20%
15%
NERC US Base level margin 13%
10%
5%
0%
2008 2012 2017 2008/09 2012/13 2017/18
Summer Summer Summer Winter Winter Winter
Source: NERC 2008 Long Term Reliability Assesment

New sources of supply are coming online over the next ten years that will require an upgraded grid to sup-
port new generation power from Wind, Solar, Nuclear, Gas and Coal. In total, the Department of Energy
(DOE) is projecting that these sources will add 258 billion KW hours to the grid through 2030. In addition,
some of these newer sources of energy are far more intermittent in their generation than traditional sources
which will require new technologies that provide frequency regulation, energy storage, load management and
related transmission gear. We would also note that generation of wind and solar energy is typically per-
formed outside the major metro regions where it is delivered, requiring new transmission line investments.
Aging grid infrastructure is also expected to provide opportunities for upgrades to transmission and distri-
bution infrastructure such as advanced Substation IP enabled equipment. GE and the Global Environmental
Fund estimate that there are roughly 100,000 substation transformers in operation and over 70% of these
have seen greater than 25 years in service, with a potential failure rate of 1.5%—suggesting a significant
upgrade opportunity given that the useful life of most transformers is 30+ years and upgrades can cost mil-
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lions. That said, Demand Response/AMI is receiving the most investor focus as utilities are now making big
bets on equipment vendors and this sector of the market should exhibit strong growth rates in excess of
18% over the next several years. We estimate the overall Smart Grid market size is $10 billion in
2008, growing to $12 billion in 2012 in North America, for an overall CAGR of 9%. The Electric
AMI Meter market on a standalone basis is expected to grow at 18% over the same period. (We
integrated the Center for Smart Energy’s Smart Grid Market Size for Transmission and Substation estimates
with our Advanced Metering market forecast.)
Another way to size up the AMI market is to look at a specific deployment, such as Con Edison's proposal to
the New York Public Service Commission. Figure 5 depicts the present value over 15 years of the equipment,
labor and maintenance costs associated with its AMI proposal. We would note that beside the larger AMI me-
tering companies such as Itron, ESCO, Echelon and Elster that will be the primary beneficiaries of AMI de-
ployments (66% of Con Edison's proposal are for metering products alone), many traditional data networking
and data center technology vendors will have an opportunity on portions of AMI projects. As shown below,
Con Edison’s AMI proposal suggest an approximately $60 million hardware and software opportunity for LAN
and WAN technologies, and $93 million will be associated with WAN communications fees. Extrapolating
across the top AMI projects that we have identified on page 20, and applying the Con Edison $149 per meter
cost arrives at a $8 billion opportunity in North America over the next 5-7 years (inclusive of all cost ele-
ments as outlined below).
Figure 4: North America Smart Grid Cap Ex Opportunity
North American Market Opportunity
(m) 2008E 2009E 2010E CAGR
Advanced Metering & Demand Response $ 1,555 $ 1,717 $ 1,904 10.7%
Transmission Infrastructure $ 8,705 $ 9 ,598 $ 1 0,317 8.9%
Total $ 10,260 $ 11,315 $ 12,222 9.1%
Source: Merriman Curhan Ford, Sensus Metering Systems, Center for Smart Energy

Figure 5: Inside an AMI Proposal—Con Edison (4.8 million meters)
Costs per Meter of $148.5 vs. Benefits per Meter of $163 for a Net Benefit per Meter of $15
Con Edison AMI Infrastructure Investments Cost per % of Total
(M): 2007 Proposal Cost (M) Meter Project Costs Comments
Metering Equipment $ 3 79.5 $ 7 9.06 53.2% AMI Meters, Modules
Operations and Maintenance $ 92.8 $ 19.33 13.0% Monthly communication fees
Meter and Data Collector Installation $ 88.5 $ 1 8.44 12.4% Meter communication gear
Labor Costs $ 86.1 $ 17.94 12.1% Program management
Meter Communications Infrastructure $ 41.2 $ 8 .58 5.8% LAN and WAN infrastructure gear
Meter Data Management Systems $ 17.0 $ 3 .54 2.4% Applications, SAN, Data warehousing
Other Costs $ 7 .7 $ 1 .60 1.1% Facility costs, training and tools
Total Costs, PV 15 Years (PV to 2007) $ 712.8 $ 148.50 100%
Source: Con Edison 2007 Proposal, Merriman Curhan Ford
The regulatory environment should provide some baseline of demand for a movement to Smart Grid tech-
nologies, in our view. While the price of oil dipping below $40 and tighter access to the credit markets has
temporarily cooled some of the market psychology around CleanTech technologies (we would note that less
than 3% of power generation comes from Oil), we do believe the industry will see sustained investment as
key provisions in the EPAct of 2005 and the EISA Act of 2007 provides clear mandates for individual states to
begin assessing AMI along with growing political momentum for a new CleanTech energy strategy for the
United States.

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Finally, we would highlight the impact that regional or federal cap and trade regulations for carbon emissions
may have on the utility market as a key driver for Smart Grid/Demand Response technologies. The largest
potential legislation on this topic is a federal cap and trade system whereby a national plan would be put into
place—potentially trumping regional initiatives. While the economic climate could play a role in a federal sys-
tem as the general sentiment among businesses is a cap and trade program would negatively impact the
economy, the incoming administration has made specific comments about passing some form of legislation in
this area (noting recently that President-elect Obama would like to see carbon emissions reduced to 1990
levels by 2020). Regardless of what form the legislation evolves into, we believe utilities will need to begin
deploying Demand Response programs over the next several years which likely means increasing purchase
orders or contract announcements for vendors in late 2009/early 2010.
Figure 6: Suggested Carbon Reduction Targets from the 110th Congress;
State Renewable Portfolio Standards Projections
Business-as-usual projection
EPRI suggests Smart Grid technologies
could reduce CO by 60-211M tons in 2030
2
Source: Pew Center on Global Climate Change, Climate Communities

Source: Edison Electric Institute
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Improved security and disaster recovery capabilities would be enabled by Smart Grid technologies as
more network aware substation technologies are brought online over the coming years with the introduction
of self-healing and contingency analysis tools. We believe technologies leveraging the IEC 61850 standard
for substation network intelligence, which provides utilities with real-time status updates of their substations
which in an event of a failure, would be able to redirect resources with Intelligent Electronic Devices and po-
tentially isolate problematic areas faster than traditional relay based approaches. The most highlighted ex-
ample of what a blackout could mean to the North American grid is the August 2003 blackout that was
caused by a tree hitting a power line in Ohio (U.S.-Canada Power System Outage Task Force) that led to a
cascading affect in the Northeast parts of the United States and Canada –impacting over 50 million people
and caused the New York ISO to lose over 80% of its power capacity (NYISO Interim Report).

Figure 7: Load Capacity During 2003 Blackout, Before & After Satellite Imagery
Impaired SCADA Controls Contributed to Lack of Real-Time Asset Awareness
Before
After
Source: NYISO Interim Report August 14, 2003 Blackout, NOAA

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Smart Grid Comp Table—Public Vendors
(Prices as of January 5 2008)
Average
Name Rating Price Symbol Volume Market Cap (m)
Demand Response Vendors
Badge Meter Inc. NR $29.17 BMI 286,000 $431
Comverge, Inc. NR $5.49 COMV 185,000 $121
EnerNOC, Inc. NR $8.00 ENOC 167,000 $162
Echelon Corp. Neutral $7.68 ELON 267,000 $217
ESCO Technologies NR $42.00 ESE 290,000 $1,100
Itron Inc. Buy $65.73 ITRI 891,000 $2,425
Orion Energy Systems NR $5.31 OESX 158,000 $140
Transmission & Diversified Utility Equipment Vendors
ABB Ltd. NR $14.94 ABB 7,530,000 $34,140
Active Power Inc. NR $0.31 ACPW 168,000 $19
American Superconductor Corp NR $17.45 AMSC 875,000 $755
Beacon Power Corp CIT $0.52 BCON 932,000 $51
Composite Tech Corp NR $0.30 CPTC:OB 922,000 $86
Eaton Corp NR $51.92 ETN 2,500,000 $8,560
Numerex Corp NR $3.74 NMRX 15,000 $53
Power Secure Intl, Inc. NR $3.75 POWR 172,000 $64
RuggedCom Inc. NR $14.38 RCM.TO - -
TollGrade Comm. Inc. NR $4.75 TOLG 46,000 $63
Telvent Git S.A. NR $14.27 TLVT 32,000 $417
Data Center Vendors with Utility practices
Teradata Corp NR $15.50 TDC 1,407,000 $2,730
Netezza Corp Buy $6.85 NZ 331,000 $408
Oracle Corp. BR $18.09 ORCL 49,000,000 $91,290

Source: Merriman Curhan Ford, company reports. Coverage of Beacon Power is currently in transition.

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