In hindsight, 2012 may be seen as the year that the smart grid industry emerged from its adolescent stage of development, graduated from school, and went out to find work in the real world.
Sure, it’s a trite analogy, given that many of the companies behind the technologies that make up the “smart grid” today have been working in the field for decades. But for the newest smart grid technologies that have captured the fancy of VC investors, corporate acquirers and utilities of late, it certainly seems to apply.
After all, we’ve seen a definite boom-bust pattern emerge in smart grid investment and government support. Billions of dollars of government stimulus funds that have given the industry a big boost over the past few years are pretty much all been spent by now. At the same time, venture capital investment in smart grid has tumbled over the course of the past few years, as the venture community has come up against the challenge of realizing returns on investment in the timeframes they’re used to in the slow-moving, regulation-burdened utility sector.
That doesn’t mean we haven’t seen lots of progress over the past year, though. We’ve seen an array of technologies to connect utilities to their customers via energy efficiency and demand response programs, as well as distribution automation and restoration projects that are starting to prove their value in efficiency and reliability for utilities behind the meter -- or amidst storms that have tested the grid.
They’ve also been struggling to integrate and manage all this new gear being put onto their grids, as well as the data that’s flowing from it in volumes unprecedented for the relatively slow, staid industry. That’s made for a big wave in technology interoperability and integration, both via partnerships and via acquisitions by corporate giants in the field. Certainly the long-running task of integrating disparate smart grid systems will be critical if the industry is to realize the value of the wave of investments over the past few years.
Here’s a quick breakdown of these key trends, in no particular order:
1) Money is much harder to come by for smart grid startups, and that means acquisitions. In late 2009, the Department of Energy announced nearly $4 billion in stimulus grants and awards to help push the smart grid industry into the mainstream. That money has since helped pay for tens of millions of smart meters, millions of in-home displays and energy controls, hundreds of thousands of distribution grid transformer sensors and other automation gear, and the like.
But the end of that spending spree has definitely left a hangover for the smart grid industry, particularly smart meters. Evidence is emerging that 2012 may well end up being slower than 2011 for advanced metering infrastructure (AMI) and automated meter reading (AMR), according to the latest North American AMI Deployments & Market Share report -- and 2013 is expected to be a flat year for AMI as well.
That’s an issue for the venture capital community, which has invested the lion’s share of its smart grid bets in network and communications infrastructure such as AMI, as well as home energy management and utility-to-customer connectivity. We’ve seen overall VC investment in smart grid slide to new lows in the first three quarters of 2012, with a few large investments failing to make up for the general turn away from the sector by investors.
Highlighting the challenge for new money trying to break into the industry is a simple fact -- so far, we’ve not seen a single smart grid startup take the step of an initial public offering. The one big name that’s publicly declared its IPO intentions, Silver Spring Networks, has been lingering for more than a year and a half without pulling the trigger. In the meantime, speculation abounds that it may be a target of acquisition by one of the giants in the field as well.
Acquisitions in the smart grid space are certainly booming -- though not necessarily delivering VCs the returns they may have hoped for. The biggest acquisitions of the year were big corporate and private equity deals, such as the $11.8 billion purchase of Cooper Industries by Eaton, German smart meter giant Elster’s $2.3 billion purchase by private equity group Melrose, and Blackstone Group’s $2 billion purchase of Vivint, a home security and energy services company, to name a few multibillion-dollar deals.
Startups acquired this year, on the other hand, include disclosed deals like ABB’s $35 million purchase of Tropos Networks, which had raised more than $30 million from investors; Itron’s $100 million purchase of SmartSynch, which had raised about $65 million over the previous decade, and Silicon Labs’ $72 million purchase of Ember, which had raised $62 million from investors since its 2001 founding. All in all, not a stellar track record for investors.
2) The last wave of smart grid investments are now facing their proving time. Tens of millions of smart meters deployed across the country are promising to deliver efficiencies and new features that will make them worth their extra costs in utility bills -- someday. But more and more of these deployments are being asked to make their values clear to consumers and regulators sooner rather than later -- or, in some cases, being postponed or delayed on those concerns (see the case of Commonwealth Edison and the Illinois Commerce Commission for a recent example).
In the meantime, spending on distribution automation -- a general term for the hardware, communications technology and back-end IT support that brings sensors, monitors and controls to the distribution grid -- is expected to outpace spending on smart meters over the coming years. It’s also poised to deliver quite a bit more value to utilities, given that it’s completely under their control, unlike the customers at the other end of those smart meters. We’ve seen a number of projects reveal statistics that help prove out this value, whether it’s in the face of some of this year’s storms, or via other metrics.
3) Despite being a hype center, home area network (HAN) technologies finally hit the mainstream in 2012 as well. For years now, we’ve seen home energy management startups with a variety of in-home displays, web interfaces, ZigBee, Z-Wave and Wi-Fi networks, etc., all tackling a market that doesn’t yet exist. Sure, utilities like Oklahoma Gas & Electric, Arizona Public Service, and the dozens of utilities serving Canada’s Ontario province, are turning on their smart-meter-to-home networks to connect with smart thermostats and energy monitors. Deregulated energy markets, like those in Texas or the U.K., are also seeing growth in HAN technology offers from retail utilities seeking to attract and retain customers, as well as to drive efficiency and peak load reduction.
But these projects are strictly utility affairs -- signing up customers, sending them equipment, and setting it all up for them. The idea of customers going out to their local Home Depot or Lowe's (or going online to Amazon or the Apple store, for that matter) and buying their own gear to interoperate with the new smart meters on their walls is trickier, involving questions of technical interoperability and data privacy, security and ownership -- not to mention the big question of who’s going to incentivize a purchase that most homeowners don’t want to spend much money on.
But that’s starting to change. Southern California Edison, which has 4.2 million Itron smart meters deployed, opened the door to smart-meter-to-HAN connectivity last month with partnerships with companies including energy display startup Rainforest Automation and big home security company ADT. Nest, the smart thermostat company founded by Apple alums, is proving there’s a market for $250 thermostats that can talk to your iPhone. Honeywell, a big player in smart thermostats (and the plaintiff in a lawsuit accusing Nest of infringing on its patents), is working on linking its mobile connectivity and automation to home energy efficiency startup Opower’s suite of energy-saving tools and big-data back-end applications.
4) Big data is not hype, it’s trench warfare. Utilities used to collect meter data once a month. Now, with a smart meter that sends back data to the utility once every hour, it’s collecting data 720 times a month, and 15-minute reads add up to 2,880 collections a month, or an increase of more than three orders of magnitude. Add in the fact that each meter is sending back multiple data points in each read -- as well as talking to devices in the home, or on the grid, for other purposes -- and you’ve got a networking problem that utilities are sorely unprepared to face.
That’s going to help drive the U.S. market for smart grid data analytics from $322.5 million this year to $1.4 billion by 2020, according to GTM Research’s report, The Soft Grid 2013-2020: Big Data & Utility Analytics for Smart Grid. And while we’ve got the usual suspects involved, like Oracle, IBM, EMC and Microsoft, we’ve also got a host of startups from the big data sphere involved as well. In the smart grid, companies like Versant and AutoGrid are building applications on top of core unstructured data analytics platforms, and smart grid companies leveraging Hadoop include Opower, Tendril and EcoFactor, to name a few.
5) Integration is the core challenge for the smart grid from now on. All those millions of smart meters we’ve been talking about don’t just run themselves. How much value a utility realizes out of its AMI deployments depends to a great extent on how well it has integrated that flood of data into its existing and new business operations, from core billing (not itself an easy task) to everything from customer service, outage management and grid asset monitoring.
But a mid-2012 survey of utility executives revealed that nearly half of those that had deployed smart meters hadn’t gotten around to implementing a meter data management (MDM) system to handle the resulting data, let alone start collecting meter data for grid diagnostics, enterprise business planning or other such second-order functions. (Of course, the survey was conducted by Oracle, a big MDM player, so it was a bit self-serving.)
Still, it underscored the fact that all this new smart grid technology takes time and money to integrate into the way each utility does business. We’ve seen smart grid contenders from Infosys and SAP to Silver Spring Networks and Echelon launch quick-to-market smart grid solutions sets, complete with “apps” like transformer health diagnosis, “last-gasp” outage notification, and the like, aimed at shortening the time it takes for utilities to start realizing the value of the technology.
The same goes for distribution grid automation, of course. Utilities have long been captive to proprietary technology from big players like Schneider Electric, ABB, Siemens, General Electric, Toshiba, Hitachi, Alstom and Eaton/Cooper, and many see interoperability and integration requirements as a key way to lower prices. But beyond that, the idea of modular smart grid deployments, or integrating with big customers’ existing building automation or demand response technologies, makes interoperability a very attractive goal for utilities and vendors alike.
On the grand scale of the enterprise, we’ve got a host of established giants like IBM, Infosys, Wipro, Capgemini and Accenture managing cross-platform smart grid integration for utility clients around the world. Perhaps the most important company to watch on the integration front is Cisco, however. The networking giant has staked a claim to become the networker of the smart grid as well, and has a long list of partners, including smart meter giants Itron and Elster and DA providers Alstom and Cooper Power (now part of Eaton), to name a few. Its list of startup partners also includes a who’s-who of specialists in certain aspects of integrated smart grid deployments, such as Proximetry’s pan-wireless network management software, or Space-Time Insight’s real-time geographic information system (GIS) software.