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How to Profit from the Smart Grid


Stock picks for the next generation of electricity.

President Barack Obama today will announce grants ranging from $400,000 to $200 million for equipment designed to boost the efficiency of the nation's electrical transmission grid.

These "smart grid" grants, expected to total $3.4 billion, are part of the $787 billion economic stimulus package passed by Congress in February, and they create opportunities for investors. Companies receiving federal grants have secured $4.7 billion in private financing, boosting the total investment in the smart grid to $8.1 billion.

The smart grid is designed to improve delivery of electricity when and where it's needed and reduce flow when demand is low. A smart grid could make it easier to deliver energy produced by alternative systems such as wind and solar in rural areas to cities. It will benefit consumers as utilities move to peak-time pricing, or charging more for power during the business day.

Is the smart grid the Next Big Thing for investors? Some have likened the effort to the Interstate Highway Act of 1956 that led to the construction of the nation's 43,000-mile system over 20 years.

Baltimore Gas and Electric Co., part of Constellation Energy Group (CEG), is expected to receive $200 million to fund the installation of new electric meters that will help customers adjust their usage during peak load times in about 1.1 million households.

There are many ways to play the new federal program, which also includes $2 billion for advanced battery systems, including lithium ion batteries and hybrid electrical systems for cars, and $500 million to prepare workers for jobs in renewable energy.

The conventional wisdom on smart grid plays: ABB (ABB) is a major provider of grid technology; Allegheny Technologies (ATI) produces alloys for electrical transformers; General Cable (BGC) makes transmission lines; and Quantra Services (PWR) provides design, installation, and maintenance services to the power transmission industry. Don't forget General Electric (GE), a manufacturer of turbines that recently announced investments in SolarEdge, a maker of solar panels, and Tendril, a maker of smart meters.

But smaller, more specialized companies such as Echelon (ELON) might provide more immediate returns to investors. Wedbush Morgan Securities rates Echelon Outperform while Piper Jaffray rates it Neutral. In mid-day trading Tuesday, the stock rose 7.6% to $14.76.

Echelon offers hardware and software designed to link and automate industrial equipment. LonWorks Network Services, an open-source operating system, connects systems via local networks and the Internet. It also provides automated electricity metering systems, known as Networked Energy Services in the trade -- a key element in Obama's announcement Tuesday.

The company is active in Europe, where the European Union announced plans to boost energy efficiency 20% by 2020. Echelon recently announced that Eaton Corp. has become a valued-added reseller of its equipment, a deal that will focus on utilities in Europe, the Middle East, and Africa.

"There are larger companies in the smart metering arena, but Echelon has posted some significant wins in the marketplace recently and appears primed to generate more," Brendan Coffey wrote recently for Cabot Green Investor.

Echelon's smart meters provide automated electric, gas, and water metering plus outage, tampering, and theft detection services. The open software system, LonWorks, may be the key to future growth because it allows products from different manufacturers to work together in a unified network. This is a key advantage in the smart networks.

In the US, McDonald's (MCD) has been installing LonWorks in its kitchens since 2007 in an effort to better manage electrical usage.

Echelon's competitors include Itron (ITRI), a maker of smart meters; Rockwell Automation (ROK), a former military contractor now active in industrial automation; and Siemens (SI), the German industrial engineering firm.

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