Research Notes: Smart Grid, November 2010

Smart Grid
Q3 2010 In Research Notes
The Rearview: Greg Neichin
VP, Research & Advisory
Competition & Consolidation 415-684-1020 x6800
greg.neichin@cleantech.com

If you looked only at venture investment in

smart grid companies this quarter, you might
think that things were beginning to cool off in
the sector. This assumption would be very
wrong. In fact, given the pace of acquisitions,
product announcements, strategic
partnerships, and contract awards, it could be
easily said that things are just beginning to
heat up. 3Q10 may be remembered as the
quarter that the sector’s global, corporate
giants truly woke up and began a serious
assault on the smart grid market.

Global Players Flex Acquisitive and Competitive Muscle

Case in point #1 is GE and no one was more active this quarter. Not only did the firm participate in
Trilliant’s $106M venture round and acquire SNC-Lavalin’s Energy Control Systems business, but it
made a series of product announcements: GE Nucleus for home energy management and WattStation
for electric vehicle charging. GE also launched a $200M venture challenge for smart grid innovators
further extending its influence in the space.

Q3 2010 GE Moves Across Smart Grid Value Chain

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GE also invested in SynapSense, a leading startup in the market for data center energy monitoring,
demonstrating a clear interest in assets across the entire energy management value chain. Headlining
the GridWise Global Forum at the end of the quarter, GE CEO, Jeff Immelt, outlined the tremendous
growth of the company’s Ecomagination initiative and commitment to its future expansion.

Not to be outdone by GE, several other technology stalwarts including ABB, Cisco, Honeywell,
Schneider Electric, and Siemens all made substantial moves in the sector this quarter signaling an
escalating smart grid arms race that will begin to reshape and redefine the competitive landscape.
Cisco continued to strengthen its expanding smart grid hand through the acquisition of Arch Rock, an
asset that now gives Cisco a viable, albeit untested, AMI platform. The deal was announced a day after
the company touted a new partnership with meter vendor Itron.

Honeywell continued to demonstrate an acquisitive nature by snatching up E-Mon, a manufacturer of

sub-metering solutions for multi-site facilities. This adds to Honeywell’s portfolio as the company
competes in an escalating race to gain more granular intelligence into energy use across large
commercial and industrial sites.

The March Towards Demand Response 2.0

This race for intelligence is being fueled in large part by a macro-evolution that we have referred to in
previous reports as Demand Response (DR) 2.0. This evolution is expanding technology-enabled DR
options, giving end-users better insight into energy use and curtailment options, and empowering
energy retailers to directly engage customers. This is not an overnight transition and the extensive
customer relationships and market knowledge that the traditional curtailment service providers (CSPs)
such as EnerNoc and Comverge have accumulated over the past decade should not at all be
discounted.

That said, both EnerNoc and Comverge seem to recognize the long term value chain “squeeze” that
may be occurring. They have both moved, in somewhat opposite directions, to proactively capture
value in other sections of the market. EnerNoc has made acquisitions to strengthen its portfolio of
energy management technologies that will assist large customers in identifying energy use and savings.
Comverge has aggressively pursued utility-facing tools for directly managing demand response
programs.

Demand Response Market Squeeze

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This squeeze was perhaps best illustrated this quarter by Constellation Energy’s acquisition of
CPower. CPower had amassed a significant portfolio of curtailment contracts and was competing
aggressively against EnerNoc and others for DR contracts. Constellation, which itself has built a
substantial base of DR customers, clearly sees these contracts and know-how as an attractive piece of
an overall energy retail business. We expect to see further value chain consolidation in the DR market
as building automation and energy management players become more active in facilitating DR
transactions and utilities begin to get more options and tools for managing DR programs. In particular,
we are watching market development for utility-facing demand response management systems such as
Lockheed Martin’s SeeSuite, Comverge’s Apollo (now known as Intellisource), Cooper’s Yukon, and
UISOL’s DRBizNet.

Startups Are Still Making Waves

While there may have been fewer financing deals, younger, venture-backed companies continued to
gain meaningful traction this quarter. eMeter not only raised additional capital, but announced new
global customers and highlighted an expanding focus on products for home energy management.
OPower --perhaps the most successful company in the home energy space if measured on the number
of end-users interacting with its application – spoke publically about its growing business, now nearing
$30M in revenue from nearly 40 utility clients. Ecofactor, a developer of smart thermostats, announced
the first commercial availability of its energy management and DR service through Texas-based Oncor.

UK-based AlertMe announced a new round of financing including a strategic investment from British
Gas. AlertMe, which has a noteworthy partnership with Google PowerMeter, provides in-home
monitoring systems. The AlertMe application leverages a meter clamp which sends energy use data
back to a home energy hub. In the long-run, we expect data to be fed directly from smart meters to a
central hub or sent via a broadband internet connection after being backhauled on the AMI network to
the utility. In the meantime, AlertMe’s clamp-enabled “hack” (and we use “hack” with the kindest,
completely legal connotation) is the best solution for customers looking to track aggregate real-time
energy use.

T&D Joins The Innovation Party

In tracking smart grid venture capital data over the past five years, we have noted the relative lack of
investment into companies focused on advances in transmission and/or distribution (T&D). The vast
majority of venture dollars have flowed to companies engaged in home energy management and
metering. The prospect of trying to sell mission critical gear to utilities, and the scrutiny of the resultant
procurement process, has apparently been enough to scare away most entrepreneurs. It is
consequently noteworthy that this quarter saw very meaningful attention paid to advancements in T&D.

Nexant’s $43M in new funding is a testament to interest in software and services that help utilities
better optimize and manage grid assets; and product announcements such as Echelon’s new ECoS
platform for distributed energy management demonstrate that significant opportunity remains to
innovate on the distribution portion of the utility grid.

Read more: www.cleantech.com

Restoring Sanity, The Meters Are Completely Accurate

On a final note, a number of the United State’s largest utilities – PG&E, Oncor, and Centerpoint – all
released independent testing data in 3Q10 that showed what any rational observer should have known
previously: the smart meters are accurate. To be sure, there will be some kinks to iron out in these
deployments – meters will break, and some bills will be wrong – but beyond this, the conspiracy
debates surrounding meter accuracy should be put to rest.

While I believe that the technology is sound, communication with customers has been anything but
smooth. We, the collective “we” of utility industry executives, analysts, and innovators, have done
ourselves a disservice by raising customer expectations far too high in the near term, leading
consumers to believe that the simple installation of a smart meter would lead to a range of magical
benefits, not the least of which was a lower utility bill. We have a long way to go to achieve this vision
for customers and we should work hard to reset these expectations to rational levels.

I would argue, perhaps controversially, that in an ideal world, we would have engaged consumers, and
the media, even less than we did. Smart meters would have been an infrastructure upgrade on the path
toward a consumer-facing smart grid, but would have gotten as much public attention as the installation
of new sewer grills or the replacement of a pole-top transformer. We would have waited until there was
a tighter story around consumer benefits and service options.

We don’t have that luxury though as the genie is certainly far out of the bottle. What we do have now
are the makings of good consumer stories and tools. Companies like OPower, EnergyHub, Tendril,
Silver Spring, Google, eMeter, AlertMe, Energate, and others are all very much real and releasing real
consumer facing tools. While the message has been fed to consumers in fits and starts, it is time to
start re-shaping and re-introducing a coherent story around end-user benefits. Luckily, the U.S. public
tends to give politicians, businesses, and pop stars, second, third, or even fourth chances.

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Cleantech Group Analysts & Coverage Areas

Greg Neichin Smart Grid greg.neichin@cleantech.com
Vice President, Research & Advisory Energy Efficiency
Software & Cleantech

Richard Youngman Global Cleantech Trends richard.youngman@cleantech.com

MD, Europe & VP, Research Europe & Asia

Debjit Mukerji Transportation debjit.mukerji@cleantech.com

VP, Research Storage & Fuels
Industrial Efficiency
Wind

David Cheng Energy Efficiency david.cheng@cleantech.com

Senior Research Analyst Solar
Carbon Mitigation
Policy & Regulation

Josh Gould Energy Storage josh.gould@cleantech.com

Senior Research Analyst Energy Efficiency
Geothermal/Nuclear

Andrew Thomson Cleantech Investment Trends andrew.thomsom@cleantech.com

Senior Research Analyst Renewable Chemistry

Mia Javier Water mia.javier@cleantech.com

Research Analyst Waste & Recycling
Hydro/Marine

Stephen Marcus Cleantech Investment Trends stephen.marcus@cleantech.com

Research Analyst Agriculture
Europe & Asia

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