The smart grid is, like, so 2009. Investors are over that story, and have moved on to newer, sexier things. Fair enough -- the smart grid theme didn't exactly make everybody rich overnight. Financial analysts got really excited, and then the whole thing kind of stalled out. Like a one-hit wonder, people seem to have forgotten its very name.

That's why we should be interested. These important and practically inevitable investments could make you a lot of money.

Why a smart grid?
The smart grid is complicated. If you're going to play it as an investment theme, it's worth taking the time to understand it. The following is a primer to get you started.


First of all, the smart grid is a concept, not a thing. It's not a single product, and no individual company makes a smart grid. It's an idea, and it's a good one. It's a response to the sorry state of our modern electrical grid. Consider that today's grid was invented in the age of Edison, designed in the age of Eisenhower, and installed in the age of Nixon. Can you imagine if the same were true for phones, airplanes, or computers? While other industries have modernized, our energy infrastructure -- on which all other industries depend -- has not.

Reinvestment in electric utilities has lagged significantly behind all other sectors. If current trends continue, experts anticipate an infrastructure funding gap of $107 billion by 2020.

There are further problems with the grid as we know it. It remains largely unadaptable to renewable energy inputs. It's prone to increasing blackouts. It's vulnerable to attack. And it cannot meet growing demand at current capacity.

Considering that more than 60% of U.S. GDP is dependent on electricity -- up from 20% in 1950 -- things look grim.

How does the current grid work?
Electricity's lifecycle falls into one of three basic categories: generation, transmission, and distribution. Generation is the creation of electricity from other forms of energy. Transmission is the bulk transfer of electrical power from source to destination. Distribution is the final stage of electricity delivery to end users.

Before deregulation in the 1990s, most utilities operated along the entire lifecycle. Today, many producers sell power all across the country over transmission lines they don't own. Massive transfers are flowing over lines that were built decades ago for local use, and this creates congestion and bottlenecks.

The current transmission grid actually prevents broader adoption of renewables, as the lines simply don't go where the energy is generated. For instance, according to the American Wind Energy Association, a backlog of 197 GW of wind projects is currently waiting in line for connection to the grid because of inadequate transmission capacity! This is an improvement from the 310 GW backlog that existed at the end of 2009, thanks to tighter regulation, but there is still much further to go.

So what is the smart grid, really?
The simplest way to think about the smart grid is to envision a melding of the existing electric infrastructure with the evolving information infrastructure. The result will support our modern economy in a more efficient and effective manner. In all scenarios, the smart grid must:

  • Heal itself
  • Motivate consumers to participate actively in operations of the grid
  • Resist attack
  • Provide higher quality power that will save money wasted from outages
  • Accommodate all generation and storage options
  • Enable electricity markets to flourish
  • Run more efficiently

Power grid of the future
A variety of technologies will contribute to achieving the above attributes, most notably:

  1. Transmission expansion: Upgrading and extending the electricity transmission infrastructure will allow further integration of renewable resources, reduce bottlenecks, and support least-cost electricity generation. ITC Holdings (NYS: ITC) works in this area.
  2. Advanced metering infrastructure (AMI): Sophisticated metering technology will provide greater information to customers and utilities, thereby improving their ability to manage consumption and cost. Oracle (NAS: ORCL) offers AMI solutions.
  3. Demand response: Helps manage customers' electricity consumption in response to supply conditions. Honeywell (NYS: HON) is expanding its demand response presence.
  4. Energy storage: Allows increased efficiency of grid operations and greater adoption of renewables. ABB (NYS: ABB) is a major player here.
  5. Distribution monitoring and control: Automates control of end-user building systems to optimize efficiency. IBM (NYS: IBM) is active in this space.
  6. Distributed automation: Extends control of grid functions to the distribution level, promoting the grid's capacity to "heal" itself in times of disruption. RuggedCom provides automation solutions.

I will explain each of the above technologies in future articles, so watch this space if you want to learn more.

Smart grid, redux
The smart grid is not a product or service. It's a concept that, when applied to existing technologies and infrastructures, can yield significant benefits. In providing solutions to the many challenges society will face in the decades to come, some of the companies involved will be great investments. We will explore these issues in detail in the coming weeks. 

Armed with this knowledge, you could make a nice pile of cash investing in a space that can only keep growing. However, If you're interested in other big technology up-and-comers that are currently expanding at a great clip, you would surely love our free report, "3 Stocks to Own for the New Industrial Revolution." Make sure to check this report now -- it won't be available for long.

At the time this article was published Fool contributor Sara E. Wright owns no shares in the above stocks, but does appreciate having electricity in her home. The Motley Fool owns shares of International Business Machines and Oracle. Motley Fool newsletter services have recommended buying shares of ITC Holdings. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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