THE SMART GRIDWhere We Are Today and What the Future HoldsBy Christian Hicks l MBA/MS 2012 Erb Renewable Energy Scholar

The Erb Renewable Energy Scholars Program is supported by the Koch Family, U.S. Renewables Group, Peter Mertz and the Erb family to encourage Erb Institute MBA/MS

students to explore and develop early-stage ideas and insights in the renewable energy field.

h

What is the smart grid and why do we need it?

The United States electrical grid, consisting of over 5,000 power plants, over 200,000 miles of high-

voltage transmission, and over 5.5 million miles of distribution lines1, is one of the most complex

machines in the world. However, the electrical grid has evolved surprisingly little over past 50 years

while the population has grown and the equipment using electricity at the other end of the lines has

become increasingly sophisticated. Today’s electrical grid suffers from a number of problems, including

that it is:

• Old (the average age of power plants is 35 years2)

• Dirty (more than half of our electricity is generated from coal)

• Inefficient (the delivered efficiency of electricity is only 35%3)

• Vulnerable (the 2003 blackout in the Northeast affected 55M people for up to two days)

In addition, the electrical grid is not set up to handle the demands that are being placed on it by end-users

or the changing generation mix of the 21st century. The Electric Power Research Institute (EPRI)

estimates that the annual cost to U.S. businesses of power outages, many of which are caused by overly

congested transmission systems, is greater than $100 Billion.4 The grid is ill-equipped to handle both

renewables, which are intermittent and less predictable than fossil fuel-based generators, or distributed

generation. Finally, the current state of the grid limits the potential of energy efficiency efforts, as there

are significant lags in the system such that users of electricity typically are unaware of their usage level at

any given time.

The “Smart Grid” has gained relevance in the past decade as the solution to many of these myriad issues.

EPRI defines the Smart Grid as “a modernization of the electricity delivery system so that it monitors,

protects, and automatically optimizes the operation of its interconnected elements…”5, while the Federal

Energy Regulatory Commission defines it as “a power system architecture that permits two-way

communication between the grid and essentially all devices that connect to it, ultimately all the way down

1 “Smart Grid.” NovaWednesdays, February 23, 2011, video file. PBS http://www.pbs.org/wgbh/nova/tech/power-grid.html. Accessed April 2012 2 Troxell, Wade O. “Smart Grid: Transforming the US Power Grid.” Powerpoint Presentation. Undated. Accessed from http://www.nrel.gov/visitors_center/ in April 2012 3 ibid 4 Electric Power Research Institute, Estimating the Costs and Benefits of the Smart Grid (PDF File), downloaded from http://my.epri.com/portal/server.pt?open=512&objID=243&mode=2&in_hi_userid=2&cached=true. Accessed April 2012 5 ibid

to consumer appliances.” 6 This paper will look at the various technologies that make up the “Smart

Grid”, highlighting the progress that has been made to date in the United States towards implementing a

smart grid, the trends and key players in each technology segment, and the current state of venture capital

financing for “smart grid” companies and M&A activity.

6 Federal Energy Regulatory Commission, Smart Grid Policy. March 19, 2009. http://www.ferc.gov/whats-new/comm-meet/2009/031909/E-22.pdf. Accessed April 2012

Progress Towards Smart Grid Implementation

The implementation of the smart grid was given a kick start by the Energy Independence and Security Act

of 2007. Key provisions of the act included the establishment at the Department of Energy of the Smart

Grid Advisory Council and Federal Smart Grid Task Force, direction to develop a Smart Grid

Interoperability Framework, and establishment of two federal grant programs to accelerate smart grid

deployment: the Smart Grid Investment Program (SGIP) and the Smart Grid Demonstration Program

(SGDP)7. Through these grant programs the federal government agreed to cover up to 20% of the cost of

qualified smart grid investments. The grant programs were accelerated by the American Recovery and

Reinvestment Act (ARRA) of 2009, which explicitly provided $11 Billion for grid modernization efforts

and increased the federal matching provision to cover up to 50% of the cost of qualified smart grid

implementation projects with a maximum of $200 million per project.

To date there are 99 SGIG projects, worth a total of $8 Billion and 32 SGDP projects worth $1.6 Billion.

The breakdown of these projects across various categories is presented below:

8

While these federal funding programs represent only a small portion of the estimated $338-476 Billion

that it will cost to develop Smart Grid Infrastructure through 2020,9 they have had significant success in

accelerating the deployment of smart meters, which, through enabling two-way communication between

the customer and the utility, are the key enabling technology for much of the Smart Grid. By the end of

7 http://energy.gov/oe/technology-development/smart-grid. Accessed March 2012 8 http://www.smartgrid.gov/recovery_act/overview/smart_grid_investment_grant_program 9 EPRI. Estimating the costs and benefits of the smart grid: A preliminary estimate of the investment requirements and the resultant benefits of a fully functioning smart grid. EPRI, Palo Alto, CA: 2011. 1022519.

2011, SGIG programs had resulted in the installation of 9.3 million smart meters, representing nearly 7%

of the installed meter base in the United States. By the program’s completion it will have supported the

installation of 15.5 million smart meters (11% of US installed base)10 Analysis to date shows that smart

meters installed through these programs cost an average of $178, with an additional $13-15 cost for

communications systems and backhaul to support the meters. A number of utilities receiving SGIG funds

are also experimenting with dynamic pricing policies. The SGIG program has supported 11 projects that

combined AMI with Time-of-Use pricing and 9 projects that combined AMI with Critical Peak Pricing.11

12

Implementation of smart meters has also been hastened by supportive state regulatory commissions and

state legislatures. Twenty-five states/territories have smart metering legislation or policies in place today.

For the most part this consists of formal approval, either by state law or utility commission ruling, that

allows for utilities to recover the costs of smart meter installation through their customer rates. At the

extreme end, a 2008 Pennsylvania law mandates that all utilities with more than 100,000 customers must

provide smart meters to all customers that request them, and to every customer within fifteen years.13 As

of September 2011, there were an estimated 27 million smart meters installed across the U.S. (~19% of

total installed base). Estimates based on announced programs suggest that this number will rise to 60-65

million (~50% of total installed base) by 2015.14,15

10 Smartgrid.gov, “Advanced Metering Infrastructure and Customer Systems” http://www.smartgrid.gov/recovery_act/deployment_status/ami_and_customer_systems. Accessed March 2012 11 ibid 12 Smartgrid.gov, “Smart Grid Demonstration Program” http://www.smartgrid.gov/recovery_act/overview/smart_grid_demonstration_program. Accessed March 2012. 13 “States Providing for Smart Metering” National Conference of State Legislatures.” http://www.ncsl.org/issues-research/energyhome/states-providing-for-smart-metering.aspx. Accessed March 2012. 14 “Utility-Scale Smart Meter Deployments, Plans & Proposals”. The Edison Foundation Institute for Electric Efficiency. September 2011

Figure 1: Summary of Current and Planned Smart Meter Deployments by State

The tables below highlight the top 10 utilities for smart meters currently installed (as of September 2011),

as well as the utilities with the largest planned smart grid programs16:

Smart meter deployment projects have frequently run into resistance by residents. An early example was

PG&E’s installation of smart meters in Bakersfield, CA, which was followed shortly after by rising

electricity bills. Complaints by residents were picked up by the media and despite an inquiry that showed

15 “Smart Grid – 10 Trends to Watch in 2012 and Beyond”. Pike Research Cleantech Market Intelligence. Published 1Q2012 16 “Utility-Scale Smart Meter Deployments, Plans & Proposals”. The Edison Foundation Institute for Electric Efficiency. September 2011

rising rates were due to a new pricing scheme coupled with exceptionally hot weather, the incident helped

foment movements elsewhere to resist smart meters.17 Today there are still vocal minorities that oppose

smart meters. Most frequently, these groups argue that radio frequency (RF) emissions pose a serious

health threat (despite the levels of RF emissions being much lower that typical consumer electronics like

mobile phones.)18 Additional opposition is due to fears of privacy invasion as utilities begin to collect

new data on electricity consumption and potential for hacking. In response to this opposition, an

increasing number of utilities and PUCs are offering opt-out options, whereby residents can refuse to

have their meter replaced with a smart meter. In most cases, those who opt-out are forced to pay a fee (for

PG&E this is $75 upfront plus $10 per month)19, in order to compensate the utility for the additional cost

of manual meter reading. Initial reports from opt-out programs show only a small percentage of customers

opting out which is unlikely to affect smart meter adoption.

17 “Sensors and Sensibilities” The Economist. Nov 4, 2010. 18 “Smart Grid – 10 Trends to Watch in 2012 and Beyond”. Pike Research Cleantech Market Intelligence. Published 1Q2012 19 Doug Peeples. “CPUC Agrees to PG&E Smart Meter Opt-out Plan – Angry Meter Opponents Don’t”. Smart Grid News, February 1, 2012 http://www.smartgridnews.com/artman/publish/Technologies_Metering/CPUC-agrees-to-PG-E-smart-meter-opt-out-plan-angry-meter-opponents-don-t-4430.html. Accessed March 2012

Anatomy of the Smart Grid

The Smart Grid is composed of a myriad of technologies that enable the precise measurement and

communication of electricity production, transportation, and usage, while providing responsiveness at

each level from the end user all the way to the power generator. A useful analogy for understanding the

various components of the smart grid was developed in a previous report by Erb Institute scholar Dave

Fribush20 and is presented in the table below:

Table 1: Components of the Smart Grid

There are many different ways in which these various Smart Grid technologies and companies can be

segmented. This paper will adopt the following segmentation:

• Advanced Metering Infrastructure

• Grid Optimization

• Home Area Networks (HAN) / Building Area Networks (BAN)

• Demand Response

• Software / Apps

20 Fribush et al. “Electric Evolution: Issues Posed and Opportunities Presented by the Emergence of the Smart Grid” Vermont Energy Investment Corporation. January 2010

Distributed generation, grid-scale energy storage and integration of electric vehicles (for energy storage

purposes) are frequently considered as additional areas of the smart grid but are considered outside the

scope of the current project.

The remainder of this section will look at each of the segments identified above, identifying key trends

and challenges and discussing the major industry players.

Network Infrastructure/AMI

Advanced metering infrastructure (AMI) includes the both the physical smart meter (a digital electricity

meter located at the end consumer that enables two-way communication) as well as the communications

infrastructure to transport the data that is generated. The latter involves the development of an intelligent

field area network (FAN), that will facilitate the communications link back to the utility’s operations and

control center, but also to the network inside the home or building.21 Full deployment of AMI creates, for

the first time, end to end communication between the utility and the end user (or even the electrical

appliance at the other end of the plug), and unlocks broad potential for new applications and business

models. In 2011 AMI was the most active area for M&A action,22 led by Toshiba’s $2.3 Billion

acquisition of Swiss advanced metering company Landis & Gyr, which it is likely to use as a foothold

into the North American smart grid market.23

While AMI has for some time dominated VC interest, “though it is historically significant as an enabling

technology, but is unlikely to be the “killer app” of the next 5 years.”24 What is far more interesting is

what applications and new business models AMI deployments make possible. “AMI deployments are

currently setting off a firestorm of activity from generation to consumption, as both startups and industry

giants are anticipating market needs and driving these new technologies and applications forward.”25

One of the key outstanding questions in the AMI space is how smart meters will communicate with one

another and with other devices on the grid. Here there are three main competing technologies: broadband

over powerlines, radio frequency mesh networks, and cellular networks. Broadbands over powerlines has

become the dominant technology in Europe but has not come into favor in North America. One potential

21 Leeds, David J., “The Smart Grid in 2010: Market Segments, Applications, and Industry Players,” (July 2009), Greentech Media. http://www.greentechmedia.com/. Accessed March 2012, p. 7 22 “Smart Grid Funding and M&A: 2011 Fourth Quarter and Annual Report,” (Jan 2012), Mercom Capital Group, LLC. http://www.mercomcapital.com/. Accessed April 2012 23 Jeff St. John. “Toshiba Using Landis & Gyr to Enter US Smart Grid, Smart Home Fram” GreenTechMedia. January 9, 2012 http://www.greentechmedia.com/articles/read/toshiba-using-landisgyr-to-enter-u.s.-smart-grid-smart-home-fray/. Accessed April 2012. 24 Leeds, “Smart Grid in 2010” p.12 25 ibid

reason for this is that transmitting smart grid data over the power lines makes the flow of data subject to

potential disruption, just as power can be cut out by downed power lines.26

Early on in North America, as smart meters were installed for commercial and industrial users in the mid-

1990s, cellular was the dominant technology. However, of the millions of residential smart meters that

have been deployed in the last decade, most communicate using utility-owned mesh networking

technologies. In these networks each smart meter serves as a node and communication passes from node

to node through proprietary radios until it reaches a network gateway that serves as the backhaul point for

communication to the utility (all AMI projects use cellular networks to backhaul data to utilities). Most

major smart meter producers, including Landis & Gyr, GE, and Itron, have focused on these mesh-

enabled meters. Mesh networks have the advantages of being lower cost and easily scalable but their

limited range and low-power can create difficulties in sparsely populated rural areas or dense urban

areas.27

In recent years, cellular networking of the grid has made a comeback. This is largely fueled by the facts

that “cellular prices coming down…(and) carriers are getting more comfortable with service terms for

utilities.”28 Utility costs for cellular connectivity are now estimated to be as low as $1 per meter per

month or less.29 Cellular networks also have the advantage of being able to carry greater amounts of data

than mesh networks, which could prove important as the amount of applications being run over the smart

grid increase. There is still debate over which cellular networks will predominate, with start -up company

Grid Net focused on 4G LTE networks and SmartSynch focused on 2G and 3G networks. The two

companies announced a partnership in November 2011 and it remains to be seen if they will coalesce

around a single standard.

While the role of cellular seems to be expanding, it is likely that several communication standards will be

able to coexist. Companies such as SilverSpring, a dominant firm in mesh networking technologies, are

now adding adding cellular nodes and connectivity options to their products.30 A key factor in which

technology wins may end up being whether utility regulators are willing to approve more expensive

networking projects based on the argument that the increased capacity may be necessary in the future.

26 ibid, p. 53 27 Jeff St. John. “Itron Buys SmartSynch for $100M” February 15, 2012. Greentech Media. http://www.greentechmedia.com/articles/read/itron-buys-smartsynch/. Accessed April 2012 28 Jeff St. John. “The Return of the Cellular Smart Grid” February 22, 2012. Greentech Media. http://www.greentechmedia.com/articles/read/the-return-of-the-cellular-smart-grid/. Accessed April 2012 29 ibid. 30 Ibid.

AMI Key Companies:

Networking: Cisco, Trilliant, Silver Spring, SmartSynch, Eka Systems

Meter Equipment: Echelon, Elster, GE, Landis & Gyr, Itron

Company Spotlight: SmartSynch

SmartSynch was founded in Jackson, Mississippi in 1998. The company provides products and services

that leverage cellular networks for utility clients, delivering grid grid intelligence to and from any

device.31 SmartSynch’s open platform combines a suite of IP-enabled SmartMeters GridRouters, and

software solutions to allow utilities to interact with any grid asset. The company has entered into a wide

range of strategic partnerships with cellular providers such as AT&T, T-Mobile, Sprint, and Verizon; and

metering companies such as Itron, GE, and Qualcomm. SmartSynch has about 130 customers. In

September 2011, SmartSynch landed its largest project, a $400 million, 1.9 million meter deployment

with Consumers Energy.32

In February 2012, Itron, North America’s biggest smart meter maker, acquired SmartSynch for $100

million. This was perceived to be a low-return exit for investors as the company had raised a $20 million

Series B in 2001, a $20 million round in 2008, and $25 million out of a planned $33.5 million round in

2011.33 Investors in SmartSynch include Battelle Ventures, JPMorgan Partners, Siemens Venture Capital,

Kinetic Ventures, Nth Power, Endeavor Capital, OPG Ventures, Lime Rock Partners, Cinergy Ventures

and GulfSouth Capital.34

Grid Optimization Historically, utilities have had little visibility into the performance of the grid beyond the substation. As a

result, utilities consistently make decisions about loading power into the distribution network with

incomplete information, which results in high line losses due to congestion and often poor quality power

for the end consumer. Without visibility into the distribution network it is also impossible for utilities to

effectively integrate distributed generation (such as rooftop solar) or distributed storage assets (such as

EVs). Today, smart grid technologies can provide utilities with full, system-wide visibility, which will

allow them to improve, and in some cases automate, the performance of the grid. Grid optimization

31 SmartSynch, “About Us,” http://smartsynch.com/aboutus/, Accessed April 2012. 32Jeff St. John, “Itron Buys SmartSynch” 33 ibid. 34 Iris Kuo. “SmartSynch raises $25M for smart grid via cell phone networks, aims for $33M total” February 23, 2011. Venture Beat. http://venturebeat.com/2011/02/23/smartsynch-raises-25m-for-smart-grid-via-cell-phone-networks-aims-for-33m-total/. Accessed May 2013

includes the addition of sensor technology, communications infrastructure and IT that will help optimize

the performance of the grid in real time, improving reliability, efficiency, and security.35 For example,

through grid optimization, utilities will be able to pinpoint and predict failure or fault locations, re-route

power around disturbances and congestion to maximize efficiency, and improve frequency regulation to

support higher power quality. The likely benefits for utilities and consumers include a reduction in the

number of outages, better utilization of both fuel sources and grid assets to minimize costs; and improved

security.36

As with AMI, grid optimization includes both hardware (such as synchrophasors and other sensors),

software (to quickly analyze incoming data and alter power flow accordingly), and communication

networks (to gather information from the sensor network). The largest grid optimization project

undertaken to date has been XCel Energy’s SmartGridCity project in Boulder, CA. In addition to AMI,

the project included installing monitoring devices on over 4,600 transformers and 4 substations that serve

Boulder and the installation of 200 miles of fiber-optic cable to allow the components of the grid to

communicate.37 The utility expected “up to a 30 percent reduction in distribution losses from optimal

power performance and system balancing”.38 The project ultimately ended up nearly 3 times over budget,

which the utility attributed largely to the expenses associated with installing the fiber optic network.39

The success of grid optimization efforts, unlike some of the other areas of the smart grid, are not

dependent on changing consumer behavior and thus more predictable. Grid optimization projects are

typically carried out by a utility based on ROI calculations. Factors that influence launch of projects

include the rate recovery program allowed by regulators and the current state of the utilities’ physical

assets. A number of regulators have argued that grid optimization infrastructure should be rolled out

before AMI infrastructure, as they can be implemented at less cost and drive immediate benefits.40

The grid optimization space is dominated by the large grid hardware companies such as ABB, SEL, S&C

Electric, Areva, GE, and Siemens, that have well established vendor relationships with utilities. However,

the convergence of IT and communications technologies in grid optimization is also bringing in new

players from related industries (e.g., Oracle and Cisco) and opening the door to start-up technology and

software providers that can provide services not currently being offered by the big players. In addition,

35 Leeds, “Smart Grid in 2010” p.16 36 Ibid, p.60 37 Snider, Lauren “Xcel declares Boulder smart grid finished, asks to recoup $16.5M from ratepayers”. Daily Camera, 12/25/11 38 Leeds, “Smart Grid in 2010”, p.59 39 Snider, Lauren “Xcel declares Boulder smart grid finished, asks to recoup $16.5M from ratepayers”. Daily Camera, 12/25/11 40 Leeds, “Smart Grid in 2010,” p.62

many of the AMI providers, such as Itron and SilverSpring, are attempting to move upstream and

establish footholds in grid optimization as well.

Grid Optimization Key Companies:

ABB, SEL, S&C Electric, Areva, GE, Siemens, Oracle, Cisco, Current Group, Microplanet, Itron,

SilverSpring

Company Snapshot: Current Group, LLC

Current Group produces a range of distribution sensors that monitor power quality across the grid, as well

as data concentrators and IP routing engines that collect the data and analyze it through a back office

software application. The company supports a full range of IP communication technologies (e.g., fiber,

ethernet, 3G/4G, DSL). Current Group is focused on marketing towards large utility customers. Says

current CEO Tom Willie, “We don’t play in the business side, we don’t play in the home, we don’t build

meters, we don’t build devices in the home. We built core infrastructure gear, we’re very, very focused in

that way.”41

Current’s largest deployments to date include XCel’s SmartGridCity project in boulder, a project with

Oncor in the Dallas-Fort Worth area, and a EU-sponsored project with Iberdrola. Overall, the company

sees greater opportunity internationally where “smart transformer” projects have a quicker payback for

utilities due to higher population density (e.g, in Europe and Asia there are 150 to 200 homes per

transformers versus 6 homes per transformer in the US)42. Current’s customer base includes utilities in the

US, Switzerland, Spain, Portugal, Italy, France, Turkey, Romania, Czech Republic, UK, Australia, and

China.

Current Group was founded in 2000 as a broadband-over-powerline (BPL) company. In this incarnation it

received over $200M in financing from Google, Hearst, GE and Goldman Sachs.43 However, BPL

technology never took off, and Current instead took its expertise in dealing with utilities and the grid to

transition into smart grid technology. The company closed its latest round of financing in September

2011, a $13M round including some existing investors, as well as a group of international investors

including Business Media China AG and Espirito Santo Ventures.

41 Bill Flook, “Current Group Raises $13 million, promotes new CEO” Washington Business Journal. Sept. 13, 2011. http://www.bizjournals.com/washington/blog/2011/09/current-raises-13m-promotes-new-ceo.html. Accessed April 2012 42 Katie Fehrenbacher, “Current’s Pivot: From broadband to smart grid to overseas”. Gigaom. Sep, 13, 2011. http://gigaom.com/cleantech/currents-pivot-from-bpl-to-smart-grid-to-overseas/. Accessed April 2012 43 Ibid

Home Area Networks (HAN) / Building Area Networks (BAN)

Home area networks (HAN) promise to change the way in which consumers relate to their energy usage.44

HAN and BAN bring the smart grid into the house, linking intelligence and networking capabilities with

HVAC systems, lighting, and appliances. Homeowners or building managers will be able to monitor their

energy consumption and take steps to reduce overall consumptions levels or change the timing of their

consumption in order to benefit from utility incentive programs.

This area includes both Home Energy Management Systems, which typically aggregate energy usage data

into a centralized portal through which consumers can monitor and perhaps adjust their usage in real time,

as well as the HAN network itself, which is the actual network that appliances and system will use to

communicate with one another.

The HAN space, and particularly Home Energy Management Systems, was one of the main recipients of

venture capital money. A myriad of start-up companies such as Tendril, Greenbox, and Energy Hub, were

joined by established players like Google (which cancelled its Powermeter project in mid-2011) and

Microsoft. However, the space has been slow to develop as it is dependent on utility pilot projects and,

although many partnerships have been established, few large scale orders have come through.45

Verizon announced its entry into the Home Energy Management Space in the Fall of 2011. The move

threatens to change the dynamics of the market as Verizon will offer its products directly to current FiOS

broadband customers rather than waiting for it to be pushed to customers through their utilities, as most

companies have done to date. However, one of the key outstanding questions is who will pay for the

implementation of a home networking system, which is estimated to cost $300-400 and require a number

of years for payback. Demand has not yet materialized amongst home owners so it may be more likely

that installation is funded by utilities or demand response companies, both of which could monetize the

cost savings due to avoiding the use of peaking power plants.46

There are several different networking technologies that are currently being employed for HAN. WiFi,

though already broadly installed, is not ideal for home automation due to its high power requirements.

Zigbee is the low-power wireless mesh standard that has been most widely adopted by utilities to date,

but Verizon chose the competing Z-Wave technology. While ZigBee is already is most smart meters that

44 Leeds, “Smart Grid in 2010,” p.12 45Michael Kanellos, “Tendril: Millions of Automated Homes Coming Soon”, GreenTechMedia. May 4, 2011. http://www.greentechmedia.com/articles/read/tendril-millions-of-automated-homes-coming-soon/. Accessed April 2012 46 Ibid

have been installed, Verizon chose Z-Wave due to the fact that the company has more automation

devices, about 500, on the market today.47

Building management is a very different market. Large players like Seimens, Johnson Controls,

Honeywell, and Echelon have sophisticated building energy management systems that are widely

installed. The front for innovation here is on software and applications that manage the interaction

between these installed systems and the utility, whether for purposes of demand response or to adjust

consumption due to Time-of-Use pricing. Start-up activity in this space is detailed later on in this paper.

HAN/BAN Key Companies: JouleX, Gridpoint, BuildingIQ, Seimens, Honeywell, Johnson Controls,

Echelon, Tendril, EnergyHub, Verizon

Company Snapshot: Tendril

Tendril, based in Boulder, CO, was founded in 2004 and launched a beta version of its Home Energy

Management System in January 2008. 48 Tendril’s system, which is based on the ZigBee network,

includes smart thermostats and outlets, and in-home displays, a consumer energy management portal and

a utility back-office integration portal, as well as other infrastructure components to provide a secure and

reliable connection into the Home Area Network (HAN).49 Tendril has attracted over $75 million is VC

investment through a Series D, has several partnerships with Fortune 500 companies such as Lockheed

Martin and General Electric, and currently has over 40 utility clients. 50

After starting out largely as a hardware company, Tendril has made a strategic shift towards software and

database management, a shift that led to the 2010 acquisition of GroundedPower, a developer of

consumer-focused behavioral-based energy efficiency program. This acquisition was evidence both of the

larger move from hardware to software and applications, as well as to the general consolidation that is

occurring in the Home Energy Management space. 51

Venture firms invested in Tendril include RRE Ventures, Vista Ventures, Access Venture Partners,

Appian Ventures, VantagePoint Venture Partners, Good Energies.

47 Jeff St. John, “Verizon Launches Home Automation via Z-wave” GreenTechMedia, Oct 11, 2011. http://www.greentechmedia.com/articles/read/verizon-launches-home-automation-via-z-wave/. Accessed April 2012 48 Chris Morrison, “Tendril, an energy efficiency startup, grabs $12M,” Venture Beat, Mar 31, 2008. http://venturebeat.com/2008/03/31/tendril-an-energy-efficiency-startup-grabs-12m/. Accessed April 2012 49 “Energy management system uses interoperable ZigBee smart energy profile” Defense Electronics, Jan 24, 2008. http://rfdesign.com/microwave_millimeter_tech/tendril-energy-management-zigbee-0124/. Accessed April 2012 50 Mark Jaffe, “Tendril, a startup in Boulder, Colorado, uses “cloud” computing in energy management”. The Denver Post, Nov 17, 2011. http://www.denverpost.com/search/ci_19352886. Accessed April 2012 51 “ON World: Home Energy Management Revenues to Surpass $4 Billion in 2016”. http://www.virtual-strategy.com/2012/03/26/world-home-energy-management-revenues-surpass-4-billion-2016. Accessed Apr 2012

Demand Response

Demand response is a first-generation smart grid technology. The concept itself has been around for

decades and two large demand response players, EnerNOC and Comverge, were among the first cleantech

companies to go public, back in 2007.52 However, better demand response is one of the key applications

enabled by an AMI infrastructure. The concept of demand response is relatively simple. Utilities enter

into contracts through which they agree to compensate users of electricity for reducing their usage at

critical periods of high, “peak” demand. The utility benefits from not having to turn on expensive peaking

power plants while the users benefit through the income derived from the contract.

Historically, utilities have entered into demand response programs only with major industrial and

commercial users and have manually called those users when they required them to reduce consumption.

With real time knowledge of electricity use patterns, demand response programs can be largely automated

and more effective. In addition, residential users with smart meters will often now have an option to

enroll in demand response programs, expanding the programs’ reach to a previously untapped portion of

the user base. Some industry analysts have argued that the demand response market will quintuple from

2010-2015.53

The most successful companies in the DR space have been the demand response aggregators such as

EnerNOC and Comverge. These companies enter into management contracts with thousands of electricity

users with the goal of maximizing megawatts under management. They then turn around and sell this

aggregated “capacity” to utilities. As of 2008, FERC reported that 8% of energy consumers in the US

were enrolled in some type of DR program, with that total demand-response capacity of 41,000

megawatts, equivalent to 5.8 percent of U.S. peak demand.54

The value of demand response will only increase as intermittent renewables such as wind and solar make

up a larger portion of the grid. Concurrently, the potential capacity of demand response will grow

exponentially as energy management technologies are integrated into homes and buildings that

automatically reduce energy use in response to the real-time requirements of the utility.

52 Katie Fehrenbacher. “Demand Response M&A: Constellation Snaps Up CPower”. Gigaom, Sep. 19, 2010. http://gigaom.com/cleantech/demand-response-ma-constellation-snaps-up-cpower/. Accessed Apr 2012 53 Leeds, “Smart Grid in 2010,” p. 16 54 Phil Taylor, “Renewables push a gold mine for demand response middlemen” The New York Times, May 15, 2009. http://www.nytimes.com/gwire/2009/05/15/15greenwire-renewables-push-a-gold-mine-for-demand-respons-10572.html. Accessed Apr 2012

Demand Response Key Companies:

EnerNoc, Comverge

Company Snapshot: EnerNoc Inc.

EnerNoc, incorporated in June 2003, uses its Networks Operation Center (NOC) to remotely manage and

reduce electricity consumption. The company has focused on commercial, institutional, and industrial

customers and now counts over 7GW under management, across over 11,600 sites.55 The company has

expanded significantly outside of its core business and now offers products in building energy

management, as well as a new product that helps customers automatically switch between natural gas and

oil for heating to minimize costs. In addition the company has expanded geographically from serving only

the PJM interconnect to new projects as far as the UK and Australia.56 As both generation assets and the

smart grid have evolved EnerNoc has also moved from traditional DR to grid management, offering rapid

response to grid variations (e.g., intermittent renewables) to help maintain grid stability.57

EnerNOC went public in 2007. At the time of its IPO major investors in the company were Foundation

Capital, Draper Fischer Jurvetson and Braemer Energy Ventures.58 Since then EnerNoc has grown to a

company with over $200M in annual revenues, even as its share price has fallen from a high of $50 six

months after the IPO to a current value closer to $10. EnerNoc has recently been an active acquirer,

purchasing at least five startups over the past three years, including Cogent Energy (building control

systems), SmallFoot (energy management for small commercial sites), eQuilibrium Solutions,

MDEnergy, and South River Consulting.59

55 Enernoc. http://www.enernoc.com/, accessed April 2012 56 Katherine Tweed, “EnerNOC Moves into Demand Response for Natural Gas” Greentechmedia, Apr 18, 2012. http://www.greentechmedia.com/articles/read/enernoc-moves-into-demand-response-for-natural-gas/, accessed April 2012 57Adam Aston, “How EnerNOC is Evolving Smart Grids and Building Energy Management” GreenBiz, Jan 05, 2012 http://www.greenbiz.com/blog/2012/01/05/how-enernoc-evolving-smart-grids-building-energy-management, accessed Apr 2012 58 Steve Gelsi, “EnerNoc IPO powers up 20%” MarketWatch, May 18, 2007. http://articles.marketwatch.com/2007-05-18/news/30770696_1_ipo-price-electric-supply-and-demand-market-debut, accessed May 2007 59 Fehrenbacher. “Constellation Snaps Up CPower”

Software / Apps

The widespread deployment of smart meters and other “smart equipment” on the grid is resulting in the

collection of an unprecedented amount of data on the minute-to-minute performance of the grid.

However, in order to turn petabytes of data into usable information and take appropriate actions to

improve grid and energy usage efficiency, a wide range of software solutions are required.

The software and application space includes a wide range of products, including those that makes energy

usage data more accessible to consumers (e.g., OPower), manage the data created by smart meters for

utilities (e.g., eMeter), and calculate and communicate real time prices to customers. Even the future

integration of PHEVs and advanced storage solutions to the grid will be largely a software challenge, and

smart grid start-ups (e.g., Gridpoint) are already expending efforts on building the products that will some

day make it possible.

Many of the major players in other areas of the smart grid, such as grid optimization and AMI, are also

building up software capabilities that enhance the value of their products to utilities and/or end users.

However, there is tremendous opportunity for innovation in the space and, as software development is far

less capital intensive than building out grid infrastructure, there is a significant amount of start-up and

venture capital activity occurring in the space.

One of the most active areas in the software space is Meter Data Management Systems (MDMS). Utilities

rely on MDMS for consolidating meter data from different collection systems, validation, estimation, and

editing (VEE) of data, and calculating time-of-use and critical peak pricing. The MDMS market, which is

forecast to grow to $221M by 2014, has been a hotbed of M&A activity recently with major acquisitions

including Ecologic Analytics (purchased by Landis & Gyr in January 2012) and eMeter (purchased by

Siemens in December 2011)60

Although MDMS is one of the more active areas in smart grid software, there are plenty of other areas

where software is critical. For example, GridPoint has developed software that enables utilities to monitor

and manage distributed generation, energy efficiency, energy storage, and electric vehicles, from a single

interface located in a utility’s control room. GridPoint is one of the most highly-funded smart grid

startups, having raised over $220M since its founding in 2003.61

60Jeff St. John. “Ecologic Analytics Acquired by Landis+Gyr” Greentechmedia, Jan 10, 2012. http://www.greentechmedia.com/articles/read/ecologic-analytics-acquired-by-landisgyr/. Accessed April 2012 61 Leeds, “Smart Grid in 2010,” p 122

Software and application development for energy consumers is being given a kick-start by the Green

Button Initiative. The Initiative, launched in 2011 by then U.S. Chief Technology Officer Aneesh Chopra,

asks utilities to standardize consumer energy consumption data, and to make that data available to each

utility customer.62 Numerous start-ups, including OPower, Simple Energy, and Efficiency 2.0, are

developing products that help utility customers understand their energy consumption data and identify

potential areas for efficiency improvements.

Software Key Companies:

eMeter, GE Energy, Itron, OSlSoft, Oracle, Gridpoint, Aclara, EcoLogic Analytics, OPower, BuildingIQ

Company Spotlight: eMeter Corporation

eMeter Corporation, founded in 1999, has built up and marketed a proprietary software solution in

EnergyIP, an enterprise MDMS platforms for linking AMI systems to utility IT systems. The company

has developed solutions that work across different meter vendors and has also incorporated functionality

to manage natural gas and water distribution systems in addition to the electrical grid. These efforts have

been part of the company’s strategy of becoming a one-stop shop for municipal and cooperative utilities

and are also part of a larger strategic effort to position the company for international markets where water

management is becoming critically important.63 In addition, eMeter entered into a partnership with

Verizon in February 2011 to develop a cloud-based meter data management solution.64 As of late 2011,

eMeter held an estimated 20% market share in processing of AMI data with over 24 million meters under

contract in big deployments in the US and Europe. Major customers include Vattenfall in Finland, Alliant

Energy, CenterPoint Energy, and Toronto Hydro. 65

Foundation Capital and Sequoia Capital led eMeter’s $12.5M Series A in 2007. Seimens led a $12.5M

Series B in 2008. Foundation and Sequoia invested a further $32M in July 2009, and brought in Northgate

Capital on a final $12.5M round in 2010. In December 2011, eMeter was acquired outright by Seimens in

a deal estimated at $180 to $220M. The acquisition represented a 5x to 6x sales multiple but produced

62 “Green Button Has a New Site to Connect” Jetson Green, Feb. 15, 2012. http://www.jetsongreen.com/2012/02/green-button-connect-energy-efficiency-app-gallery.html, accessed April 2012 63Katherine Tweed, “EMeter Focuses on Water for the Muni, International Market” Greentechmedia, Feb 21, 2012 http://www.greentechmedia.com/articles/read/emeter-boosts-its-mdm-with-water-offerings/, accessed April 2012 64 “Verizon Teams with eMeter to Enable Meter Data Management from the Cloud” eMeter press release (Basking Ridge, NJ, February 1, 2011) 65 Katherine Tweed, Jeff St. John “Siemens to Aquire VC-Funded Meter Data Management Leader eMeter” Greentechmedia, Dec 5, 2011. http://www.greentechmedia.com/articles/read/Siemens-to-Acquire-VC-Funded-Meter-Data-Management-Leader-eMeter/, accessed April 2012

only a 2.6x to 3.1x multiple on VC funding, less than the 3.65x multiple that has been the average of

Silicon Valley software start-ups in the past 15 years.66

66 Jeff St. John, “Sources: eMeter’s Price to Siemens was $180M to $220M”. Greentechmedia, Jan 30, 2012. http://www.greentechmedia.com/articles/read/sources-emeters-price-to-siemens-was-180m-to-220m/, accessed April 2012

VC and M&A Activity

Venture capital activity in the Smart Grid had increased steadily from 2005 to 2010. However, after the

banner year of 2010, which saw over $750M invested in 51 companies, total funding fell by half in 2011.

The fall did not appear to be due to a decrease in VC interest, as the number of VC investors in the smart

grid actually increased from 87 in 2010 to 92 in 2011, but rather to a major decrease in average deal

size.67 VC activity in 1Q2012 remained roughly on pace with the depressed levels seen in 2011, with 10

deals completed worth a total of $62M.68

Figure 2: Smart Grid VC Activity, 2007-2011

The top VC investors in 2011 were GE (6 deals), Emerald Technology Ventures (5), Kleiner Perkins

Caufield & Byers (5), Foundation Capital (4), Intel Capital (4), and Rockport Capital (4).69

As seen in the figure below, roughly half of the $377M of VC investment in 2011 was directed towards

companies involved in Smart Grid communications, while demand response, grid optimization, and AMI

also saw sizeable investments. (Note that software is not broken out as a separate category in this

analysis)

67 Mercom. Smart Grid 2011 Annual Funding Report 68 “Smart Grid Q1 2012 Funding and M&A – Another Weak Quarter with Only $62M in VC Funding” http://mercomcapital.com/smart-grid-q1-2012-funding-and-ma-another-weak-quarter-with-only-$62-million-in-vc-funding, accessed April 2012 69 Mercom. 2011 Smart Grid Funding Report

Figure 3: 2011 Smart Grid Funding by Technology

VC activity was headlined by the $51.6M invested in home automation and energy management start-up

iControl. iControl, which competes in the market with Tendril, received funding from Intel Capital,

Kleiner Perkins, Comcast Ventures, Rogers Communications, and several others.70 In addition to AMI

communications companies SmartSynch and SilverSpring, the top deals included software start-up

Gridpoint and building energy management company JouleX.

Figure 4: Top VC deals in 201171

Source: Mercom Capital

70 Michael Kanellos, “IControl Raises $50 Million More for $0B HAN Market” Greentechmedia, Jun 20, 2011. http://www.greentechmedia.com/articles/read/icontrol-raises-50-million-more-for-0-billion-han-market/. Accessed April 2012 71 Mercom 2011 Annual Smart Grid Funding Report

M&A Activity

The past few years have seen high levels of M&A activity in the Smart Grid sector as established

industrial giants and power engineering companies move to develop product offerings in the space. In

2011, M&A activity remained high and was dominated by two megadeals: The $2.3B acquisition of AMI

company Landis+Gyr by Toshiba and the $2B acquisition of IT and monitoring company Telvent by

Schneider Electric. Other major deals with disclosed values are listed in the table below:

Table 2: Top Smart Grid M&A Deals in 2011

As mentioned, much of the M&A activity has involved large industrial companies with established

businesses serving the power industry. Also active in the space have been building management

companies such as Johnson Controls and Honeywell, and demand response player EnerNOC. The table

below lists the companies that have been most active in M&A in the past two years and their key

acquisition over that timeframe.

Table 3: Top Smart Grid Acquirers, 2010-Present

Conclusion

Mercom, which tracks VC and M&A activity in the Smart Grid, has attributed the decline in VC

investment since 2010 to “a disconnect in smart grid between consumer interest and awareness, and the

market offerings of smart grid technologies and products”72 Indeed, technologies and software solutions

have come a long way in the past several years. However, the business model for the Smart Grid is yet to

be fully defined. In particular, there is great uncertainty around who will pay for the various upgrades that

are required to bring a true Smart Grid to fruition. In the absence of dynamic pricing schemes, which have

met with resistance by consumer advocacy groups, the benefits to consumers for investing in Smart Grid

technologies are limited.

Utilities, on the other hand, have not moved residential-focused Smart Grid projects beyond the

pilot stage. In addition, utility investment in other areas of the Smart Grid, such as grid optimization, has

been hampered by their historical organizational structure and focus. Since their inception utilities have

operated largely as project-focused organization, looking at one project, whether a new power plant build

or a transmission build-out in isolation and seeking recovery of investment from regulatory commissions

on a project by project basis. However, realizing the full potential of the Smart Grid will require that

utilities begin to view their business more as a telecom or enterprise IT system with complex interactions

between the various parts. For many utilities this will require changes in strategy, organizational structure,

and especially, the skill sets of management teams.

The next several years will be telling in the development of the Smart Grid. The pace of

challenges to the existing grid continues unabated, with increased renewables linking onto the grid as

utilities meet RPS requirements and existing infrastructure continuing to age. With many AMI programs

completed or nearing completion, utilities will turn their focus to how to best leverage the end—use data

from millions of smart meters and use it to change the way that they manage their distribution systems

and consumers manage their energy use. In the short term, grid optimization efforts, with benefits that are

divorced from consumer behavior, are likely to increase. The overall pace of smart grid technology

deployment continues to be restrained by lack of generally accepted standards and by concerns over

security of information. The latter becomes increasingly important as utilities turn to over-the-air

communication systems, such as RF and cellular, to transmit data. Advances in either of these areas

would provide a much needed boost to the market.

72 Mercom Capital, “Smart Grid Q1 2012 Funding and M&A”

VC funding for smart grid companies is unlikely to return to the peak levels seen in 2010 as the market

realizes the uncertainty in adoption for many areas of smart grid technology. Absent consumer acceptance

and utility implementation of dynamic pricing systems, the home energy management space will not

expand and start-ups in this space will likely follow more established companies like Google and

Microsoft, in seeking to exit the space and apply their technologies to other areas. AMI communications

companies have already been heavily-funded by VCs and, as there do not seem to be new technologies on

the horizon, it is likely that the winners will emerge from the existing big players. The “best bet” for VC-

money is likely to be the software space, particularly software that is targeted towards utilities for grid

optimization or demand response. Having already invested millions in smart meter deployments, utilities

will be actively seeking opportunities to best leverage those investments. Furthermore, equipment

manufacturers, particularly the large industrial companies, offer strong exit opportunities as they are

clearly demonstrating a voracious appetite for acquisitions that will enable them to offer complete

solutions to their utility customers.

Finally, look for many companies in the smart grid space to continue to expand their product offerings

into the natural gas and water distribution systems. These areas offer new growth opportunities for

companies operating in a market that has not grown as quickly as expected. Smart water distribution

systems, in particular, will become increasingly important as certain areas of the world deal with more

frequent water shortages. With a large percentage of total water use occurring in electricity generation,

and a large percentage of electricity (in some regions) being used to create and/or move fresh water, there

is a natural connection between the two areas and thus opportunities to improve efficiencies by adding

intelligence to both systems.

APPENDIX