Companies ranging from global blue chips to start-ups awaiting IPOs are gearing up to participate in the so-called "smart grid," which offers potential for both financial advisors and investors with a stomach for risk and a desire for alternative investments.

The smart grid is actually a nickname for applications that use digital technology to deliver electricity from suppliers to consumers in ways that save energy, reduce costs and increase reliability and transparency. Some governments believe such a modernized electricity network will increase energy independence and limit climate change.The Obama administration earmarked some $4.5 billion in smart-grid funding for utilities in its $787-billion stimulus package.

Many existing transmission systems in the United States and Europe are antiquated and can't handle the increased delivery demands placed on them. The smart grid would not only make delivering electricity more efficient, but it would also help consumers manage their usage better, says Dan Delurey, executive director of the Demand Response and Smart Grid Coalition (DRSG), a trade association. With the smart grid," says Delurey, "you're basically putting in controls, sensors and management systems that have simply not been there before. You're putting technology which exists in other industry segments into the electricity system."

So what are the smart plays for investors? Most public utilities may not be the best answer. According to Maurice E. May, a utilities analyst at Soleil Securities in New York, utilities' smart-grid projects are a relatively minor part of their operations. For most utilities, their cost of debt will be lower if they get some of the government stimulus money for smart-grid projects, but those lower costs will benefit ratepayers more than shareholders, he says. One utility May does like is Pepco Holdings (POM), a Washington, D.C.-based utility that he says has been driving smart-grid investments in Maryland; Washington, D.C.; and the Delaware area.

For advisors, a better way to invest may be in a highly visible, nonregulated public company. Three large firms in the space-Siemens AG, General Electric Co. and Cisco Systems-are pushing heavily into the smart-grid market, expected to jump nearly three-fold in value, to approximately $43 billion, over the next several years, according to a recent Wall Street Journal report. Giant companies IBM, Google and Oracle also developing smart-grid technology. Siemens, a German industrial conglomerate, according to the Journal, wants to achieve the equivalent of more than $8.55 billion in orders related to intelligent power grids by 2014. The orders are coming mostly from utilities and other companies that are in turn subsidized if they invest in the technology

A potentially more lucrative-but riskier-approach may be to invest in a smaller venture-capital firm. Venture capital experts say a wave of smart-grid IPOs is expected soon, and it has the potential to provide strong upside returns for patient investors.

Lyle Deitch, a principal at 21 Ventures (, a New York-based VC firm that has invested in the industry, recommends advisors consider privately held smart-grid companies that do not solely rely on utilities for business. "Many smart-grid plays tend to have a dangerous reliance on cooperation from local utilities, whose pace of progress can be dangerously slow and threaten even the most conservative projections," says Deitch.

One possible VC play, Silver Spring Networks, Redmond, Calif., announced that it will soon be profitable on expected revenues of $200 million this year. Another is commercial and residential energy management software provider Advanced Telemetry, San Diego, Calif.

Gus Ezcurra, CEO of Advanced Telemetry, says its "EcoView" energy management system reduces users' energy consumption, with utility-bill savings of 20% or more per month. GE recently licensed Advanced Telemetry's technology. Advanced Telemetry has rapidly growing revenue and installations, yet does not solely rely on utilities to provide their service, says Deitch, who has invested in the firm. "Many smart-grid-related companies have not been as fortunate, and are seeking private capital at much reduced valuations from previous rounds," he says.

Other possible plays include firms such as Aclara, Ambient, Bridge Energy Group, Direct Energy, EnergySolve, LG Electronics and Tendril, to name a few.

When considering a VC type investment, look for a good management team, a defensible technology and growing sales, Deitch advises. "Just because a company cannot raise money from its prior backers does not mean it is inherently flawed. Venture capital firms are undertaking triage on their portfolios and many are only investing in their most mature companies to speed possible exits."

Bruce W. Fraser is a New York-based freelance financial writer who contributes frequently to Financial Advisor magazine. He can be reached by email, [email protected]. Visit him at