By Matt Lecar
By contrast, the energy utility business has seen only a modest pace of technological innovation over the last century. In the case of electric metering, the analogue electromechanical device i n most homes and businesses in North America would be instantly recognisable to Thomas Edison, who filed the first metering patent in 1881 (from that other Menlo Park, in New Jersey).
But change in the utility world has finally arrived. Advanced Metering Infrastructure (AMI) deployments are accelerating in number and pace in North America, motivated by improving meter economics, state and federal regulatory push, and a widespread interest in enabling demand response as a means to avoid new power plants, ensure peak reliability, maintain price stability, and empower consumer options.
Thanks to AMI, new technology is already beginning to disrupt the staid utility marketplace and create opportunities for venture capital type returns – as witnessed in the recent initial public offerings of Comverge and Enernoc.
I recently checked in with three veteran venture colleagues, John Rockwell (JR), managing director of DFJ Element, Nancy Floyd (NF), founder and managing director of Nth Power, and Daniel Weiss (DW), co-founder and managing partner of Angeleno Group, who have investments in metering technology companies, to see how they came to make their investments and what changes they’re seeing in the AMI marketplace.
ML: First, tell me a little about your background with metering and what companies you’re involved in.
JR: Both with DFJ Element and prior to that with Advent International, we’d been looking at the metering space since probably 1996 and just couldn’t find our way to doing a deal. The economics just weren’t there. I’m not sure of the exact price point but from what we’ve heard from utilities, you have to get to about $20 per meter to make the sale on a pure price basis, just on the value of the meter read with no soft benefits.
Last year, we invested in a Chinese company called Miartech. It’s a fabless semi-conductor design shop with some great expertise in mixed signal systems design. They have a PLC chip that allows them to obtain three to five times the performance at a price point that makes AMI a no-brainer for the utility.
NF: Nth Power has made two investments around metering. We invested in SmartSynch, starting in 2000 and Comverge in 2003.
DW: Angeleno Group focuses on high growth investments in the energy vertical. We’ve been looking at advanced energy infrastructure for several years now and we think that there’s a convergence of factors that really could open the window for larger scale deployments and adoption of advanced infrastructure and, in particular, metering related technologies that enable the smart or intelligent grid. We’ve just made our first investment in the space with Eka Systems.
ML: What was the thesis about the metering market when you made the investment and how has that played out so far?
JR: North America was not the initial focus for us; we were looking at markets in Europe and even China and India where there’s tremendous demand for low cost two-way communications to support theft detection. We also had a belief that it would be a long lead time to get qualified with a utility customer, maybe 12 to 18 months.
With the low burn rate of a Chinese company, we can afford to be patient. We think if we can get the cost of the meter down to less than a one-year payback for the utility, then we can play with the different two-way features, like demand response and theft avoidance, to figure out where the best value proposition is in different parts of the world.
NF: The thinking in 2000 for SmartSynch was not that different from the thinking today, which is to be meter neutral and communications neutral. What has changed is that the market is clearly a lot closer to breaking open than in 2000. Back then, a lot of utilities were piloting systems, primarily with large commercial and industrial (C&I) customers. Now, we’re seeing system-wide rollouts, and that’s being motivated not just by the avoided cost of meter reading, which has always been at about 50 cents per meter-month, but demand response and real time pricing, and I think we’re beginning to value those additional benefits.
For SmartSynch’s approach, that shift validates their value proposition of being two-way communications and communications neutral, because there is no one approach that’s going to work for an entire service territory. Flexibility really is the key.
Right now, SmartSynch is rolling out a residential product and that was a change from our initial thesis, which was all about C&I. Again, that’s being driven by the value from demand response and other services.
Comverge was a little different. The company had been around for a number of years as a privately held company. We invested in the first institutional round in 2003 when Bob Chiste came in as CEO. The thesis there was around being an independent power producer but delivering negative watts, “negawatts,” instead of megawatts. Many areas in the country are seeing increasing peak demand being driven by air conditioning load, and the idea was that through a service offering you could start to impact that.
That was the original thesis and it has just gotten stronger over the lifetime of our investment. They’re winning more and more projects and this is not being driven by regulation. It’s simply more economic to take load off the system than it is to build a new peaker, to build a new transmission line, or to buy peak power on the market.
DW: One of the drivers is regulatory – the Energy Policy Act of 2005 which requires state regulators to adopt ratemaking standards, including time-based metering and communications, with the goal of using pricing signals to attain demand response – as well as a series of state level mandates. The second driver is the technology piece. There’s been substantial evolution of the technology and, in particular, the area Eka specialises in, which is wireless mesh networking. And then you also have a supportive customer base that is increasingly ready to adopt new technology. All of these things together make us investors take notice because we see the real opportunities there for growth.
We reviewed dozens of companies in this space but, at the end of the day, Eka stood out for a few reasons. Within the wireless mesh space, which we think of as one of the leading contenders to provide large scale deployments in the utility and submetering markets, we think they are a leader and have distinctive technology solutions. Though not widely advertised, Eka actually has more deployed nodes worldwide in a metering context than virtually any other company of its kind.
Historically, one of the things that has hampered the adoption of AMI in the utilities is that utilities need things that are reliable and scalable. Eka seems to have a powerful value proposition to offer to customers: reliable and scalable products, flexible design as well as the engineering and technical capabilities to execute large scale deployments. They’ve been focused like a laser beam on the product and quietly, but smartly and diligently, developing what we think is the leading wireless mesh technology in the AMI market. I think there’s a tremendous future for it, especially in the United States.
ML: How do you see the metering market evolving? There’s obviously a lot of consolidation going on, as well as pressure to move meter production offshore and reduce costs. How does that affect your positioning?
JR: Within a few years, a half-dozen or maybe a couple more, large companies will have most of the market share and will acquire the innovators. As a component company, though, Miartech will not necessarily be acquired – they will be selling their chips into other industry verticals for applications like traffic light control and security systems, maybe even appliance control for demand response. That makes them a better target for acquisition by a semiconductor company or even an IPO.
NF: The challenge for all AMI providers, big and small, is that the big utility projects are phased and it’s challenging to build a business around some of these very large deployments. They represent hundreds of millions of dollars of revenue and it’s hard to plan around that. They’re going to do 10,000 units and then 200,000 units and then 2 million units. Then, there’s the inevitable delay from regulatory and business cycles. It’s a very challenging business to be in.
Consolidation in the meter industry is inevitable. It’s been happening and it will continue to unfold. I don’t watch the offshore question that closely, but this is a slim margin business and if you have competition coming in from offshore that can cut those margins further, that’s obviously a serious threat.
DW: One of the things that seems to be contributing to Eka’s growth is their focus on the communication technology. They don’t make the meters, they make the communications infrastructure piece. What they do well, and we expect will continue to do well, is partner with other providers to offer the complete product solution to customers.
At the end of the day, customers want the solutions that are the most cost effective, the most robust in terms of functionality, and that are the most reliable. Eka believes that if they focus on those priorities, partnering will happen organically. One example of that is the partnership they’ve recently announced with Itron in the mobile C&I market. This is a good example of a large, respected metering solutions vendor partnering to address a very particular need, leveraging Eka’s technology.
I think it’s likely that there’ll be a relatively small number of companies that are recognised as commercial scale product providers and they’re going to end up competing, and in some cases collaborating, to go after the growing AMI market.
With regard to price, the general value proposition for many utilities continues to be built on the demand response component. If a utility can factor into its business case the reduced capital expenditure associated with building new peaker plants, if they’re able to optimise energy consumption for their ratepayer base, then they’re getting a lot of bang for the AMI investment. Some utilities are focused on the short term gains from eliminating the costs of meter reading, but I think that represents a smaller number of the larger utility RFPs.
ML: When you look in your crystal ball, what do you see as the future state in say the next 5 or 10 years? Will every meter purchase be an AMI purchase?
JR: AMI will get there and I think we’ll also see monitoring in all kinds of products and infrastructure as the chip prices come down. We think Miartech has the potential to be a $100 million company within the next few years.
NF: I think the companies left standing will be global, multibillion dollar companies – maybe a dozen of them. For the developed world and parts of the developing world, AMI will become standard. There are clearly other parts of the developing world where they can’t support the price of AMI.
The interesting question is, if you look at the top 10 solar companies in the world, the top 10 wind companies – both of those industries having started in the US – none of them today are based in the US and none of them manufacture in the US. Is that going to be the case for AMI?
DW: As with many large and complicated markets, it’s not a one size fits all solution. You have a customer base that’s different in size, in terms of geography, and in terms of the business case. A very large investor owned utility on the West Coast may have a very different look than a small co-op in the Midwest.
If you look at the evolution of computers in the 1970s, organisations would do an ROI analysis to see if a new employee should have his own computer or share it with several others. Today, employees have a computer on their desk when they join. AMI is really about networking meters and other transmission and distribution-related assets and realising the power of networking to get greatly increased efficiencies and decreased costs.
Looking out 3 to 5 years, yes, AMI will have more traction, and more and more market penetration at more and more utilities. Right now, only about 25 to 30 percent of US gas, electric, and water meters utilise some kind of automation, so there is a significant opportunity for growth. At the same time, I don’t think there’ll be only one winner. There will be multiple vendors and service providers that continue to address the priorities of their customer base. What’s attractive for Eka is that, with all that variation, there are a lot of applications where wireless mesh can play a role.
Outside the US, as you saw with wireless telecoms in Latin America and elsewhere, there’s a very good case that can be made for a “leapfrog” scenario. Where you have rapidly growing economies that are expanding investment in energy infrastructure, you’ll start building a smart grid from scratch, since they’re not just retrofitting infrastructure that’s been around for 30 or 40 or 50 years. Various aspects of AMI are going to be attractive and the whole notion of a smart grid will be compelling in some of those markets.