Echelon (ELON): Smart play on smart grid

"A smart grid is one of the holy grails of 'green' technology, enabling utilities to deliver resources when and where they’re needed and reduce resources when they’re not," says Brendan Coffey.

In The Cabot Green Investor, he explains, "There are larger companies in the smart metering arena, but Echelon (NASDAQ: ELON) has posted some significant wins in the marketplace recently and appears primed to generate more."

"Right now, grids are set up to provide as much power as needed at peak times, all the time.

"Studies show that when customers are part of a smart grid, and have more information to reduce energy usage, demand is slashed by up to 50%, particularly in areas where rates are discounted depending on the time of day.

"Echelon's smart metering product -- called NES -- offers automated gas, electric, water and heat metering, as well as automatic outage, theft and tampering detection and a host of other services to utilities.

"About 27 million homes are outfitted by utilities with NES technology, with one million NES smart meters deployed.

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"But Echelon is more than smart meters. Its edge is its open software architecture called LonWorks, a standardized system that allows products of many different manufacturers to communicate with one another and be 'smart' on any number of networks, not just NES.

"LonWorks is the basis of many different systems that manage utility networks, municipal streetlights, solar panel arrays and subway cars, among others.

"What makes LonWorks appealing is that it communicates over existing power lines rather than requiring dedicated broadband, like some competitors.

"Two examples of LonWorks in practice give a good sense of the network’s capabilities. In Norway, the city of Oslo is replacing its older streetlamp components with LonWorks-based products.

"The new system automatically dimsg specific sections based on daylight data the system collects. So far, the first batch of 7,000 streetlights has reduced total energy usage by an astounding 62%.

"In the U.S., McDonald’s started outfitting its kitchens with LonWorks technology in 2007 to allow more effective data collection from appliances to help calibrate optimal electricity usage.

"The system also collects data that McDonald’s maintenance crews need to judge whether a fryer is going to fail soon and take care of the problem before it affects service.

"Further, the power line capability oLonWorks has great potential for the LED lighting wave that’s just starting. LED lights are on the path to be the next generation of efficient lighting because they don’t use mercury, like current compact fluorescents.

"LonWorks can communicate with LED nodes individually and regulate the flow of electricity, resulting in richer light emission and more efficient power usage. While more suited to new construction and full renovations, which is slack now, it promises good potential growth down the line. 

"The impressive technology is one thing—but it’s the surprising rate of adoption in the marketplace over offerings from competitors that makes Echelon a compelling story now.

"At the end of August, Echelon was selected (along with partner Telvent) to provide smart metering technology to 3.1 million customers of Finland’s largest utility.

"Echelon also inked a deal with Duke Energy to provide $15.8 million worth of smart meters to smart grid efforts by the green-minded utility in Ohio.

"Also exciting, if a little more speculative, is the fact that LonWorks has been approved as a standard in China for streetlights. The government there is expected to start approving next-generation streetlight projects this fall and it is believed Echelon customers there stand a good chance of being in the winner’s circle. 

"Boosting Echelon’s prospects is the belief that the first half of 2009 was a bottom for the industry. The stock entered a prolonged bear phase in mid-2007, falling from a high of 30 to a low of 5 last November.

"Shares stabilized between 6 and 9 before news of the agreement with Duke and the Finnish utility deal pulled in lots of buyers. Technically, very little selling pressure came after the jumps, a sign that institutional investors are onboard in expectation of greater things."