Smart Grid / Energy Monitoring Research Overview
M2M MARKET OVERVIEW
Machine-to-Machine Communications (“M2M”) is a broad term that describes the hardware and services that allow software programs to remotely control, monitor or receive and analyze data from machines. M2M is not a single industry, but a series of solutions for a variety of industries, with many different verticals and market segments.
The industry is comprised of established companies and innovative start-ups with a variety of business models. M2M solution sets can be segmented both vertically and horizontally:
Vertical segmentation. There are many types of M2M services/products: kiosks, supply chain management, remote device monitoring, remote patient monitoring, energy management, security, environmental monitoring, fleet management, etc.
Horizontal segmentation. There are three basic horizontal segments: M2M solution provider (software, integration, monitoring services); network infrastructure (network connectivity management); and data acquisition (hardware and device networking).
- M2M solution (application) providers consist of those similar to traditional IT (upfront purchases of software, hardware and technology integration services) and others similar to SaaS or BPO (recurring revenue, end-to-end solutions); 40-60% gross margins (higher for pure software)
- Network infrastructure services are generally value-added MVNOs – packaging wholesale wireless capacity and selling it on a recurring revenue basis; 30-40% gross margins
- Data acquisition hardware is sold through M2M solution providers, technology integrators, or as “hardware-as-a-service”, packaged with an end-to-end solution; 30-50% gross margins
While the M2M industry as a whole will likely remain fragmented, we expect each vertical to eventually be dominated by 2-3 end-to-end solution providers. For the purposes of this paper, we will focus on M2M solution providers in the smart grid / energy monitoring vertical with a particular emphasis on SaaS providers.
SMART GRID / ENERGY MONITORING ECOSYSTEM
The objective of smart grid technologies and energy monitoring applications is to conserve energy. According to the US Department of Energy, if the electrical grid were just 5% more efficient, the energy savings would equate to permanently eliminating the fuel and greenhouse gas emissions from 53 million cars. The goal of energy conservation can be achieved through improved energy efficiency as well as optimized demand response.
Energy efficiency. This involves using less energy at any given time, including at peak demand times, to provide the same or improved level of service to the energy consumer in an economically efficient and more environmentally friendly way.
Examples of energy efficiency technology are grid analytics applications that enable utilities to ensure better planning, design, construction, operation and maintenance of utility transmission and distribution networks. Grid analytics include transformer management, grid optimization, outage management, system modeling, power quality optimization, advanced distribution management, real-time network operations and predictive asset maintenance.
Demand response. This refers to programs initiated by utilities to alter the usage of electricity by their customers. Demand response programs change energy consumption patterns through (i) voluntary action by customers to help maintain grid reliability, (ii) triggered responses to directives sent by the utility or (iii) consumers shifting their usage patterns to avail themselves of incentives offered by the utility.
Examples of demand response are customer analytics that include meter data analytics, customer segmentation, pricing optimization and other back office services that enhance the relationship between the utility and the customer.
Smart Grid / Energy Monitoring Stack
Advanced Metering – Advanced metering companies develop and manufacture devices that enable two or more way communication.
- Selected companies: Itron, Landis+Gyr (Toshiba)
- Users: Sold to utilities / grid operators
Networking Communications – Networking communications are connected platforms that enable two or more way communication between utilities, devices and end-users of electricity
- Selected companies: Silver Spring Networks, Trilliant, On-Ramp Wireless
- Users: Primarily utilities / grid operators
Optimization and Distribution Automation – Optimization and distribution automation includes software, sensors and switches that perform automatic switching and or other feeder operations/control
- Selected companies: EnerNOC, Gridpoint
- Users: Utilities / grid operators and commercial businesses
Analytics, Billing, Operations – Analytics, billing, and operations software enables utilities and end-users to monitor, manage and predict energy usage
- Selected companies: Nexant, EcoFactor
- Users: Utilities / grid operators, commercial businesses and consumers
Local / Home Area Networking Providers – Local / home area networking providers are localized systems of hardware and software that enable smart homes and buildings
- Selected companies: EnTouch, Alarm.com
- Users: Commercial businesses and consumers
MARKET SIZE AND GROWTH
M2M is a broad term that includes hardware, applications and services. While the definition of what constitutes M2M varies across sources, we believe that the overall M2M market is growing in excess of 20% annually. The scalable applications and services layer is growing at over twice the rate of the overall market at 40-50% annually.
- MarketsandMarkets estimates the global M2M market expected to grow at a 26% CAGR from $27.0 billion in 2012 to $86.0 billion in 2017
- According to ABI Research, M2M application enablement platforms (AEPs), defined as software designed to provide core features to multiple M2M applications, is expected to increase at a 47% CAGR from $169 million in 2011 to $1.7 billion in 2017
- ICT Market Review estimates that M2M wireless data services will grow at a 45% CAGR from $3.2 billion in 2011 to $14.0 billion in 2015
Smart Grid / Energy Monitoring Market
While an exact market size is difficult to pinpoint, we believe that the statistics below help to frame out the market opportunity for M2M solution providers in the smart grid / energy monitoring space and triangulate to an annual growth rate in excess of 20%:
- According to Transparency Market Research, demand for smart electricity meters is expected to increase at a 19% CAGR from 25 million units in 2011 to 148 million units in 2018, resulting in a market size increase from $4 billion in 2011 to $20 billion in 2018, 17% CAGR
- Utilities Analyses, Inc. estimates the North American grid analytics market to grow at a 33% CAGR from $215 million in 2011 to $902 million in 2016
- Pike Research forecasts home area networks to grow at a 31% CAGR from $127 million in 2012 to $1.1 billion in 2020
We believe that the market growth outlook outlined in the original M2M memo in 2008 still holds true today. Although M2M adoption has occurred more slowly than we originally anticipated, except for in a few verticals (e.g. fleet management), we believe that the market opportunity today is even larger and is well-positioned for continued growth. Key adoption drivers are outlined below:
- Demonstrable benefits drive demand
- Accenture reports that a North American energy executive estimates that each dollar invested in smart grid analytics can result, conservatively, in an estimated $40 to $70 in annual savings per electric meter
- McKinsey estimates that the identifiable ROI from demand response and building automation programs could result in a reduction of commercial electric consumption by 31% and industrial electric consumption by 18% by 2020
- Multiple networks help rationalize costs
- Enhanced connectivity infrastructure from LTE and 3G networks offers higher speeds and lower latency to enable more complex (e.g. underground), high-touch and mobile M2M solutions
- Legacy 2G networks serve lower bandwidth solutions at reduced costs
- Broader technology innovation increases use cases
- Cloud and mobile “native” applications enable a wider user base through expanded business use cases
- For example, the regional manager of a fast food franchise can monitor energy usage across multiple locations from an iPad while in transit between stores
- Greenfield opportunity exists in commercial buildings
- According to Continental Automated Buildings Association (“CABA”), ~90% of North American smart meters have been installed in residential buildings, which represents a significant opportunity in the commercial building market
- CABA estimates that ~80% of non-residential North American buildings do not have building management systems (“BMS”) in place to efficiently manage and automate energy operations
- The smaller the size of the commercial building, the less likely it is to have a BMS, which indicates opportunity for a SMB commercial solution
- Public/private partnerships catalyze investment
- Smart Grid Investment Grant (SGIG) program, a public/private partnership between the US Department of Energy and private investors, provided $7.9 billion in smart grid investment grants since October 2009
- The program has installed 14.2 million smart meters, which represents ~30% of the 46 million smart meters deployed nationwide
Large conglomerates. There are numerous large conglomerates that currently have a strong foothold in smart grid / energy monitoring. Examples include utility software (Oracle, SAP, Teradata, IBM), advanced metering (Johnson Controls, Toshiba, GE, Honeywell), distribution automation (ABB, Schneider Electric, Siemens), home area network providers (Microsoft, Google), and communication / networks (Cisco). Although we don’t know the scale and amount of resources devoted to the space, we can infer from the M&A activity that conglomerates are willing to buy innovation and move into new areas as the market continues to grow in size.
Challengers. This group consists of newer companies with specialized technology to serve the smart grid / energy monitoring vertical. The advantage that challengers have relative to large conglomerates is that they are not tied to legacy products, partnerships, costs and other internal issues that often plague large enterprises. The downside is that many customers, especially utilities, are conservative in nature and are less inclined to take risks, perceived or actual, with a new technology or undercapitalized company.
Partnership driven. Through a combination of a fast-evolving industry, complex technology and customers with established relationships, a partnership-heavy approach has developed. For example, to be viable to a large percentage of the market, an analytics software provider needs to be compatible with various communication networks, smart meters, distribution automation solutions and other software providers. This dynamic is reflected in Silver Spring Networks’ having ~75 commercial partners, many of which with duplicative offerings.
The smart grid / energy monitoring vertical is a large and growing market with positive momentum and identifiable customer ROI in which Catalyst should consider an investment. We can leverage Catalyst’s expertise in both wireless and SaaS to pursue M2M software application opportunities.
The following are a few areas where we believe Catalyst could participate:
Energy conservation applications for medium-sized businesses and commercial buildings: As energy efficiency offerings proliferate for large companies and individual homes, medium-sized businesses and commercial buildings are largely forgotten. Medium-sized businesses seek cloud-based applications that are user-friendly, proactive (e.g. monitoring, alerts) and affordable. The US Small Business Administration estimates that small businesses spend ~$20 billion annually on energy costs, which represents a large market opportunity for a medium-sized business focused solution. As it relates to commercial buildings, we see opportunity to sell BMS solutions into the underpenetrated medium-sized commercial building market to efficiently manage and automate energy operations.
Analytics, billing and operations software: We believe that analytics, billing and operations software is an attractive product category within the broader smart grid / energy monitoring vertical. These software applications enable utilities and end-users to monitor, manage and predict energy usage. The value proposition of these next-generation applications is the actionable insight achieved by bringing together the wealth of data coming from new smart meters, sensors, control systems and other grid technologies combined with customer, workforce and business process data. Given the complexities and pace of innovation, we believe that cloud-based challengers can compete effectively with Oracle and SAP in the utility market as well as incumbents in the industrial, commercial and residential markets.
SMART GRID / ENERGY MONITORING MARKET MAP
We identified a universe of ~100 private companies operating in the smart grid / energy monitoring vertical. Given Catalyst’s investment strategy, we have distilled the universe to ~40 relevant companies. We excluded companies with a focus on networking communications, consulting services and on-premise software. The M2M software application provider market map that follows is grouped by product focus within the smart grid / energy monitoring vertical and organized along a horizontal continuum of targeted end-users.
SMART GRID / ENERGY MONITORING MARKET MAP