Utilities and the Internet of Things

According to the Electric Power Research Institute, US electric utilities have a $1.3 trillion opportunity to cut operating costs over the next decade by adopting technologies and processes enabled by the internet of things (IOT). We heard similar estimates at the Energy Information Administration’s annual conference last summer.

Gauging the scope, timing and magnitude of these potential savings will be one of my primary goals at the Edison Electric Institute’s annual financial conference this week.

Access to relatively inexpensive sensor content, data storage, processing power and high-capacity telecom networks has enabled a new era of machine-to-machine communication that can unlock significant efficiencies for industries rooted in the physical world. As we explain in our subscriber-only report Telecom Titans and the Rise of the Machines, the rollout of 5G communications networks over the next few years will enhance remote monitoring and other long-distance IOT functionalities.

As one of the least digitized major industries, gas and electric utilities can leverage powerful IoT applications to optimize their operations and reduce costs through predictive maintenance and other opportunities. Today, the industry collects less than 2 percent of the potential data generated by a typical power plant.

These investments could reduce unplanned power outages dramatically, as plant operators would be able to forecast when different components will need to be replaced. Such a program would save millions in maintenance expenditures and general operating costs over a facility’s lifetime. Older plans would run for longer, while managers could head off potential concerns at newer facilities much sooner.

Lower costs would enable utilities to step up investments in system enhancements that reduce customer rates while increasing the rate base that underpins earnings and dividends.

At the Edison Electric Institute’s 2016 financial conference, much of the conversation focused on the transition from inefficient coal-fired power plants to lower-cost gas-burning facilities and renewable energy. Utilities also highlighted the growing importance of tech customers in the enterprise market. Opportunities related to IOT applications were more of a side topic.

The Trump administration’s war for coal likely will loom large at this year’s conference—and we’ll share our key takeaways and best ideas related to federal policies. But we won’t give short shrift to how the utility sector could benefit from the rise of machine-to-machine communications.

Conrad’s Utility Investor subscribers can look forward to my exclusive takeaways and best ideas from the Edison Electric Institute’s 2017 financial conference later this week.

There’s a reason this report is so hotly anticipated. On-the-ground intelligence from meetings with management teams has resulted in measurable outperformance, with my top picks from each of the past two years averaging a total return of more than 30 percent and outperforming the S&P 500 and the Dow Jones Utility Average.

One of the utilities I’ve highlighted on my schedule stands out as an early adopter of money-saving IOT applications through a long-term partnership with General Electric (NYSE: GE) that will leverage the latter’s Predix software. This utility also would benefit immensely from some of the Trump administration’s proposed policy changes. Talking to management one on one will be the final part of our due diligence process.

The company in question has already made significant strides in improving its nuclear power plants’ utilization rates and appears poised to unlock similar efficiency and reliability gains through investments in its grid.

Capital expenditures of this nature will be critical to driving returns in service territories where regulators have proved to be stingy with rate increases.

Another utility on my watch list for this year’s conference trades at a valuation where investors might want to take some money off the table. Even though the company continues to execute and meet its guidance, the stock’s upward momentum has petered out this year, raising the question of whether the next leg will be up or down.

This utility is laser-focused on cutting costs and improving efficiency—and these efforts have contributed to its impressive earnings and dividend growth over the past few years. If the economic benefits promised by the internet of things live up to expectations, this stock could have much more room to run. Our conversations with company executives will go a long way toward determining whether we should raise our buy target or cash out for a 40 percent gain.

Big Yields, Done Right

Buying the right names at the right prices and kicking back while we collect fat dividend checks–that’s what Conrad’s Utility Investor is all about. Even better, some of my favorite picks offer leverage to powerful secular growth trends, including renewable energy, the rise of electric vehicles and machine-to-machine communications.

I don’t want you to miss out on my best investment ideas from the Edison Electric Institute’s annual financial conference. That’s why we’ve taken $100 off a Conrad’s Utility Investor subscription for the next 72 hours. 

Want to try before you buy? Check out a sample issue of Conrad’s Utility Investor to see what you’re missing out on.