Navigant Research Blog

Honeywell Steps into Smart Grid Fray with Elster Acquisition

— July 29, 2015

Honeywell’s purchase of smart meter maker Elster is a sign that the smart metering business still has some attractive runway for companies willing to endure the somewhat lengthy procurement process of utilities. The $5.1 billion deal gives Honeywell a solid global competitor for the next wave of smart grid investments.

The Deal

Honeywell is purchasing Elster from its current owner, Melrose Industries, a British investment firm that specializes in buying manufacturing businesses, turning them around, and selling them for a profit. In this case, Melrose did that after paying approximately $2.3 billion for Elster in 2012, suggesting a profit of nearly $3 billion. Melrose said it generated a 33% internal rate of return in the 3 years since acquiring Elster.

Here is what Honeywell is getting by purchasing Elster: a global manufacturer of gas, electricity, and water meters; communications equipment; and software solutions, including data analytics. It is also taking on about 6,800 employees of Elster, which is based in Mainz-Kastel, Germany. The company has operations in 39 countries, including the United States, the United Kingdom, and Slovakia. Honeywell is also taking on about $1.4 billion in pension liabilities.

Fits with Plans

While this move raises some eyebrows for its premium price, the acquisition fits with Honeywell’s stated plans last year that it would target some $10 billion to buy companies over the next 5 years. And while the smart meter business has slowed, particularly in the United States since federal stimulus money dried up, Elster has been active, picking up business in France as part of ERDF’s deployment of 35 million meters, and scoring a deal with CFE in Mexico earlier this year for about 300,000 meters. In addition, earlier this year, Elster launched an enhanced gird software platform called Connexo that integrates utility workflows, business processes, and grid data from multiple devices and vendors into a unified solution. According to Honeywell, Elster is attractive for several reasons: its high- and low-temperature burner products and residential heating components complement Honeywell’s existing business within its Environmental Combustion and Controls group; Elster’s presence in high-growth regions aligns with Honeywell’s strategy; and the existing Elster customer base presents an opportunity to cross-sell legacy products.

For Elster and its employees, the deal makes sense. Honeywell already has some synergies in the gas sector, and is no stranger to the way the utility industry operates. Elster’s electricity and water businesses give Honeywell a broader set of technologies it can leverage as those sectors grow in ways different from gas. Nonetheless, Honeywell will be facing some experienced meter manufacturers. Companies like Landis+Gyr, Itron, and General Electric are formidable global players, not to mention lesser known Chinese manufacturers, such as Holley Metering, that want to move beyond their domestic markets.  By acquiring Elster, Honeywell has the vehicle to be competitive now, and with skill can stay among the leaders as the market evolves.

 

Smart Grid Deployments Moving Ahead in Latin America

— June 3, 2015

Smart grid deployments in Latin America have struggled to gain traction in recent years compared to North America or Europe. But that is starting to change. Significant projects in two countries—Brazil and Mexico—are moving ahead, with vendors being selected in recent weeks.

Brazil

Eletrobras, Brazil’s leading electric utility, has chosen several technology vendors for a smart grid project that involves six of the utility’s distribution subsidiaries. The utility selected Itron’s new OpenWay Riva solution that enables a single network to support two communications technologies (radio frequency and power line carrier) in the same device. The result is an adaptive system that can dynamically choose the best path for communicating based on network conditions, type of data, or application requirements. The solution is supported by Cisco’s IPv6 network infrastructure.

Other vendors selected for the Eletrobras project include Siemens, Telefónica, and Telemont. Approximately 115,000 endpoints are expected to be deployed at the six subsidiaries in the states of Alagoas, Piaui, Acre, Rondonia, Roraima, and Amazonas. The goal of the project is to reduce theft of service, a chronic problem in Brazil. Full implementation of the project is expected to be complete in 2017.

Mexico

In Mexico, Comisión Federal de Electricidad (CFE), the state-owned electric company, has selected a number of vendors for its smart grid project in Mexico City’s Central District. Silver Spring Networks was chosen to provide its IPv6 network, which enables connectivity to cabinets that house a group of centralized meters. In addition, vendors chosen to support the project include Elster and Tecnologias EOS. Elster will provide its EnergyAxis software and field network devices in addition to its REX2, A3 ALPHA, and mREX2 smart meters. A total of 300,000 meters are expected to be deployed, according to Elster. Similar to Eletrobras, the goal of CFE’s project is to reduce theft of service, which can be substantial. Nearly 15% of CFE’s total electricity production was lost due to theft or defaults in 2013, according to the utility, and in some areas of Mexico City, that figure surges to more than 35%.

Theft Reduction and More

Clearly, the main driver for smart grid deployments in these two projects is the same: theft reduction. But beyond that, the technologies being deployed lay a foundation for additional smart grid applications. For instance, Eletrobras has indicated it will add outage detection and analysis along with improved transformer load management. And while these two projects do not necessarily portend a wave of similar deployments, they do represent a next step toward grid modernization by leading utilities and are likely to be imitated by others across Latin America in coming years.

 

Doubts Surface About U.K. Smart Meter Rollout

— March 26, 2015

Serious doubts have surfaced about the rollout of smart meters in the United Kingdom, with a key government committee raising the issue to a new and alarming level. In its most recent report, the Energy and Climate Change (ECC) parliamentary committee concluded the program “runs the risk of falling far short of expectations. At worst it could prove to be a costly failure.”

The smart meter rollout is large, expensive, and complex. By 2020, a total of 53 million electric and gas meters are to be installed in some 30 million British homes and small businesses. The estimated cost is $16.2 billion, which is to be passed on to consumers. The cost is supposed to be offset by an estimated savings of $25.5 billion, in part from greater energy efficiency. One of the more complex features of the rollout is a communications infrastructure that aims to coordinate meter data among the energy suppliers, network operators, and authorized service providers. A government-appointed company called Smart DCC is charged with setting up this infrastructure.

Shaky Foundation  

The rollout is still in its early stage, called the foundation phase. The committee’s report expresses disappointment with several unresolved issues to this point: meters unable to communicate in multiple occupancy and tall buildings; interoperability issues among different types of meters and in-home displays; a shortage of installation engineers; network rollout delays by Smart DCC; and delays in public engagement around the program. So far, about 550,000 smart meters have been installed and are in use, which is about 1.2% of all domestic meters under management by the country’s largest energy suppliers.

The start of the next phase, called the mass rollout, has been delayed twice, as noted in a previous blog. As of now, the mass rollout is to begin in the fall of 2016. However, with this latest government report and the ongoing technical issues, that start date could slip once again.

Eventually, smart meters will be deployed widely in the United Kingdom. But given the complexities involved, it’s a good bet that the 2020 target will be missed—and perhaps by a wide margin.

 

ConEd Details Its Smart Meter Plan

— March 11, 2015

Con Edison, also known as ConEd, one of the largest U.S. investor owned utilities, has provided details of its planned rollout of smart meters over the next several years. Contained in ConEd’s recent rate filing with the New York Public Service Commission, the plan reflects a comprehensive strategy to make smart metering the backbone of future customer engagement, as well as improve outage restoration, enhance operational performance, and ease the integration of distributed energy resources such as rooftop solar.

The utility envisions an advanced metering infrastructure (AMI) deployment over 8 years at a cost of about $1.5 billion—about $8 million this year, $69 million in 2016, $174 million in 2017, $317 million in 2018, and $306 million in 2019. Projected spending details beyond that have not been made available. The approximate number of meters involved is 3.4 million.

Aligned With the Vision

Con Edison’s AMI deployment plan also aligns with the state of New York’s wide-ranging Reforming the Energy Vision (REV) initiative, which was announced last year by Governor Andrew Cuomo. The REV initiative is aimed at transforming the state’s electric grid into a more customer-oriented industry, featuring “market-based, sustainable products and services,” with an emphasis on enabling clean distributed power generation. Smart metering, with its two-way communications functionality, is a key technology for facilitating this type of flexible, modern grid.

Even though smart meters have been around for a number of years, no deployment lacks naysayers, nor controversy. Con Edison is likely to face opposition from consumers who have concerns over health risks, privacy, and the accuracy of the data smart meters provide—concerns the industry says are unfounded.

Take Your Time

For smart meter manufacturers and infrastructure players like Landis+Gyr, Itron, General Electric, Elster, and Sensus among others, the ConEd deployment represents a significant potential opportunity. The utility is expected to announce the bidding process in the coming weeks. Given the large scale of this project, it is possible the utility will choose several vendors or a primary contractor and various partners.

At 8 years, the anticipated timeline for ConEd’s smart meter deployment appears prolonged. Other large U.S. utilities—such as Pacific Gas & Electric, San Diego Gas & Electric, Oncor, and CenterPoint Energy—have rolled out smart meters in 4–6 years. But ConEd may be playing it safe, giving itself enough of a time cushion to overcome the inevitable hurdles and detours.

ConEd’s smart meter plan hinges on regulatory approval, but regulators are inclined to be in favor, especially since the deployment fits in with the state’s REV initiative. And despite the considerable costs involved, smart meters provide benefits to both customers and the utility, and tend to outweigh any drawbacks.

 

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