RocketCap Smart Grid Stock Index: Annualized ROI Through 5-28-10

The chart above shows our index since inception on 3-13-09. The chart also shows the sub-indexes for vendors and utilities, the PUI utility ETF and the S&P500 Index for comparison. Our vendor index remains the leader. Note that our IP leaders for smart grid technology are well represented in our index.

Dr. Ruth Fisher, who’s a specialist in IP analysis and competition, and I decided to find out. This is one of those deals in which one says “If I had any idea what this would lead to….”  We compiled an initial list of 23,000 US patents from an online, subscription database called WIPS. We filtered them down to 3000 patents which we further analyzed. We (mainly Ruth)  literally read the summary page and first claim for all 23,000 patents. By our readings we placed each patent into at least one NIST standard technology category. Then we sliced and diced the categories, patents and owners.

All of this work was designed to identify the IP leaders in smart grid technology.

The results will surprise you. Read the report here:

Who Is the Smart Grid Technology Leader?

Performance of RocketCap Smart Grid Stock Indexes

We see that all these performance measures are highly correlated, but RSGSI_V  has had superior ROI over the time period from 3-13-09 through 3-31-10 (266 trading days).

We think the stock market is a good system for measuring value. We also know our RSGSI includes both power utility companies publicly committed to smart grid investing, and also vendors to those utilities. But we thought there might be a difference between utility and vendor valuations, reflecting a market estimate of who will “win” in future. So we refined our index into two component indexes to dive deeper. We now have these indexes to compare:

• RSGSI     = Rocketcap Smart Grid Stock Index
• RSGSI_U= Rocketcap Smart Grid Stock Index of utility companies
• RSGSI_V= Rocketcap Smart Grid Stock Index of vendor companies to the utilities

The utility and vendor indexes are simply comprised of the utilities and vendors which make up the RSGSI, so that

RSGSI=(9/21)*RSGSI_U  + (12/21)*RSGSI_V

• ^GSPC   = S&P 500 Index ETF
• PUI= PowerShares Dynamic Utilities ETF consisting of power utility firms. The top 10 holdings of this ETF, which comprise 46% of it’s whole market value, has only one utility from our own RSGSI (SRE-Sempra Energy). Those top 10 holdings range from 3.02% to 5.33%, with SRE at 5.25%.

Consider this graph, which shows the annualized returns for each of these indexes since 3-13-09, a 206 day time period.

The beginning of this time period corresponds with the market bottom last March (would we have invested then!). The graph shows the wild volatility of returns for the three months ending in June. The returns settled down after June 09. Now let’s consider the various cross correlations:

From the graph of returns and the correlation matrix, we can make these informal conclusions:

• RSGSI is highly correlated with S&P500, and their ROIs have tracked well.
• RSGSI_U and PUI are highly correlated and RSGSI_U has had superior ROI
• RSGSI_V and PUI are weakly correlated and RSGSI_V has had superior ROI to PUI
• RSGSI_V has best overall ROI of all the indexes, particularly superior to the utility indexes, RSGS_U and PUI

These vendors have so far gotten the greatest market valuations, yet have minimal implementations (sales) of Smart Grid systems! Thus, this value may reflect the market’s future valuation, including that of the vendors’ Smart Grid intellectual property.

This is not rigorous analysis, but it is suggestive. The innovation value of the Smart Grid vendors may be key to Smart Grid evolution.

Further Reading and Explanations

Introduction, definitions and meaning of the RocketCap Smart Grid Stock Index©

What annualization means

RSGSI for 10-30-09: 164 days annualized ROI

RSGSI Portfolio Correlation Matrix: 45 Days Ending 10-30-09

Further Reading and Explanations

Introduction, definitions and meaning of the RocketCap Smart Grid Stock Index©

What annualization means

RSGSI for 9-30-09: 142 days annualized ROI

RSGSI Portfolio Correlation Matrix: 45 Days Ending 9-30-09

Further Reading and Explanations

Introduction, definitions and meaning of the RocketCap Smart Grid Stock Index©

What annualization means

RSGSI for 9-18-09: 134 days annualized ROI

RSGSI Portfolio Correlation Matrix: 45 Days Ending 9-18-09

Further Reading and Explanations

Introduction, definitions and meaning of the RocketCap Smart Grid Stock Index©

What annualization means

RSGSI for 9-11-09: 129 days annualized ROI

RSGSI Portfolio Correlation Matrix: 45 Days Ending 9-11-09

Further Reading and Explanations

Introduction, definitions and meaning of the RocketCap Smart Grid Stock Index©

What annualization means

The Original Grid (OG), in all its aging glory, consists of a remarkably large number of physical objects. These physical objects in the OG have been counted to a reasonable extent. However, it’s very important to plan for the number of elements in the Smart Grid (SG) for two reasons, one of which is surprising.

First. the SG will overlay the OG with more physical objects, almost all of which will be sensors/actuators, and network communication system elements such as WiFi or cellular modems. All of these physical and logical entities require planning and operational management by the utility firms. The physical stuff in the OG is mostly large, and there is a lot of it. The electronic network and sensors of the SG are much smaller and there’s even more of it. Second, the surprising and very important point is that all of these sensors will require a unique logical address in the Internet Protocol (IP), and these IP addresses are already rapidly being consumed by the non-grid world.

We will explain the very real scope of the problem and what can be done to solve it.

Scope of the Grids

Let’s see the scope of these two grids by examining the table below, and then consider the address limits again.

The table is organized to roughly enumerate the numbers of large objects in the OG and then to estimate the numbers of logical elements required to fully monitor and control the OG using the SG overlay. So we list the real objects and also “attach” SG sensors, add it all up and see where the numbers lead us.

First, according to Erik Udstuen, a general manager at GE Fanuc Intelligent Platforms, for a typical OG utility with 5M meters, there would be only 30,000 sensors for its whole OG. We note none of the OG meters has a sensor, so the sensors are for conventional utility components, as implemented in SCADA systems (“Supervisory Control and Distribution Automation”), by example. Of course, the number of sensors will rapidly grow with the addition of SG functions and Smart Meters.

Next, let’s approzimate the overall number of big objects in the OG in the USA. According to the list shown above, the entire OG has at least 600k large objects. If sensors are attached as indicated in the table, the whole SG could operate an additional 2.8M sensors each with a unique IP address.

Finally, focus on the edge of the OG, where customers attach things to power. Our estimate that there will be one Smart Meter per household and 100M households is straightforward. Then we assume one sensor per Smart Meter. We also make some crude approximations to the potential numbers of Appliances and Plug-In Vehicles. These are all low. For example, we assume only 4 appliances per household to get 400M smart appliances, each with 1 sensor.

If we add the number of envisioned sensors for the OG with SG overlay and the edge of OG sensors, we get about 505M sensors, which is a low estimate of what is likely to evolve. Keep in mind these numbers apply to USA alone. The rest of the developed world adds it’s own similar growth.

Why the Numbers Matter Now

Here’s why the numbers are so important: the world wide internet is literally running out of distinct addresses for connected objects, even without consideration of the Smart Grid. These “IP addresses” must uniquely identify every physical object that communicates on the internet, such as PCs, routers, and cell phones, cable modems, set top boxes. From a grid viewpoint, now include appliances, like a coffee maker, attached to the OG but being programmable through the web to have our coffee ready upon arrival home.

Given the relentless growth of the web, the “Internet of Things” is literally limited by a lack of sufficient IP addresses for world wide growth.

Using the currently installed internet protocol IPv4, only about 4B objects can attach to the internet. This is fewer than the expected number of cell phones and PCs to attach, so the scope of the problem really hits home.

Help is on the Way!

Actually, help has already arrived. Network engineers have known for many years the currently installed internet protocol, IPv4 would finally be unable to address all the attachments desired for the internet, even without the SG. So they developed a new protocol and tested it. The current version, IPv6 is ready for installation and is being selectively deployed commercially. IPv6 offers many important improvements over IPv4, most important for us being the number of address bits.

See the summary table:

The address space for IPv6 is truly stunning. Using IPv6, every grain of sand on earth can be addressed!

The catch is this: any small to medium firm will have to spend about $2M to install new equipment and software to process IPv6. This will be a process not familiar with utility IT staffs. So the reasons to use IPv6 by a specific utility firm, from its parochial point of view, need be substantial. It’s like the Social Security dilemma: the government knows it will run out of money, but refuses to deal with the problem in advance of the pain.

The electric utility industry won’t need to deal with millions of installed SG devices in the next 5 years, but it certainly will over time. But if they use IPv4 now and transition later, the project will be much more complex. Meanwhile, the industry will have foregone many other communication and networking advantages from IPv6 (such as very strong security).

We will follow this issue with interest.