The SmartGrid is here to redefine how we generate, deliver, and pay for electricity—and that will be a big opportunity for energy investors in 2016.

The SmartGrid will help utilities reduce demand among their customer base during the very expensive peak periods, and cost-effectively increase their use of renewable energy.

The good news for investors is that there are a lot of small to medium sized public companies creating the innovations that these utilities will have to spend billions of dollars on to modernize the US grid, and keep rates low for customers in a market that’s getting more de-regulated and competitive all the time. (The EIA reported today that wholesale US electricity prices dropped 25-35% in 2015–that’s huge!)

To better focus my research on which stocks to buy, I’m attending the Grid Modernization Forum at the Chicago Conference Centre Jan 19-20 (http://www.grid-modernization-forum.com/).

I’ll be meeting with key technology innovators and executives who are attending to share perspectives on how best to leverage their investments, and take the SmartGrid to the next level.

One of those executives is Tom Hulsebosch, Managing Director of West Monroe Partners, a consulting firm with a division specializing in utilities and the electrical grid. Hulsebosch leads the firm’s efforts in developing smart grid and sustainability programs for utilities.

The SmartGrid is barely out of the womb—new standards, new products, new services are just being developed and fighting for market share—and Hulsebosch is helping this baby grow.

In a 45 minute phone interview last week, he shared some great insights into the investment opportunities happening, and some of the smaller public companies moving to take advantage of them.

What’s exciting to me is that most of this innovation is on the edge of the grid and is happening outside of the utilities’ control—the Market is deciding which new technologies and companies will be King (i.e. the Amazon or Microsoft of their niche) and Hulsebosch says utilities will have to adapt and interface with the New Winners.

Hulsebosch says the innovation is happening at the very far end of the power grid, nearest the customer.

“If you think about the electrical network there are 3 key parts – generation, transmission and distribution. Smart grid innovation is happening around that distribution and distributed energy generation and soon battery power.”

He points to solar and battery storage as an exciting new area, especially in areas where the price for power varies dramatically between night and day.  With a home battery, residential and commercial accounts could charge at night—and in some places in the US, night power only costs 20% of daytime power—and then use that energy during the day, saving a lot of money.

“These advanced rates can enable new innovative products to take advantage of this pricing differential and make the business case for things like home energy storage and solar.” says Hulsebosch.

As an example of home innovation that rewarded investors, Hulsebosch point to Nest, which was bought out by Google in 2014 for $3.2 billion—likely the market cap of the entire thermostat market!

Of course Google wants all the home usage data.  They’re going to learn all about when people are home and away and habits and figure out new ways to monetize that data and insights to customer behavior. So it was a strategic play by Google.

“They created a very cool interface to the thermostat. It’s a learning device that tries to figure out when you’re home or away, automatically saving energy when you’re away.  Nest has integrated motion sensors on their devices all over. which include carbon monoxide and smoke detectors.

“Not only does it provide a great customer experience, but it helps people save money.  They’ve taken a lot of complex concepts and made them easy to use.

Hulsebosch says utilities are incentivizing customers to buy a Nest thermostat. The utility doesn’t have to install or manage the thermostat; it’s being done between Nest, the contractor, and the homeowner.  The utility can send Nest a price or “curtailment” signal into their Cloud application to reduce or increase temperature during peak periods–and Nest makes the adjustment to the thermostat. The customer feels good about being green and in many programs receives a credit on their bill for being part of the program.

This is called ‘Demand Response’ and Hulsebosch says this is a great example of a win-win between an innovative company like Nest, the homeowner, and the utility.

There is an entire public company dedicated to demand response—Enernoc (ENOC-NASD).

Hulsebosch says there are lots of other potential Smart devices for your home that could save you money when a utility deploys smart grid which enables advanced rates.

“You may also have other smart switches so you could remotely control your outlets, your pool pump.  And appliance companies like Whirlpool are providing ways to control when the refrigerator goes into the defrost cycle when energy is cheaper. To really take off these technologies will need to be ‘set and forget’ because most people don’t really care alot about saving on their electricity bill.

“This is where innovation is in the customer interface, like what we see in the Nest products.  This could help make these smart devices in our homes and building more ubiquitous. How do you create ‘set and forget’ solution and take advantage of the new energy paradigm?”

I asked Hulsebosch to voice the new energy paradigm in his own words:

“I would say we’re doing a couple things here that are pretty exciting around the smart grids that are enabling this new energy paradigm.  One is we’re providing customers with near real-time feedback–or a speedometer–on how much energy they are using through the smart meters.  The smart meters enable this feedback to the customer and all the utility to bill customers not only based on how much energy they use, but when they use it.”

“We are seeing more compelling applications that use this smart meter data. And example is where  the utility allows the customer set a budget for how much they don’t want their bill to exceed.  If the application anticipates that the customer’s bill will exceed their desired budget it will flag the customer that at the current consumption level and they will not hit their budgeted amount.

“For larger energy users like commercial and industrial users this could be very helpful on a couple of fronts since excessive energy use could also indicate they have a maintenance issue on a piece of equipment.”

“The second key area that is very exciting is around the integration of Distributed Energy Resources including battery storage and solar into the electric grid at higher levels of penetration.  Customer owned DER is an exciting shift in the new energy paradigm and when we combine this with the new advanced rates I expect to see new innovative solutions and customer business models.”

DER means anybody else besides the utility generating electricity–like homeowners with rooftop solar who sell excess electriticity to the Grid. “Advanced rates” means a highly variable rate structure for electricity during the day, where peak time usage is SEVERAL times more expensive than night time.

Hulsebosch says he never would have guessed that one of the coolest things coming out of the smart grid would be a thermostat.  But he says that’s a sign investors should be looking close to the home for innovation and therefore, capital gains.

“I think the space where we will see new innovative energy technologies and companies is around the smart home/office.  These companies will be creating  a compelling customer interface around their solutions that enable energy savings and the integration of distributed generation.

He says he’s not seeing many new companies come innovating close to the utility. “It is at the edges where I expect to see innovative new companies with investment opportunities,” he says

The edges of the energy market are where I’ve made all my money in the last few years.  In Part II of this interview, Hulsebosch and I discuss other areas of the SmartGrid and mention a couple small caps succeeding in their niche.

PS—You can join me at the conference—register today.