It’s not every day that you see an opportunity to get in on the ground floor of a whole new industry, but smart grid technology is just that.

The “smart grid” term has come to encompass a whole array of different technologies, creating some confusion about exactly what it is. It doesn’t help that the publicly-traded companies in the sector are mostly young, with cheap stocks regarded as speculative.

What investors should not be confused about is the outlook for this sector, which is nothing short of spectacular.

In the U.S., it took only 25 years for commercial mobile phone technology to evolve from mainly business users of Motorola’s “brick” to everyone over the age of four owning one. In the same way, the early trial programs of smart grid technologies today will become ubiquitous, only it will happen much more quickly.

The reason is simple: The cheapest watt is the watt you don’t have to produce. Eliminating waste is by far the low-hanging fruit in the energy sector.

The waste in our electrical grid is enormous. According to the U.S. Energy Information Administration, over half of the energy we generate is wasted in generation and transmission. For example, coal and nuclear power plants need to keep running even when demand is lower than their generation, because it takes days to start plants up and shut them down.

Worse, everyday waste from unused but running lights and appliances can force utilities to start up “peaking” power plants (usually powered by natural gas) in order to meet peak demand loads that could be met without them if the waste were eliminated.

Energy is wasted from one end of the electrical grid to the other. Inefficient generator turbines, wasted heat from power plant cooling cycles, transmission lines, inefficient motors using the power, and dumb appliances all contribute to the losses.

In many ways, the smart grid is about reducing wasted energy. That’s not just good policy; it’s also good business. Deploying energy saving technologies usually pays for itself quickly, and always pays for itself in the long term. It also cuts down on greenhouse gas emissions from generating unneeded power.

Smart grid technologies are going to receive a nice boost from the U.S. stimulus package as well. The Senate bill includes $11 billion to improve the electric grid.

Between the cost benefits, the lower emissions, and federal funding, investing in smart grid technologies now is a no-brainer.

I fully expect that within 20 years, today’s electrical grid architecture will seem unbelievably wasteful, and all of our end-user devices incredibly dumb. The smart grid renaissance has only just begun, and investing in it will be a long-term home run.

Let’s take a look at a few of the companies that will profit from the smart grid transformation.

Utilities Getting Smart

The utilities’ efforts to make the grid smarter began in the US around 2003, when several operators began replacing their old mechanical meters with electronic “smart meters” which communicate with the utility’s head office, a technology known as Advanced Metering Infrastructure (AMI).

Smart metering can give customers immediate feedback on their own energy consumption, letting them know when power is expensive and in short supply, and when it’s cheap and in excess. By moderating their usage of it accordingly—say, doing laundry at 9 pm instead of in the middle of a hot, high-demand day—customers will save themselves money.

At the same time, the utility will save money by not having to produce more peak demand power than necessary. Smart meters can allow utilities to shut down part or all of a customer’s power consumption when grid demand is high, and customers agree to do without the power in exchange for lower rates.

Smart meters communicate usage data to the utility electronically, eliminating the need for “meter maids” to physically visit each meter, or the need to estimate usage when the meter maid couldn’t get to the meter.

But that’s just the beginning. Smart meters also enable a host of other technologies. Smart appliances can take orders from smart meters about when and how to run, and when not to run. Likewise, smart sockets can control the usage of dumb devices plugged into them. The utility can quickly pinpoint service outages, and restore service more quickly.

Smart meters also allow customers with solar, wind, and micro-hydro systems to sell power back to the grid, thus enabling the deployment of more distributed generation. As plug-in hybrid vehicles become more common, smart meters will be able to use them as distributed storage, drawing down a small part of their battery power by agreement of the vehicles’ owners. In time, such “vehicle-to-grid” power technologies could be the “holy grail” of renewable energy, by giving the grid a way to store energy from intermittent sources like wind, then use it later when it’s needed.

Utility operators in Austin, San Francisco, and Boulder have all embarked on long term programs to replace their meters, with other cities soon to follow.

California utility operator PG&E has the nation’s most ambitious program. Currently deploying new meters at the rate of 10,000 per day, the company aims to install 10.3 million new meters at the nearly 6 million homes and businesses across its entire grid by 2011. The utility estimates that roughly 90% of the $1.7 billion cost of the project will be offset in savings over its 20-year life, of which over half will owe to meter-reading savings.

The rest of the country is watching PG&E closely. If their rollout is successful and the cost benefits are clear, we should expect the rest of the country’s utilities to soon follow suit.

Smart Players in Smart Grids

There aren’t many real “pure plays” in the smart meters themselves. The meters deployed by PG&E are made by diversified giant General Electric (NYSE: GE) and privately-held Swiss company Landis+Gyr.

But there are some side plays on the PG&E rollout, such as utility infrastructure company Esco Technologies (NYSE: ESE) whose subsidiary Aclara RF Systems Inc. provides a secure radio transmission network for the smart meters to communicate with the utility’s head office.

Another smart metering company is Green Chip Stocks favorite Itron, Inc. (NASDAQ: ITRI) which provides metering, data and software for automated meter reading. Itron recently announced a deal to use communications technology by Digi International (NASDAQ: DGII) in its advanced metering network.

There are also the smart grid companies whose technologies will ride on top of the smart metering networks. Echelon Corporation (NASDAQ: ELON) makes a variety of devices that will put the “smarts” into everything from air conditioners to light switches, enabling them to communicate with each other and with the grid operator. Comverge, Inc. (NASDAQ: COMV) provides demand-response and energy management technology that allows grid operators to better manage peak and baseload capacity. A similar play is EnerNOC Inc. (NASDAQ: ENOC) whose technology allows utilities to remotely manage and reduce electricity consumption across their networks.

Even Google (NASDAQ: GOOG) is getting into the smart grid act, with a new iGoogle gadget called PowerMeter. The application will display power usage per appliance in real time, so that customers can see where their power is going. The company cites research that indicates the feedback to consumers encourages them to cut 5-15% of their energy usage by changing their behaviors. Google is offering an open-source standard for collecting and reporting that data over the Internet, and encouraging companies in the smart grid sector to conform to their standard.

Smart grid companies were punished along with everybody else in the market meltdown, but have stabilized and started working their way back upward. Over the last four months, most of the above-mentioned companies have gained 20-50%, while the rest of the market continued to struggle and fall. The time is now to jump on the smart grid and start picking up some smart profits!

Until next time,Chris