A smart grid makes use of coded signals that travel along power lines, much like DSL broadband messages move through the phone telephone. Two plays on the development of a smart grid are Esco Technologies (NYSE:ESE) and Quanta Services (NYSE:PWR).

In a smart grid, the signals allow electric meters to report power consumption automatically to suppliers. At the same time, signals can be sent to customer’s appliances such as freezers and refrigerators to prevent them from cycling on and off at the same time. During low-demand periods when power is the least expensive, dish washers and laundry machines can be run and electric cars can be charged. A smart grid will also allow customers with solar and wind power generators to sell surplus electricity back to the electric company.

The biggest advantage of a smart grid is it can even out the demand for power. The result will be a greatly reduced need for expensive new electric plants, and a corresponding reduction in the use of foreign oil and the production of greenhouse gasses.  The electrical grid that we have now is incapable of carrying the additional energy the country needs from new power sources. 

Germany is already using a smart grid to reduce the country’s dependence on Russian energy.  In the U.S., utilities from Maryland to Los Angeles are also starting to adopt smart grid technology. Because the systems pay for themselves in energy savings within eight to ten years, in time every power supplier will begin to use it. As a result, the outlook for smart grid investment profits is very good.

Esco Technologies (ESE) is a leading supplier of two-way communications systems for electric networks, a successful engineering firm. The company produces systems that communicate with smart meters and many of the devices they control. Esco also supplies software and support services that allow electric utilities to manage their substations, high voltage lines, and other parts of their networks. These internal efficiencies deliver many of the biggest savings from a smart grid.

Esco is also starting to adapt its smart technology solutions for gas and water utilities. Given the grim price and supply outlooks for all energy sources, Esco should have a worldwide market for its products within a few years.

The best indication of Esco’s potential for growth is its first quarter performance. While most companies were falling over the economic cliff, Esco more than doubled its profit. The company is in the right business at the right time.

Another smart tech company that has yet to attract the attention it deserves is Quanta Services (PWR). The company specializes in building advanced grids for the electric power industry. Quanta also provide similar networks and services to the telecommunication and cable TV industries. In the electric power market, Quanta is one of the few companies that constructs complete distribution networks with towers, transmission lines, substations, control systems, and associated equipment.

One of Quanta’s strengths is building different types of networks at the same time using the same rights-of-way.  For example, electric power lines, fiber-optic cables, and natural gas pipelines can be constructed together, and even placed in the same trench. Such multipurpose networks can be put in place at a fraction of the cost of individual projects.

Quanta Services (PWR) technically looks solid and presents a low risk entry point currently, PWR is trading at $23.50. The 20 day EMA is above the 50 day EMA, and it looks like PWR has just broke out of a 6 week long consolidation, and PWR has also moved through a 50% retracement ($34.25) from the August  2008 high of $35.39  and the November 2008 low at $10.56. A buy of PWR in the 22.50-23$ range would offer a low risk entry point. I would use the $30 level as a 3-6 month target on the upside. PWR has a good base of support under it between $20-23. I would stop out of the trade on a close below $20.

Note: I do not own ESE or PWR