Energizing Defense Contractors

Energizing Defense Contractors

February 17, 2010

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief

Defense contractors aren't exactly shooting for the stars. But they are aiming for a greater share of the ever-changing energy business. Their scientific and technical expertise coupled with their well capitalized businesses is giving them an inside track into the world of intelligent utilities, green energy and emissions reductions.

Most of those spacecraft and weapons makers have long had their fingers into energy-related businesses, although they reason that that market is now ready to expand. And while those contractors certainly have the money and brains to make a go of it, they are mindful that a lack of commitment has caused some past forays to remain dormant.

"We see energy as one of the significant but related new markets that we can get into," says Tom Grumbly, vice president, Lockheed Martin Energy & Environmental Services. "We have this experience and we see a lot of parallels. We came to the conclusion three or four years ago that it was going to be a disruptive time in the energy world and if we were going to make a move to get into an industry with an established set of players, then now is the time. Eventually other defense contractors will see opportunity."

Even Lockheed Martin describes its risk-taking in the energy space as well calculated, or the willingness to "get their feet wet." In its case, the $45 billion conglomerate has a tiny sliver of its portfolio in the energy sector. But it does have high hopes that the company will play a greater role there and particularly as the government enters into international carbon contracts and as the emphasis on grid security blossoms.

Others such as BAE Systems, Boeing and Raytheon are also getting into the space. Each company, though, must choose for itself how it would like to reassign its brainpower and financial wherewithal. It's about understanding the evolution of the energy business and channeling resources to the proper adjacent markets.

Lockheed Martin, for instance, got its start in energy efficiency after buying up a related business. It now earns annual revenues of $100 million by performing audits and making retrofits to major enterprises and government agencies.

BAE Systems, meanwhile, is participating with San Diego Gas & Electric and 25 other companies to develop San Diego's smart grid demonstration project. Using the name Balance Energy, the contractor will provide overall system engineering that will interconnect a greater percentage of renewable energy as well as use automated sensors to manage the flow of electrons across the wires.

"This project will transform the way smart grid deployments occur from here on," says Terry Mohn, vice president and chief innovation officer for Balance Energy. "When combined with variable generation from solar and wind, we can balance energy demand with available supply."

Ripest Fields

On the surface the defense contractors have what it takes: a wealth of intellectualism and capital as well as critical experience in energy fields. The overarching goal of U.S. energy policy, however, is to meet the growing need for energy in a cleaner fashion. That objective requires a specific set of skills that the spacecraft and weapons makers have yet to demonstrate on a commercial scale.

And while the stars are aligned, the dream of an energy renaissance is not guaranteed. It's about more than having the essential financial resources. It's also about having staying power and surviving the continuous reallocation of stretched budgets. Take Boeing, which has been involved in array of projects from windmills to hydrogen to nuclear to coal gasification: Some of its ideas panned out but never flourished.

Lockheed Martin, too, is testing the waters. It, for example, has a rich history monitoring changes in the weather for NASA through the use of satellites. The same technology, it adds, could eventually be used to oversee carbon emissions. Likewise, it's negotiating with Arizona and California to build commercial-scale solar plants -- a skill that it says it has from powering its satellites through solar energy.

"The past is littered with examples of defense companies trying to diversify," says Rob Stallard, an analyst with Macquarie Capital, in a Seattle Times story.

Risk certainly abounds. But so does opportunity. Some ventures, in fact, have the political and financial backing of state and national governments. The federal stimulus plan enacted in February 2009 is allocating $4.5 billion to the intelligent utility and most of the major defense contractors are angling for a piece of it.

It's potentially a natural fit: If the defense contractors can protect this country's most valuable secrets, then they can help insulate both the public and private sectors from attack. Raytheon, for example, says that it can protect its global customers' critical information and infrastructures from the most complex threats. It is in the process of hiring several hundred highly skilled workers to help monitor the networks.

Lockheed Martin, which is part of a consortium that won $70 million in stimulus funding, is also providing cyber security. It is all necessary, it notes, to safeguard a robust grid that is now able to accommodate more distributed generation and to perform evermore functions such the facilitation of two-way communications.

"We are taking a lot of the technology on the defense side and moving it over to the energy space," says Lockheed Martin's Grumbly. "A number of major utilities and engineering companies have been surprised by the kind of cyber security we can provide."

The energy sector's rapid evolution is attracting several well-funded and highly schooled businesses. Defense contractors are among them. They are not betting the farm. But those companies are hoping to extend their reach into some emerging and promising fields.