By Michael Liebreich
Chairman & CEO
New Energy Finance
Over the past five years the grid has moved from the periphery of discussions about how to restructure the world’s energy system, to its very heart.
There have been three main reasons why even our daily papers have started enthusing about the smart grid. First, there is a realisation that our current grid infrastructure is completely incapable of accommodating the changes in supply and demand that are coming down the tracks. Secondly, it is acknowledged that the supposed low-hanging fruit of energy efficiency is in fact very hard to pick without better information on usage, and thirdly, the grid sounds like the perfect home for some of the billions of dollars of stimulus funding suddenly being made available for infrastructure projects. At our last count, no less than $32bn of stimulus funding has been earmarked for grid projects around the world.
And what promise of nirvana the smart grid offers! The smart grid will allow users to control their energy use. The smart grid will reduce grid power losses. The smart grid will smooth peak power demand. The smart grid will integrate huge volumes of renewable energy. The smart grid will allow the electrification of vehicles. The smart grid will drive innovation. The smart grid will spur competition. The smart grid will create jobs. The smart grid will usher in a new era of economic well-being. The smart grid will help us cut emissions. The smart grid will save mankind from itself. All hail the smart grid!
Amazingly, not everyone has been converted to the Church of the Smart Grid. The smart grid will cost trillions of dollars, say the dumb grid fundamentalists. Consumers aren’t begging for a smart grid. There is little evidence that a smart grid will drive conservation. The smart grid will bankrupt utilities. The smart grid will be a hacker’s dream. The smart grid is nothing more than a monstrous invasion of privacy. The smart grid is a boondoggle. The smart grid doesn’t work yet. In fact there is not even agreement on what makes up a smart grid. And there is not a single example of a major city or region that can say it has entered the promised land of smart grid and drunk of the milk of efficiency and eaten the honey of digitisation, and pronounced it good.
As in most heated debates, there is truth on both sides. There is extraordinary uncertainty about how the smart grid story will play out – the deployment of digital technologies will not represent a new dawn for mankind, but they will be deployed, they will play a significant role in our future energy infrastructure and they do represent an extraordinary, possibly once-in-a-lifetime business opportunity.
There are mountains of research out there on the technologies, the standards and the policy of the smart grid, much of it very good. The uncertainties all lie around systemic questions: How will the network change? How will groups of consumers respond? How can regulation accelerate the transition? What will the economics look like? What will the new value chains look like? How will all of this be funded given existing capital market structures? What are the business opportunities? What are the threats?
These are the sorts of questions for which we created the Consortium on Digital Energy. The aim was to bring together 50 participants along the entire value chain of the future energy industry, including leading utilities, network operators, technology providers, car companies, telecoms providers and software developers. We were particularly keen to include players who were not traditionally creatures of the energy sector, but who could be major players in a postdigitisation world. Since we believe the big questions are network questions, we felt that only networked problem-solving would produce real insight.
Last month we hosted the initial workshop – a closed-door, two-day session outside London. The participants included senior decision-makers from some of players leading the way in piloting smart grid technologies, such as Duke Energy and Denmark’s Riso Institute. We brought in experts who had lived through deregulation and technology discontinuities in the rail industry, the media and telecoms industries, and were visited by a director of Ofgem, the UK’s power industry regulator, and Greg Clark, the Shadow Minister for Climate and Energy.
It would be impossible to summarise properly in this short space two whole days of discussions, and anyway the rules of the discussion preclude me from quoting participants. But here are some of the observations which I took away from the event – which do not purport to represent the views of the participants:
First of all, we were right in thinking that the revolution will have implications far beyond the bounds of what is currently described in most quarters as the smart grid. The types of data that will be produced and the decisions that will need to be made extend far beyond just energy usage and grid optimisation, to encompass issues of privacy, security, emissions tracking, pricing, payment and new information services currently hard even to imagine.
Second, this stuff is really hard. There are some very exciting pilots around the world, which have demonstrated some of the technologies and even quantified some of the benefits. But no one has yet started to scale any of these pilots up into the hundreds of thousands, let alone millions of consumers. There are tough problems around network stability and communications theory which have to be solved before one can do so, and those are not problems that can get solved quickly or cheaply.
Third, the economics are complex. There are so many stakeholders, from the obvious ones – network operators, utilities, generators and consumers – to less obvious ones like software and telecoms companies that are not even involved in the debate, all the way to future generations who might benefit most from investment today. And the costs are not borne symmetrically: the benefits do not necessarily accrue to the players who will bear the costs.
Fourth, the key to all of this is consumer behaviour, and no one yet knows which way this will play out. How much will long-term consumption patterns really change if information is available to the user? How much interaction do consumers want with their utilities? Will they be prepared to invest to reduce their bills and have control over their energy services, or will this have to be presented purely as a way of saving money? We will need much more information before we can know what models will work.
Fifth, the real wild cards are power storage and electric vehicles. There is much uncertainty about when grid-scale power storage will become economically feasible – and when it does, whether it will be deployed locally at the point of use or in huge centralised storage farms. But that uncertainty pales into insignificance compared to the uncertainties around electric vehicles. When will they be adopted at scale? How much power will they use/store? What will their usage pattern be? Electric vehicles could be the biggest driver of new electricity generating capacity for 100 years, or the way in which we balance the load on the grid. You choose!
Sixth, we will need to tear up large parts of the regulatory book. Electricity market regulation in most markets is based on two immutable pillars: security of supply – which is achieved through mandated generating margins, spinning back-up and transmission redundancy; and price controls – which are achieved in various ways but are always measured on the basis of costs per kWh. Now we are going into a world where security of supply may be better achieved through diversity of energy sources, distributed power and fault-tolerant networks; and costs per kWh may go up as a result of massive investment, but volumes should come down as we improve efficiency, so net energy spend is more important than kWh prices.
Seventh, and finally, there are two fundamental ways to do this: via regulation or via deregulation. Utilities and network operators simply don’t have huge incentives to invest in any of this under the current system. Should the incumbents essentially be allowed to hold on to their positions but have their behaviour subject to a raft of new controls? Or should the new technologies be used to open up an innovation-poor industry to the cold winds of competition, unleashing a decade or two of unprecedented turmoil but offering the promise of economic and social benefits of unthinkable scale?
I think I know which way most utilities around the world – with many notable exceptions such as those participating in our workshop – would vote. And I suspect many regulators will be inclined to let them get away with it, either through inertia or as captives to the industry they regulate. But I know where I sit on the issue. And my sense is that pressure from those not currently at the table will build and build, until their voices are heard and the barriers to change are demolished and a new enlightenment dawns.
Then, and only then, will we get to find out what lies in the smart grid promised land.
The New Energy Finance Consortium on Digital Energy will run through to March 2010. Members have now formed Chapters to pursue a selection of research topics over the summer, in preparation for a second Consortium in Boulder, Colorado, in November.
Download the PDF here.