Stimulus, Smart Grid and Utility Budgets

Warren B. Causey | Dec 03, 2009

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Editor's note: While this article was written and originally appeared in EnergyBiz magazine prior to the federal government's announcement of smart grid investment grant awards and its announcement of smart grid demonstration grant awards -- and no one's crystal ball is absolutely flawless -- Warren Causey's look at the effect stimulus funding is likely to have on the electric utility industry solidly nails the numbers, and the concerns, to the wall, and I felt strongly that it deserved sharing here.

With the federal government issuing $787 billion in stimulus money and pushing hard for a remaking of the industry, to what extent is stimulus funding speeding up deployment of smart meters and other smart grid elements? Maybe there will be some acceleration, but it hasn't yet started and the stimulating effect is likely to be relatively minor when it does get under way.

Taking the issue of speeding up deployment first, as of mid-September, there had been no speed-up because the money hadn't started flowing to utilities -- some seven months after the American Recovery and Reinvestment Act was signed into law. The smart grid investment program of the Department of Energy has, as a stated purpose, "to stimulate the rapid deployment integration of advanced digital technology that is needed to modernize the nation's electric delivery network for enhanced operational intelligence and connectivity," according to the DOE formal funding opportunity announcement.

Utilities were required to have full applications for the funds filed by August 5. Awards were scheduled to be announced in early fall. (Editorial Note: smart grid investment grant announcements were subsequently made October 27, and smart grid demonstration grant awards were announced November 24.) Other parts of the stimulus money have been flowing to states, cities and counties across the country, but this money was coming from other federal departments, notably for transportation, education, housing and other areas. The Department of Defense has $7.4 billion in stimulus money to spend and a significant portion will fund research and development of energy-efficient technologies.

Some demonstration grants for renewable energy projects, studies involving clean coal and other areas have been awarded. Energy Secretary Steven Chu announced the first funding awards in July. The $47 million would go to eight projects in seven states. The biggest chunk -- about $12 million -- will go to Massachusetts-based American Superconductor for two projects. Lead organizations in this first set of awards included a utility, a municipality, universities and private companies.

Specific smart grid funding for utility projects, however, still was not to be disbursed until after grants have been awarded, meaning utilities aren't likely to receive much until the end of the year. Once the utility funding does begin to flow, it will represent only a small portion of the trillions expected to be needed to remake the utility industry.

However, utilities were jumping on the bandwagon to obtain as much of the money as possible. According to research by Sierra Energy Group, the research and analysis division of Energy Central, 78 percent of investor-owned utilities and 79 percent of co-operative utilities said they planned to apply for smart grid funding. The percentages were much lower among municipal utilities -- 47 percent -- and public utility district utilities -- 26 percent.

In fact, the $3.4 billion available was oversubscribed by just the first 46 utilities that publicly announced their requests. Those 46 submissions totaled $4.3 billion. If all of the roughly 2,500 utilities that indicated they planned to apply asked for the average $93 million in the applications publicly announced, that would be a total of some $232 billion in requests. Obviously, the industry believes there is a lot of money needed to build out smart grid. By providing roughly 1.4 percent of the requests, the government doesn't appear to be doing a great deal of stimulating in this area.

Of course, the $3.4 billion from the feds has to be matched by a utility, bringing the total likely to be spent under this program to $6.8 billion, still a relatively small drop in the bucket of all the money needed to build out a nationwide smart grid. Thus the question remains, how much will the stimulus spending really speed up smart-grid development? Anecdotally, the answer seems to be "some, in some places, but across the entire industry, probably not much."

Anecdotal evidence of a possible speed-up in one place comes from Houston, where CenterPoint Energy already is engaged in deploying advanced metering infrastructure and smart grid. In fact, CenterPoint is one of the most advanced utilities in this area. Dave McClanahan, CenterPoint president and CEO, said the Houston electric has installed some 45,000 smart meters and was on target to deploy some 145,000 by the end of the year.

"Under our current plan, we will deploy more than 2 million meters across our service territory over the next five years," McClanahan said. "If our request for DOE stimulus funds is approved, we will accelerate our deployment plan to substantially complete the project by 2012."

McClanahan went on to say that if CenterPoint receives its requested $200 million (Editorial Note: It did.) CenterPoint will match that from its own budget to accelerate the project. As best as can be determined -- although it's almost impossible to learn from the DOE if such substitution of stimulus funds for already-budgeted local funds will be allowed -- this would constitute about a two-year speed-up of CenterPoint's already-underway project.

However, the odds of CenterPoint receiving its requested $200 million seem to be relatively small. Again, anecdotal information from utilities that have been in contact with the DOE seems to indicate most utilities may receive less than half of their requested amounts, in order for DOE to spread the funding around further. And, with a possible $200-billion-plus in anticipated applications, the $3.4 billion isn't going to go around very far. According to the 56 pages of rules for applications issued in June, 40 percent of the funds will be awarded to proposed projects that are less than $20 million and 60 percent will go to projects that are between $20 million and $200 million.

Many other utilities have requested stimulus funding primarily for pilot projects for smart metering infrastructure and smart grid. Whether these pilots will result in full-scale deployment remains to be seen, as does the question of whether utilities could fund the projects once the stimulus money is spent.

Many utilities, as a result of the recession, already are facing financial difficulties, have cut spending and are having difficulty funding smart grid or any other major projects. "Residential and small commercial customers are having problems paying their bills," said one utility executive. "For the industrial and wholesale customers we are in a new era -- we can't forecast their revenue with any accuracy anymore."

Utilities face a host of issues as the year ends. They include looming electricity supply shortages, potential carbon cap-and-trade legislation, the recession and spending constraints, requirements to adopt intermittent green energy, billing and cash flow problems. In another survey conducted by Sierra Energy Group, a division of Energy Central, only 28 percent of utility executives expressed high confidence in their utilities being able to meet these demands. The other 72 percent expressed varying degrees of concern, including up to 16 percent who said the industry may be overwhelmed by all of these issues.

The smart grid and green energy also are going to require utilities to build out improved nationwide transmission systems to handle what is being proposed. But in July, more than a dozen conservation groups sued the federal government for its designation of thousands of miles of energy corridors through 11 Western states.

Will the stimulus funding speed up deployment of the smart grid? Possibly, in a few random spots. The problems utilities face are multiple orders of magnitude beyond the funds to be parceled out to a few dozen utilities scattered across the country.

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EnergyBiz magazine is the thought-leading, award-winning publication of the emerging power industry. This article originally appeared in the November/December 2009 issue.

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Comments

Warren,

Very good overview of the changes in our utility industry that government funding is attempting to foster, and problems the industry faces, particularly the magnitude of them.

"Once the utility funding does begin to flow, it will represent only a small portion of the trillions expected to be needed to remake the utility industry."

This statement is very sobering but reality. Where will this money come from is the daunting question governments must wake up to and answer. Under current utility regulatory regimes, utility companies everywhere have only two options to find this money - either massive government handouts at taxpayer’s expense (read much more public debt), or draconian rate increases for all consumers down the road. Both are very likely to be very unpalatable with the public.

The answer lies in regulatory reforms as I have been preaching on this website for months now, that would potentially allow utilities to make money over and above rate base income. This in part could be from commercializing smart grid devices to residential consumers, or from commercializing conservation and efficiency upgrades to consumers, competing directly with private sector companies already doing or poised to do so.

Sadly, these ideas are not even on the radar screens of most regulators or governments, are likely not preferable to utilities because they would be quite happy to not pursue anything beyond the comforts of guaranteed rate base income. But as you point out in the article, even rate base income has been eroded by the recession, and is not so comfortable any more.

Indeed, America is facing a grim future having lost untold numbers of high-paying jobs in our devastated manufacturing industries. The ugly prospects for a poorer work force down the road means more consumers will be unable to afford their energy bills.

Your last statement Warren says it all - "The problems utilities face are multiple orders of magnitude beyond the funds to be parceled out to a few dozen utilities "scattered across the country.""

I for one am not optimistic to see much change happen on a wide scale to our electricity industries in a timely manner beyond perhaps simple Time-Of-Use billing imposed on consumers by all the smart meters rolling out.