A more compelling justification

Grant Smith | Jan 07, 2010


Proponents of the smart grid often cite reduced carbon emissions through integration of renewable energy and empowered customers as a significant business driver for the smart grid. Although this argument provides a good "warm and fuzzy" for all of us who are interested in reducing carbon emissions, it is too imprecise in value to achieve much traction with utility executives or regulators. A better and much more precise driver for the smart grid is the operational efficiencies that utilities can and should achieve as a result of newer and better technologies.

Utility investments are typically made after the development of a sound business case that is complete with return on investment calculations. One of the profound weaknesses of the stimulus grants and resulting investments is that there is little visibility into the business cases that support them. While this has been helpful to get the ball rolling, so to speak, it will not be sustainable. Regulators and utility executives will demand a solid business case for future investments. Identifying return on investment for reduced carbon emissions and speculation about changes in customer behavior is difficult and subject to interpretation, variability and debate. In short, it will not result in a good business case. If rates are to be increased to help fund smart grid investments, consumers and regulators will demand more precision.

The good news is that the operational benefits of the smart grid are easier to calculate, less subject to variability and present compelling reasons for investment regardless of the reduced carbon issues. Consider, for example, the smart meter, which many believe to be a primary enabling technology of the smart grid. A smart meter may or may not actually lead to reduced power consumption and carbon emissions through changes in customer behavior. It is simply unknown what actions customers may take in response to price signals and how predictable and sustainable those actions will be. But, with a smart meter installed, the utility can operate much more efficiently. Common examples include: remote meter reads; remote on and off orders; outage diagnoses (determining which side of the meter the outage is on) and outage scope and location analysis.

Each of these operational activities has a cost associated with it. For example, a utility knows what it costs to assign a crew and roll a truck in response to a report of an outage at a customer location. If that outage happens to be on the customer’s side of the meter, it is a lost cost for the utility in many jurisdictions. The utility also knows how many times that activity occurs each year. The same is true for the other examples. Because these are defined and repeated activities, they are predictable in terms of how much they cost and how much could be saved with the implementation of smart meters. Of course, smart meters are just one example of smart grid technologies that produce operational efficiencies.

Much of the regulatory and media commentary focuses on the carbon based benefits of the smart grid. Those should certainly not be ignored, but we need to recognize that our understanding of them is simply not sophisticated enough yet to help support a good business case. The specific operational benefits of smart grid technologies present us with much more compelling reasons to be excited about the smart grid.

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A More Compelling Justification

The power industry tends to operate in a universe all its own, where key business rules and practices that matter in most competitive industries just don't apply. So it is here.  A competitive firm that attempted to impose smart meters and complicated tariff structures on its customers would have a tough time surviving.

I would argue that the Smart Grid should end at the utility side of the meter.  Period.  Customers that wish to replace their meters with a better model should be able to do so (and utilities should be required to accommodate these customers at reasonable cost).  Customers that do choose interval meters should have the option to a) stay on their current fixed price/variable volume rate, b) take service under a fixed price/fixed volume rate, or c) take service under a dynamic rate that mirrors wholesale prices.  If the early adopters perceive clear benefits, then their neighbors will quickly follow suit.  If not, then early adopters will bear the brunt of any costs. 

Our industry continually invents new ways to engineer solutions to basic economic problems that have, for the most part, failed repeatedly.  Instead, we should be looking at other industries for inspiration, we should abandon our obsession with the futil pursuit of perfect equity, and utilities in particular should be more willing to conduct small experiments with shareholder money so they can avoid the dead weight of regulatory oversight that tends to stifle innovation rather than encouraging it.

The Intelligent Power Industry Justification

Hi Jack,

I think you did not considered my comment in yours, that was posted only six minutes later. I think you were writing while mine was posted. Under that assumption, I am replying to your comment.

In the intelligent power industry, organized under the EWPC-AF, the regulated Smart Grid will be a delivery only intelligent utility. This is a new unverse, where rules and practices that matter in most competitive industries apply on the generation, retail, prosumer (a consumer that has the right to produce) value chain.

For more details, please take a look at The Global Intelliegent Retailer Justification.

The Global Intelligent Retailer Justification

Hi Bart and hscott,

Your propositions are based on the assumption that successive incremental extensions of the Investor Owned Utilities Architecture Framework (IOUs-AF) will help increase efficiency of the power industry. That assumption includes the new intelligent utility incremental extension. The original IOUs-AF had the demand side as an externatility and all the development of the resources were for transmission, distribution, and generation, which are on the supply side.

As you will see below, to be able to develop the revolutionary changes to integrate the resources of the demand side, it is necessary a shift to the Electricty Without Price Control Architecture Framework (EWPC-AF) to open the power industry to innovations, as can be seen through the introductory post Can We Let Google and Wal*Mart be Global Energy Retailers?

In a comment under the article Smart Grid Will Generate $200B of Global Investment, I quoted a renowned industry expert who said that “the impact of new technologies in the industry will be minimal in generation, moderate in transmission, important in distribution, and revolutionary beyond the meter. That means that predictions need to be based on the migration of value from supply to demand.”

In fact, most value creation potential in the development of the resources of the demand side is beyond the meter and thus competes with utilities investments in the smart grid, which is the delivery infrastructure. For example, load factors of distribution facilities, which could be, for example, close to 25% in many locations, could go well beyond 50%, meaning higher efficiency based on reduced investments and reduced distribution losses. The reason for such a low load factor is that under demand as an externality requires utilities to invest in sufficient capacity to meet that annual peak demand, which occurs in one hour of the year.

Now, when we loosely compare (the figures do not correspond to the same time period nor include the same items) the prediction of $200B of investments versus the 4 trillion opportunity described in the post Smart Grid 2.0, we know that the huge difference is in the new architecture framework that includes the integration of the demand side, which was explained more than two years ago in the highly read EWPC article Demand Integration is NOT the Province of Politics.

A More Compelling Justification

Yes, the business case will assume its more traditional role in the future.  However, you seem to miss the key point -- it took the political impetus of reducing carbon emissions to move the ball forward.  Without that impetus, Smart Grid would likely have languished like so many other good ideas.  Around the world electric utilities are now moving to Smart Grid, and the driver has primarily been these political considerations.  

The politicians merely made a change to the "rules."  The prior set of rules were based almost entirely on business case.  They weren't divine rules; people chose them because they made sense.  But they weren't the only rules that made sense.  The flaw with the old rules was that they often didn't allow common sense to factor into decisions.  So politicians merely applied a temporary correction factor.

If there is a disappointment here, it is that the politicians did not impose carbon emission considerations to improve the decision-making process.  They were merely advocating a political position.  In the future when carbon emissions cease to be a decision-making factor, we will still be left with the old flawed system where valid, measurable factors can be disallowed from business cases.  Simply stated, we learned nothing and the politicians learned nothing about making wise decisions in our industry.  

Too may politicians will reach the wrong conclusion that they need to periodically interfere with our industry's decision-making processes.  The right conclusion is that our industry's traditional way of making decisions is good but flawed, and we need to make a minor change to that process so that we can make smarter changes in the future without political interference.