Only 50/50 Smart Grid Odds of Success

The pace of consolidation among smart grid players is accelerating, but the probability of smart grid success is not getting better as more smart meters are installed.

Why?

The promise of smart grid is a seamlessly integrated digital electric system that enables the scalable growth of new technology applications to improve efficiency, brings cleaner renewable energy supply to market and reduce emissions to improve grid performance.  Notice that the promise does not say it will cost customers less.  The hidden agenda in the promise is that our politicians will finally be able to live fully into their political correctness—no matter what it costs.

My thesis is that the odds of smart grid success over the long term are no better than 50/50.   I come to this conclusion based upon my belief that customers want reliable energy services at affordable, competitive prices.

Yes, we care about the environment.

Yes, we want to use energy efficiently.

But in the sanctity of our confessional we just want the lights to stay on at prices we can afford.

The other dirty little secret is that we have learned that competition works to give us the products and prices we want and markets that encourage competition generally work better—more efficiently even, than those that are jury rigged by government bureaucrats and politicians. The risk for politicians and energy regulators is that pushing too far, too fast before the competitive market mechanisms are in place to make smart grid and other policies really work puts the entire smart grid promise in jeopardy.

The irony is we have been in this place before, remember the California energy crisis?

After Congress adopted the National Energy Policy Act of 1992 which introduced wholesale competition in power generation prices fell, dirty old power plants were divested by utilities, bought by merchant generators, fixed up and turned back on with improved performance and lower costs.  Wholesale power competition worked and still works to bring down the cost of meeting our energy needs—if we let the markets work competitively!

Retail energy competition was supposed to bring that same promise of better performance and lower prices to end use customers, but it failed in California and was tarnished elsewhere as a result.  Why?  Because regulators and legislators aided and abetted by utilities seeking to protect their markets set up jury rigged rules that froze retail rates but allowed wholesale prices to float.  You know the rest of the story about how well that worked out. Smart grid is retracing those steps and the risk of the same outcome is growing.

Living into the promise of smart grid certainly requires installing smart meters and other digital equipment and there is fierce competition among vendors and deep subsidies by the Federal government to speed up the process.  But that alone is not sufficient to get us where we want to go since we have not built the electric transmission to enable smart grid to scale.  Nor have we adopted dynamic pricing to allow price signals in competitive markets work to manage demand and control cost using all this new smart grid equipment and services.

Similarly, setting renewable portfolio standards for clean energy is good public policy, but the cumulative consequence of feed in tariffs and procurement regulations that force utilities to buy that energy at above market prices while holding their rates steady is catching up with us fast.  Rates are going to go up—and up, and up some more. Customers are blaming smart grid and telling regulators and politicians those smart meters are pretty dumb.

The Clash of Business Models

Those smart meters are built by cleantech companies with different business models and values than regulated utilities.  Those in the software business know the powerful pressures to get your products to market—to go GA ASAP!  Microsoft and other software vendors have taught us the game.  Push the product out knowing there are bugs to work out and then focus on the pain points of customer complaints to prioritize fixing the problems.  No beefs, no work required to fix it.

The problem is utilities don’t work that way.  In a business model that requires perfect harmony and balance on that grid to keep the lights on, you can’t install smart meters now and wait to see if they work.  Ask PG&E, ask the people of Bakersfield—they are the new California energy crisis in the making.  But this time it’s not just California.  The same confusion and conflict is arising in Texas with Oncor, in Boulder’s SmartGrid City with Xcel Energy and elsewhere.

Technology glitches can be fixed, but policy procrastination will be fatal to smart grid.

I have no doubt that the problems of broken or poorly installed smart meters can be fixed and the software and network bugs will be worked out.  Smart meters are the symptom not the problem.  They are that proverbial canary in the mine alerting us to bigger problems ahead.

What problems?

Politicians and state regulators who championed all these policy changes are fair weather friends.  Many of them are now running for cover as voter anger over deficits, government expansion and the hangover from a weak recovery all bear down at election time.  Don’t count on these fair weather friends to be around when the heavy lifting is required.  The Administration is working double time to spend everything it can, adopt every policy change it can, advance every agenda it can before it is too late.

So my conclusion is that the smart grid promise writ large has no better than a 50/50 probability of success for these reasons:

  1. Rising utility rates in a weak economy is risky business for politicians running for cover with ratepayers clamoring for change they can believe in. Each new rate surprise tarnishes the policies and politicians who have championed them.  Utilities are complying with orders and filing rate cases to pay the bills. Ratepayers resent the rising cost of political correctness.
  2. Renewable energy is good public policy but it is not sustainable if it requires subsidies. Now that wind and solar energy have reached grit parity levels, renewable energy must compete with other demand side and supply side options in a least cost, best fit competitive environment.
  3. Emissions reduction is good public policy but cap and trade is not. The global warming crowd lost the battle over COP15, saw research discredited with the Climategate scandal, and are losing the cap and trade debate because the voters mistrust the politicians.  We still care about the environment, but see actions by corporations to reduce their carbon footprint, get more efficient to control their costs, and use green strategies as a competitive advantage as a more sustainable outcome than poor legislation or treaties.
  4. Smart Grid Success requires building transmission across state lines but the Federal government is unwilling to step up to that challenge and NIMBY rules state by state siting.  The result is much of the renewable energy potential will not have affordable access to load centers where it is needed.  Without a multi-market digital grid structure based upon nationwide standards the scalable growth of smart grid is not economic and will fail.
  5. Dynamic pricing—the third rail of utility regulation. Living into the full potential of smart grid requires that state utility regulators introduce dynamic pricing to let the markets work to change demand patterns based upon price.  But as utility ratepayers we hate this idea and the volatility it will bring.  All the smart grid equipment and investment is largely wasted under the traditional average cost pricing model for ratemaking—so why are we spending all this money for smart meters if the end result is the cost savings all flow to the utility for reduced meter reading and better distribution optimization while the costs to pay for it are embedded in retail rates.

So what?

If I were a utility CEO I would be developing a plan B based upon a scenario in which smart grid fails to thrive in a climate of mistrust and rising costs.

If I were a smart grid vendor in search of the best deal for my product, I’d be putting lipstick on my pig and get my flip done while the intoxicating lust for everything smart grid still offers plenty of dates.

If I were a state utility regulator I would worry that the convergence of rising rates, inflation and the policy agenda for dynamic pricing, emissions reduction, RPS and transmission siting is going to bear down on me like the perfect storm.

If I were a venture capital managing partner I would be thinking more like a vulture capitalist and planning to pick up the road kill at cheap prices to reassemble into solutions that work at a fraction of the current peak pricing.  The question is whether Oracle, SAP, GE, ABB or other strategic buyers will beat me to the best products.