Factors Shaping the Smart Grid End Game

There is a growing body of anecdotal evidence to suggest we may be at the crest of the smart grid wave and key players are beginning to map out an exit strategy.  They are not yet running toward the exits but there is a sense that time may not necessarily be their ally so the pace is quickening.

Smart grid hype was born out of the global warming movement in the belief that improved efficiency in the use of electric power would result in easier access for clean and renewable energy from wind and solar, fewer line losses or wasted power, and better grid management.  And there is some truth to these beliefs since the transmission segment of the electric power value chain has been the most neglected.  It has always been tough to build transmission lines because of NIMBY problems so smart grid became a way of wrapping transmission expansion in a political correctness that might make it more acceptable. After all, getting that wind energy from West Texas, Wyoming and Iowa to the load centers that need it most requires transmission. Likewise, unleashing the solar potential of Arizona and the Mohave Desert to bring that clean energy to Los Angeles meant investing in wires as well as solar panels.

The excitement over smart grid was fed by the seduction of billions of Government, venture capital and utility investment in smart grid technology.  And it has now produced deal flow sufficient to accelerate installation of smart meters, sensors, boxes and the networks needed to live into the cleantech potential it promises.

So why—-when smart grid potential is reaching its peak is this first wave of investors in smart grid looking for ways to cash in or cash out?

Signposts of the Smart Grid End Game Taking Shape?

  • Cleantech Investors were in it for the flip. Many of these early Silicon Valley cleantech investors are not “true believers”.  They saw cleantech as a profitable way of aligning the market and politicians to cash in on the global warming concerns.  Just like Al Gore, these players looked for ways to make money on our fears and pain points.  Seed money produced a wide range of start-ups all across the cleantech value chain leveraging the networks, software, gadgets and chips that made Silicon Valley famous.  More importantly, it created a global market for the innovative technology America does best and united it with the low cost manufacturing efficiency of China and the social welfare tendencies of Europe “juiced” by the EU fear being dependent upon Russian gas.  Obama became the darling of Silicon Valley because he proved willing to spend our money pursuing a policy regime that enlarged the Government’s industrial policy and social engineering—and paid off for Silicon Valley.  But now it’s time to put lipstick on this pig and flip it.  So Silver Spring Networks is talking about IPO? Consolidations from M&A is speeding up as smaller weaker players are acquired by stronger ones.  This is happening sooner than expected but the return on investment is sufficient to do well by having “done good” before the risk erodes the value peak.
  • Risks for Smart Grid Investor are Rising.  The dirty little secret of smart grid is that all that investment in smart meters, networks, sensors and gadgets is meaningless unless state regulators and politicians do two things they are loathe to do—raise rates and build transmission lines.  Since ratepayers are charged based upon average cost based rates they have little incentive and even less ability to influence demand on the system.  Smart grid technology works by using real-time pricing so that customers, being exposed to the volatility and high costs of on-peak power change their behaviors and reduce demand.  Smart grid technology taken together is well suited for this, but customers are not ready for it and politicians see it as something to consider—in the future.   As a result we get all the embedding costs of adding smart meters and none of the benefits.  Add to that the need to build new transmission to bring that clean wind and solar power to load centers and costs are going up—and so are rates.  Not a good set of facts for investors seeking to monetize their start-up investments so it might just speed up the exit for many.
  • Ratepayers are angry over rising utility rates. The cumulative cost of all this “do-gooding” is beginning to hit the utility bills just when ratepayers can least afford it.  The result is pushback by ratepayers, complaints to politicians and pressure on utility regulators.  But it is too late.  The costs of years of procurement of cleaner, but more expensive renewable energy is coming due.  The rate impacts of program after program of energy efficiency, demand response, subsidies and feed-in-tariffs paying above market costs to get cleaner energy resources built is going into rates.  In California, PG&E gets pushback in Bakersfield over high utility bills and politicians run for cover.  In Colorado, Xcel Energy does “good” by sponsoring Smart Grid City but when the cost go up—way up, the Colorado regulators slap it with a prudency review and threat of disallowance.  In Florida, the Public Service Commission denies most of FPL and Progress Energy’s rate increases and both utilities respond by slashing capital investment and thousands of jobs.  It’s getting ugly out there in ratepayer city—and the worse is still to come.
  • We Told You It Would be Expensive! The age old process of CYA is setting in big time across the smart grid landscape.  In Spain and Germany, the use of feed-in-tariffs to pay above market costs for solar energy imploded in the recession and the governments decided they could no longer afford the subsidies.  The action in Spain pulling back on the FiT caused worldwide chaos in the solar PV panel supply chain as Spanish vendors dumped panels at less than cost to avoid being stuck with them sending PV prices around the world plummeting.  The lesson: what lives on unsustainable subsidies cannot be sustained when they dry up. Now in the US there are growing concerns that utility investment in smart grid especially smart meters may turn out to be a poor one since the prospect of real-time pricing diminishing at the same pace as the rise of ratepayer squealing about rate increases.  The same is true of other global warming “solutions” where in California the implementation of AB32 remedies to reduce emissions are likely not cost effective unless the market price of natural gas rises to $13.87 per mmbtu and a carbon tax of $100 per tonne is imposed according to the state agencies responsible for implementing this law.  Even in California we have limits.
  • Settled Science is, perhaps, Not So Settled after all.  The meltdown of the Copenhagen COP15 climate change treaty process is only one of the problems plaguing the proponents of global warming solutions.  The IPCC panel scandals over research manipulation has destroyed the credibility of the foundation for smart grid, AB32 like draconian measures to reduce emissions, real-time pricing and perhaps even renewable portfolio standards for clean energy by the time it runs its course.  I am not cheering this on, just stating the reality that the implosion of the scientific basis underpinning all this hype on global warming and smart grid or clean energy solutions tarnishes these strategies in the face of their staggering cost.  Perhaps, we do have time to find more balanced, affordable, cost-effective solutions that do not require the remaking of our global economy.   And besides that, unless China, India and a few other fast growing economies agree to play by the same rules there is little reason to commit economic suicide to pursue a policy prescription that will not work to reduce emissions.

So what?

So the pendulum is swinging back and a sense of balance, proportionate response, and re-examination of the facts and science is likely to save us from our own political folly—this time.  Cleantech investments will produce a rush of new products that the natural process of consolidation and flip will combine into better solutions.  Subsidies and stimulus will give way to economic rationalism once again.  The aftermath of the recession will have purged our economy of its unrealistic leverage and our next few rounds of elections in the US and EU body politic will purge incumbents and relieve the pressure of excessive spending—we hope.

Investors in cleantech and otherwise will do what they do best—harvest profits and move on to the next big thing.  And their investment in smart grid may yet be realized—not thru stimulus or subsidies but by leveraging the convergence of information technology, communications, entertainment, security and, yes—energy management to create the next generation of ‘must have’ and oh so cool products we will gladly spend money to acquire and use.  Look around you, it is already at work.

Check out the latest AT&T ad for its iPhone which touts—almost in passing—the iPhone App for “did we turn off the light at home before we left?”  It’s here today.  Or consider the new Comcast ad for Xfinity, the next generation of bundled services with 100 mbps bandwidth for streaming TV combined with VOIP, cable TV and a menu of thousands of movies and soon apps to meet your every need.

Smart grid investment will pay off in the long run but not because we bankrupted ourselves to install them—-but because —in the nick of time—we didn’t!