Smart Grid History: The Bad, the Good, and the Revenge of the Customers

UT Austin Poll

When the short history of smart grid is written someday, I predict it will include four chapters:

  1. Government industrial policy and political correctness
  2. Market rationalization of the policy mistakes
  3. Customer aggregation, choice and revenge
  4. The return to rational energy economic equilibrium

In Chapter 1 we will hear all about the first phase of smart grid where the focus was on deployment of smart meters by investor owned utilities. The reasons were simple.  The Federal Government was spending money to stimulate it.  The state regulators were ordering utilities to implement smart grid.  Utilities put 1+1 together and got with the program.  They tried to do ‘pilot’ programs like Smart Grid City in Boulder which played into the utility’s traditional caution.  Even the experiments that failed like Boulder taught valuable lessons.

In order to get the economy going again after the Great Recession the Federal Government threw money at every corner of the economy.  Smart grid was seen as ‘shovel ready’ because smart meters could be deployed relatively quickly.  State regulators wanted smart meters to enable dynamic pricing—the social engineering of customer lifestyles by rewarding ‘good energy’ behaviors and punishing ‘wasteful, emission-ridden, inefficient’ bad behaviors and to support more renewable energy use.

Cap and trade legislation was supposed to transform the energy economy by taxing carbon to reduce emissions and raise billions of new Federal revenue.  But states pushed back fearing that the Federal Government was getting in their business too much.  And being politicians they worried that serious harm could be done to their states if Federal environmental regulation forced the premature retirement of coal plants. Utilities especially those in the Midwest were dependent on low cost coal to keep rates low enough to fuel industrial production and keep ratepayers quiet. But the sum of all the worries about the unintended consequences of cap and trade forced Congress to back off.

Climate-gate and the failure of Global Warming Treaty negotiations cooled the ardor for greenhouse gas emissions legislation worldwide.  But the true believers in the EU and US pushed forward.  US EPA pumped out new regulations on power generation from coal like a bilging smokestack when cap and trade legislation died in Congress.  The piling on of new regulations exacerbated worries about the impacts on the economy which carried over into the off-season Congressional elections and cost the Democrats control over the House of Representatives resulting in Congressional stalemate that saved the US from an even worse train wreck.

In Chapter 2 we learned that reaching the saturation point in smart meter deployment shifted the focus back to the market from government.  Federal stimulus money  was largely spent and government industrial policy was discredited from bankruptcies like Solyndra and Beacon Power.  Smart grid remained one part of a big lab experiment in social engineering with promised benefits for consumers someday.  So business set out to rationalize the mess and figure out how to make money from the infrastructure build and the billions spent installing smart meters.

I’ll spare you the long dissertation in chapter 2 about government policy implications of picking technology winners and losers, about using regulation as a poor substitute for the failure to enact the preferred cap and trade legislative program, and the electric rate increase implications of preferring new technologies at above market costs instead of low cost technologies that have little technical risk.  All of these realities required business to clean up the mess in a M&A frenzy where small fish were eaten by bigger fish that were, in turn, eaten by the giants of the global business seas.  Many good products and capabilities were sliced and diced to be integrated into the giant’s existing solutions and rolled up to make a portfolio strategy that worked across global markets.  It was carnage but it was a necessary purging of the sins of failed government industrial policies and unsustainable spending binges.

Out of this process of rationalization, we began to see business models and strategies emerge that played to the strengths of the global industrial giants and set up both the scalable global growth of energy and technology markets.  Politicians clung to their environmental religion and used their regulatory guns to challenge the ruthless efficiency of the industrial giants.

But in the EU, in the US and even in China the spending ammo of the governments was being limited by the cumulative impact of their failed policies.  The industrial giants played their timing game and deep pockets well and forced these global markets to compete against each other giving the politicians just enough political rewards to keep the rationalization process moving forward until it was sustainable.

One by one smart grid product players started speed-dating trying to find a partner to hook up with to create more valuable end to end solutions.  These solutions were then acquired by even bigger players to fill gaps in their portfolio of software, solutions, equipment and services.

  • ABB bought Ventyx in part to jump start its smart grid play after feeling it was falling behind other giants like GE and IBM.  Ventyx rationalization led ABB to turn it into the software integration factory for many such acquisitions rather than trust that the ABB silos would play nice with each other.  Smart, very smart.
  • IBM pitched its Smarter Planet and its endless variations on the optimization theme across the energy value chain.
  • Not to be outdone, GE took a fork in the road recently to seduce the public power and private electric cooperatives in Georgia to play in the GE Smart-Grid-as-a-Service sandbox.  The promise is you get a smart grid system GE guarantees will work to enable these smaller utility players to compete in the big leagues of smart grid alongside their larger investor-owned utility cousins.
  • Siemens and GE did not forget their roots in traditional power generation so both are focused on playing both sides of the market with development of very high efficiency natural gas power plants—60%+ efficiencies.  That is enough to win political praise by savaging the economics of coal fired generation far more ruthlessly than anything US EPA can devise—and with no fingerprints on the dirty deed for politicians.

But such political cohabitation had its price in the added pressure on renewable energy from low gas prices and high efficiency gas turbines making it tougher—-much tougher—for wind and solar energy to figure out the bottom line of grid parity prices.  As so this process of ruthless rationalization goes—eat or be eaten, perform or else, be profitable or be gone.

Grid parity is the holy grail, scalability is the bread of life, and interoperability forms the rest of the rationalization trinity.

In chapter 3 we learn that customers hate to be trifled with and used technology and choice to take back control. The object of their first revenge attack is politicians and regulators who have tormented them with peak day pricing, smart meter hassles, tiered rate designs that seek to re-engineer our lifestyles and stick the government’s nose into our personal business.  Technology in the form of smart meter data, interoperable demand response and energy efficiency programs, and net-metered rooftop solar has taught customers to take back control over their lifestyle and energy use.

Customer choice led to customer aggregation.  Customer aggregation led to customer power. And customer power led to a ‘pox on all your houses’ revenge when the ruthless efficiency of markets that served so well to give commercial and industrial customers choice and buying power is now turned loose on residential customers joined together by customer aggression tighter than a SEIU local at a hotel convention.

Some customers want to exercise their choice to get greener than the local utility’s portfolio—fine, was the answer here’s how much more that cost.  No subsidies, no cost shifting—get as green as you want.   Others wanted low prices, always low prices—to steal a line from Walmart—and their wish was also answered even if it meant buying some coal outside of California since the state still won’t let you do that through the regulated utility.  Customer aggregators not being regulated by the California Public Utility Commission, the California Energy Commission or the California Air Resources Board—are a lot more like Amazon—fast, cheap and always there.

So what happened as customer aggregation lead to customer revenge?  Customer choice is messy and takes time to figure out all the options.  It’s a little like asking Grandma to shop for Rx plans to fill the donut hole in her Medicare coverage—you know a big pain in the #$%%!  But guess what Grandma figured it out with a little technology help from Walgreens, CVS and RiteAid that offered to match up Grandma’s prescriptions against all the donut hole plans and rank them from cheapest to most expensive.  Well that is what happened to energy too and, guess what, customers preferred cheaper but not necessarily cheapest if it meant chain-smoking coal plants.  Choice ended up providing a range of options that fit every customers needs, aspirations and values from cheapest even if dirty to greenest even if most expensive.

The revenge part came into play when figuring out what choice to make got to be such a hassle that the customer aggregators began experimenting with bundled solutions.  It was not like Comcast bundles either that forced us to supersize our cable bill in order to watch the few channels we really wanted.  Customer choice let us develop our own bundles not just of commodity energy but other stuff we needed to make our homes or businesses work to fit OUR lifestyle not the governments.

For more than 100 years the energy industry had been run from the top down with market leaders from Thomas Edison and Sam Insull on down to Steven Chu and Mary D Nichols, chair of the California Air Resources Board telling us what we’ll get instead of asking us what we want.  Choice and technology delivered the real benefits of smart grid in the form of distributed energy networks, net-metered zero net building rooftop solar solutions and microgrids, energy storage in PHEV cars, high efficiency appliances and software to run it all based upon business rules WE SET on our own smart phones.

That gets me to Chapter 4, the return of rational equilibrium in the energy and technology markets.  For a while the B2B market in energy and technology looks like a cross between Water World battles and Transformers!  It was ugly and a lot of blood and treasure was spilled in search of market leadership, market share growth and price leadership.  But guess what—that lost money was not taxpayer money it was venture capital and investors’ bets.  Sometimes the magic worked and the winner ate the loser. Sometimes it did not work and the assets were sold in bankruptcy at low ball prices that helped drive costs down to grid parity equilibrium through the same market rationalization process at work since the bazaars of Babylon.

There are no shortages of power in market equilibrium.  There are no FiTs of climate change pique either since the market rules are driven based upon customer demand and most customers decided they did not want to breathe air as dirty as China’s so they started producing products closer to home and quit emitting a trail of crap halfway around the world and back to send raw materials one way and get cheap good back in reverse.  The rising cost of cleaning up the mess in China raised the price of its goods, moderated its export growth, increased domestic Chinese pressure for change and over time leveled the competitive playing field as better cleaner technology and customer demand for quality —both product and environmental—made all the difference.

The lesson is the real benefit of smart grid is to give control back to customers.  It starts with choice and a sense of reclaiming control over our lifestyles from politicians and regulators eager and willing to substitute their own values and politically correct behaviors for ours.  We sent them packing or cut off their power over us.  Customers love competitive markets because they provide high quality, reliable products at competitive prices.  Markets give us choice from a range of product features and functionality and never let the search for the perfect product become the enemy of the many good products also sold and varied price points.  Lastly, smart grid kept the lights on by letting the competitive markets work without industrial policy jury-rigging, socially engineered tiered rates, feed-in-tariffs or other politically correct fads.  Smart grid well applied let the government play the role we intended for it—referee—calling goals not just scoring political points.  Calling penalties and enforcing the discipline of the market.

2 thoughts on “Smart Grid History: The Bad, the Good, and the Revenge of the Customers

  • Meanwhile, outside the charmingly parochial town of North America, 7 billion other people discovered there was a lot more to SmartGrid than just smart meters and political chicanery. They discovered they had paid less Yuan (the new global reserve currency) to increase their use of electric power over the last 50 years and their environment was far healthier than it would have been had they continued down the path they were headed before Smart Grid. It had surprised them to learn that free market economics was a lot like TNT, very powerful, tends to cause explosions, can be useful when managed intelligently but it was not the answer to everything.

    Back in little old North America they did some research and discovered public opinion was often wrong too! That was a big surprise, but when they realised they did not know where their food came from, who made their clothes,or even what their govenment spent their money on in far away lands they began to doubt their ability to comprehend the full scope of Smart Grid. Fortunately, that doubt didn’t last long, they soon went back to their TVs and doughnuts and decided they did not need to know how TVs or even doughnuts worked as long as they could keep saying “keep big government off our backs” at partys. Eventually, a far sighted individual travelled abroad and gained the insight, support and funding he needed to bring the little town’s aging infrastructure up to the same standards as Northern Europe and parts of Asia. He returned home a hero in the eyes of his people and promtly laid claim to the invention of this new technology he named Smug Grid.

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