What will our Smart Grid Future be? Starvation, Redemption, Insurgency or Endurance

In my previous post called A short History of Smart Grid: The Bad, the Good and the Revenge of Customers I wrote about the relatively fast evolution of the smart grid and some of the missteps we’ve taken and ways those missteps could be corrected.  I predicted that short history would boil down to a discussion of four themes:

  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

This discussion picks up where we left off but turns to the smart grid future.  Like you, I don’t pretend to know the outcome of this smart grid marathon we are running.  I know it will require endurance to realize the benefits of smart grid but there are market and regulatory potholes along the way that we will not always foresee.  So instead I want to offer you a multiple choice question to provoke your thinking about where this smart grid marathon might end up.   Here are four equally plausible views of the smart grid future.  Where are we now and which pathway do you think we will follow?

  1. SMART GRID GRINCH: (Starving markets muddle through).  This is a business as usual scenario of muddling through a long period of slow growth, regulatory uncertainty with market and financial volatility before we get to the end of the smart grid race.  The question is when we get to the finish line will we be asking—is that all there is?  Or will holding the gold medal on the podium be worth the aggravation?  Even the best smart grid technologies we can imagine are of limited use in a market environment where poor economic fundamentals and little growth create weak demand.  We might call this scenario Stuck in the Rut, except we all know we cannot wallow in self pity in the rut very long without grave consequences.
  2. NIETC WORLD: (Merchant-driven redemption of the entrepreneurial business model).  This might be called the Turning Lemons into Lemonade Scenario because it is focused on releasing our suppressed demand and rekindling our traditional exceptionalism to pull the country out of that rut and get the economy growing again.  It is entrepreneurial and envisions leveraging the smart grid opportunities for growth in the midst of volatility.  Tiring of the grid lock in Washington over energy and economic policy, market players take action and use the potential of domestic energy production to gain competitive advantage for themselves. But all that oil and gas production requires electricity to move it, convert it, and put it to use where it is needed.  This new domestic energy push motivates others and the economy begins to pull out of its slump as confidence grows that we have finally turned the corner.  This is a story of redemption by old line business and black fuels.  It is the story of new bursts of investment in infrastructure and technology to change the rules.  It uses transmission and technology to alter the course of the race and rewards the sprinter for daring and speed in making critical decisions before competitors. There are penalties for unsportsmanlike conduct in this scenario, but the opponents are often politicians and regulators who have held back the market too long with their industrial policies.  Redemption is the outcome, but the question is who are the winners and who are the losers in this scenario?
  3. CUSTOMER AGGREGATION: (Insurgents drive toward a market-led distributed energy future).  This is the blending of idealism and practicability.  It preaches the greener, clean energy future with a focus on energy efficiency, demand response, renewable energy sources and new technology.  But the leaders of this insurgency enlist customers in the battle for choice and the opportunity to pursue the clean energy future promise.  Since the government is out of money, the insurgents pursue the fight in the market themselves.  It starts in commercial and industrial segments as business seek to control costs and gain traction in a slowly recovery economy.  This scenario might be called Taking Back our Future. Technology is used as an ally breaking down barriers to entry, converging IT and OT, energy and telecom, old and reliable with new and cleaner to create a new portfolio of options that is cleaner, more efficient, still reliable and most important profitable at grid parity prices. Yes, there are technology winners and losers but it is not the government making the choices but customers in ruthlessly competitive markets.  The question is who is predator and who is prey?  Who adapts and who is Darwinian toast?  And there are surprises in the ability of some old technology to be re-purposed to play new roles never imagined in a ‘Government Motors’ past.
  4. ENERGY ENDURANCE:  (Utilities morph from command and control to choreograph a modular, secure, clean distributed energy future).  Can old dogs really learn new tricks?  That is the question in this scenario as states ‘declare victory’ when they reach their renewable portfolio standard goals in the absence of new subsidy money, push back on rate increases and dynamic pricing as customer resistance grows, and threaten a return to prudence reviews of utilities out of fear of customer revolt over rising rates.  But this time utilities do not line up for the beatings.  Instead they say—by all means let’s have a prudence review of all those failed regulatory policies and their costs you imposed on utilities and our customers.  Bring it on!   Fearful of the sum of the costs of their political correctness and the trashing of their policy aspirations, politicians and regulators reach a new regulatory compact with utilities balancing energy costs, economic growth and environmental consequences. Can utilities really change that much that fast?  A new strategy emerges around a common theme of protecting energy security and using it to grow the economy to compete in global markets on our terms.  Will market forces really deliver a cleaner, distributed energy future?  Will the end of RPS and other costly regulations lead to a more sustainable clean energy future? This is a scenario of conflict, negotiation, alignment and shared values for the long haul ahead.

Those are my scenario story lines for your consideration.  I plan to use them to ‘sanity check’ some of the regulatory and policy proposals on the horizon, look at the actions of utilities and other market participants  and play ‘what if’ in considering the real market potential of smart grid and other big changes in our energy future.  I invite you to weigh in.

Signposts of Our Smart Grid Future

Here are a few signposts to help you assess which scenario pathways we might be on today?

  • The real cost of energy, environmental and regulatory policies are hidden from customers.  As it is exposed to daylight how will customers react?  Here is one signpost of change from my home state of California: “You’re going to see significant price increases over time from renewables as you add it to the system, it is going to result in higher costs for consumers.” Aaron Johnson, director of renewable energy policy at Pacific Gas and Electric Co. said in a San Francisco Chronicle story.  California Governor Jerry Brown signed SB 836 by Senator Alex Padilla requiring disclosure of prices utilities pay for renewable energy procurements in a published report to the California Legislature due in February 2012 and each year thereafter.  Previously, renewable energy procurement prices were kept confidential for the first three years after each solar, geothermal or wind project comes online. This nondisclosure rule was adopted when there was little competition among renewable developers to avoid collusion in pricing, but today with plenty of competition the rule has the perverse effect of preventing customers from understanding the real drivers of rate increases ahead. But it also leaves the public in the dark, unable to know how much they’re likely to pay until the higher bills arrive.
  • US total non-farm payrolls are the same in 2011 as they were in 2001. Unless we get our economy growing again we will be unable to achieve our energy, security, environmental or social goals.  In 2011 the first eleven months of total non-farm payrolls averaged 131.08 million according to the US Bureau of Labor Statistics.  But in 2001 US total non-farm payrolls averaged 131.83 million per month.  Do you see the problem?  We lost a decade of economic growth.  But our costs did not go down so we borrowed the money to pay our bills and kept borrowing.  The sand on the beach underneath our feet is rapidly eroding taking with it our economic and industrial foundation, our global economic competitiveness, defense and security capabilities, our productive growth and the tax revenues we need to sustain our economy and pay for the social benefits we have promised past and future generations.  If we muddle along like this much longer our muscles will atrophy and our wallet will be completely empty.  We can’t keep borrowing money we no longer can pay back.  We must face the barriers to growth head-on, change the policies that are not working to encourage growth, and restore our competitive position with sustainable growth.  There is no substitute for doing this.
  • Will EPA Regulatory Policies will Create Reliability Issues?  While utilities and regional transmission organizations raise questions about the impact of proposed EPA regulations on electricity reliability, FERC is holding a technical conference to consider the matter.  The Administration claims the proposed regulations are reasonable and released a new report to support its claims.  Fitch ratings revised upward its estimate of the impact of proposed regulations on coal fired generation says that as much as 83GW of coal fired power might be forced into early retirement in part because the short time frame for compliance forces utilities to make decisions to close power plants because the lead-time required to retrofit them is not long enough to make the changes before the plant falls out of compliance.  Kansas was the latest state to join in the challenge to the Cross State Transport Rule at the US Court of Appeals arguing that the rule is unreasonable.  EPA says the implementation of the rule will cost Kansas utilities $5 million per year and that the benefits of the rule in preventing 83 to 210 deaths annually in Kansas and saving $700 million to $1.7 billion annually in health care costs is worth it.  Kansas says the actual cost if about $100 million and EPA is overstating the benefits.
  • US International Trade Commission find Probable Cause China dumps Solar PV Panels on US market.  That was the December 2, 2011 finding of the US commission charged with hearing complaints about unfair trade.  The decision was unanimous among the six commissions.  The matter now goes to the US Department of Commerce to recommend punitive tariffs against Chinese solar PV panels.  A recommendation is expected early in January when the Commerce Department files its report.   The issue cuts both ways.  China has used feed-in-tariffs and other subsidies of solar PV panels in Europe and the US to grow market share for its domestic production of PV panels by driving down prices below those of EU and US manufacturers.  In 2010 this action caused FiT subsidized markets in Spain and Germany to crater as local producers were forced to cut prices to meet China’s lower prices creating a kind of death spiral for local manufacturing in an over supplied market for PV panels.  On the other hand, China’s low prices have made solar energy project more affordable and increased the pace of solar market growth overall.

There are many moving parts and changing rules in the smart grid future.  Like any new market there is volatility and uncertainty.  While competition is good for markets by weeding out inefficient players, as we have seen in these signposts a global competition for market share sometimes leads to unintended consequences.  Frustration over 9%+ GDP growth in China while it dumps PV panels in US and EU markets at subsidized prices is not the way we expected to get to grid parity.  Similarly, the nation’s energy infrastructure was built over decades, but the Administration is trying to remake it at warp speed by churning out one new regulatory demand after another.  Customers are worried that the reliability of the electric power system is being put at risk before the smart grid enabled clean energy future the Administration has promised is delivered.