Will Smart Grid Peak Too Soon?

Jesse Berst had an interesting post on his SmartGrid News blog saying that smart grid progress was going better than expected but was about to get worse.  It describes his recent conversation with eMeter’s Chris King about the pace of meter installations.  Jesse compares the answer from Chris with the conventional wisdom in the industry that we should reach 20 to 25% smart meter market penetration by 2020.  Chris King’s view is it will happen much faster with his estimate of 50 million smart meters by then.  The faster pace is confirmed by a separate report from Pike Research which suggests we could get to the 25% market penetration tipping point by as early as 2013.

So what?  That sounds like good news, right?

Not necessarily.  The fast tracking of smart meter installation has been artificially accelerated by stimulus money and a lot of meters are being bought and installed.  The ‘not necessarily’ part of the answer is the rest of the transformation infrastructure is not as sexy or subsidized so it will take longer—maybe much longer to implement.

What are you talking about?

Smart meters are really pretty dumb without the software and other technology to turn the data collected into useful insight.  There is the messy business of interoperability and whether all these Silicon Valley start-ups hoping to build a better sensor, dashboard, meter data management software and other applications can get their act together so all this stuff plays ‘nice’ together.

So if we have smart meters and smart gadget attachments we need the smart operating system to make it work. This part of the smart grid puzzle is shaping up like the Star Wars trilogies as a competition between good and evil, between rebellious Jedi Knights and the more powerful Empire.  In this competition we do not yet know who is Luke Skywalker and who is Darth Vader.

We do know this—while the cleantech forces of Jedi Knights are busy skirmishing over smart grid market dominance and the competition to build end-to-end solutions to actually make it all work, the Empire is working—or not working more accurately—to frustrate the Jedi aspirations for a new Republic of competitive smart grid enabled entrepreneurs.  And there are two Death Stars in their arsenal waiting for the right moment.

Those Death Stars are:

  1. Interstate Electric Transmission
  2. Dynamic Pricing

The empire knows that the traditional utility business model relies upon regulatory fragmentation, protected service territories and the torture of NIMBY resistance to building transmission lines.  The Empire does enough transmission construction to keep its regulators assuaged and enable access to enough renewable energy resources to meet its RPS obligations—-and no more.

But without substantial new interstate electric transmission to enable smart grid Jedi to scale their business enough to survive the expected fall in market penetration after the stimulus money dries up, the republic will fail to thrive as a massive wave of consolidation sweeps the cleantech crowd leaving only a few big players standing.  Much as we have seen in the wind and solar energy spaces, it takes deep pockets and scale to compete with China and play in broad global markets.  Start-ups are no match for the Empire even if a few of them might get lucky.

The other Death Star is dynamic pricing.  Today the Empire protects itself with average cost pricing embedding in the regulatory compact for generations to protect ratepayers from price volatility.  But a smart grid enabled work that depends upon demand response, energy efficiency and new technology and gadget sales needs volatility to assure that end users make choices that promote the scaling of their products.  If ratepayers continue to be protected by average cost pricing in rate structures and budget billing plans all the incentive to do something different goes away—-and with it the market share growth and recurring revenue from incremental sales after the stimulus.  Life in calm water is a terrible place for a surfer who needs a Maverick’s size wave to win the competition.

Guess what?

My guess is there is no better than a 50/50 probability that the Federal Government and the State will get together to build enough interstate electric transmission to make a competitive, profitable smart grid market.  Nor will regulators and terrified politicians be willing to risk the wrath of voters by adopting dynamic pricing that subjects end use residential customers to electric or gas price volatility enough to get the demand response and energy efficiency the smart grid enabled vendors need to scale their Jedi enterprises.

Expect to see a substantial consolidation in the energy cleantech space that is already underway accelerate to warp speed as soon as smart meter installations start to fall off.  The big players see it coming and are doubling down for market share growth now, but lower future installation forecasts will displease investors as Jesse correctly suggests.  Smaller players with a good product in need of a sufficient solution to plug it into better get their deals done or start ‘putting lipstick on their pig’ and head for the exits.

The Death Star in Star Wars was defeated by determined Jedi who did not give up—and that might happen here too.  But the Bakersfield Effect of negative ratepayer reaction to the unintended consequences or confluence of forces surrounding smart meter installations suggests—it ‘ain’t gonna happen on my watch’ as the mantra of most politicians and regulators for the foreseeable future.

For that reason I think smart grid is peaking too soon and a lot of smart meters will end up saving the Empire the labor costs of manually reading meters—and not much more—until we know who Luke Skywalker is and in which prequel scenario the evolving smart grid rules suggest we are playing.

Then again the other question is who will be Darth Vader?