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(originally published by Booz & Company)


What’s So Smart about the Smart Grid?

Changes in the ways consumers use electricity have spurred the need for a more intelligent way to distribute energy.

The traditional electrical grid, in which electricity is generated and then distributed far and wide from large centralized facilities, is facing unprecedented change. On one hand, patterns of demand are shifting in unpredictable ways: The use of energy-efficient appliances, for example, is reducing demand at the same time that the rise of electric vehicles is making new demands on the grid, causing changes to usage volumes and load distribution. On the other hand, electricity is now being generated in unexpected places, from alternative energy sources to individuals’ homes. Incorporating these new sources into the grid in a way that meets unfamiliar patterns of demand requires a new way of managing electrical distribution. And in this regard, a concept that is beginning to gain traction is that of transforming the “old grid” — one that Thomas Edison would recognize — into a super-efficient and intelligent system: a smart grid.

Smart grid technology leverages the idea of the “negawatt,” the notion that the cheapest form of electricity is the watt of electricity that you never use. A smart grid system allows for collaborative, two-way communications and electrical interaction between utilities and consumers. Utilities can selectively modify the amount of electricity they supply, and consumers can adjust their electricity use to take advantage of market price conditions. This process, called demand response, employs smart meters that provide real-time pricing to customers, which gives consumers the incentive to reduce electricity use during high-priced peak periods. The target is a phenomenon called “peak load shedding,” or “peak shaving.”

In addition to load management, the smart grid would integrate and then distribute to utilities and consumers electricity produced by the increasing number of widely dispersed, often intermittent electricity generators operated by businesses and homes. These can include everything from large, utility-scale wind farms and photo-voltaic solar systems to wind, solar, and micro-generators in individuals’ backyards. If they can be incorporated into the electrical grid, micro-generators would add a level of useful redundancy, making the grid more robust, and would also cut consumer costs. A recent MIT study found that adding a gigawatt of solar power to the New England region — which is about equal to the power produced by a midsized conventional plant — would shave peak pricing and hence lower utility rates for all New England customers by 2 to 5 percent.

Despite these benefits, many utilities have yet to invest in the smart grid. Their hesitance is caused by a number of factors. First, the technology is still evolving, and utilities are wary of making substantial investments in systems that could quickly become obsolete. Second, regulatory moves regarding the smart grid remain uncertain. Finally, although smart grid technology would bring more stability to the system, it is not entirely clear whether the massive investments required will show a return.

There are exceptions, however. Austin Energy, which is owned by the city of Austin, Tex., and is the ninth-largest public power utility in the U.S. by number of customers served, recently overhauled its IT system to accommodate smart grid technology. The company says this move has trimmed millions of dollars from its operating costs — money that was reinvested in more cost-saving technologies. And Pacific Gas & Electric (PG&E) has led the way in integrating alternative power such as wind and solar into its distribution system, which is being transformed into a smart grid. But even the success of such projects has not convinced regulators that smart grids are inevitable. “Regulators, myself included, need to understand this technology,” Suedeen Kelly, commissioner of the U.S. Federal Energy Regulatory Commission, said in March 2008. “We need to understand what it can deliver and what it can’t deliver so that decisions to deploy it are smart decisions.”

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  1. Rolf Adam and Walter Wintersteller, “From Distribution to Contribution: Commercializing the Smart Grid” (PDF), Booz & Company white paper, June 2008: The article on which this piece is based focuses on the challenges of the smart grid in Europe and recommended steps for the industry.
  2. Suedeen G. Kelly, Official statement from the Federal Energy Regulatory Commission (PDF), June 2008: A brief overview of the government agency’s position on the smart grid and the steps it is taking to learn more.
  3. The Edison Foundation Web site: The events section provides an overview of the foundation’s conference on the smart grid, including downloads of the presentations.
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