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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.

(originally published by Booz & Company)

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.”

Rather than viewing the smart grid as a threat, utilities can incorporate this nascent concept and its byproducts into a business plan with the potential to decrease investment costs. For example, utilities could charge a tariff for allowing homes and businesses that produce their own electricity to hook up their micro-generators to the larger grid. By tapping the output of these independent electricity producers at critical times, utilities will enjoy a more robust grid and minimize the need for expensive oil- or gas-fired generators that they rely on now to provide extra intermediate-load electricity.

And as the smart grid becomes more popular, it is likely to encourage a broader awareness of the need for energy conservation among consumers that will trickle down to activities traditionally separate from home electricity generation — especially to transportation, as more and more people purchase hybrids, plug-in hybrids, and electric cars. The growth of the “alternative” automobile sector will put tremendous pressure on utilities to add the capacity necessary to charge the batteries and other equipment that will power the millions of next-generation cars. In one of the more ambitious projects, PG&E is experimenting with a Vehicle-to-Grid smart grid system that would use wind power, which often generates significant electricity in the dark, to fuel millions of electric car batteries plugging into the grid at night.

The utility industry and other interested parties are beginning to take tentative steps to at least investigate and discuss the benefits of the smart grid. In April 2008, the Edison Foundation, the lobbying group for U.S. electric utilities, held a two-day conference on the smart grid that featured keynote speeches by Jeffrey Immelt, CEO of General Electric, and Peter Fox-Penner, a principal partner of utilities consultancy The Brattle Group. Also in April, utilities from across the country and from as far away as Ireland, Germany, and Nigeria met for the “Metering America” conference in San Diego. In June, more than 150 state and federal regulators, consumer advocates, utilities, and technology companies met at the Demand Response Symposium in Baltimore. And that same month, the U.S. Department of Energy hosted a “Smart Grid Implementation Workshop” for federal and state agencies, consumer groups, academics, utilities, and electric-equipment manufacturers. It is crucial that these symposia and conferences continue — and that they continue to be bolstered by industry surveys, reports, and white papers making the industry’s best-case vision of the future. These insights form the basis of an argument that will invite regulators and consumer groups to join forces and chart an intelligent course toward a profitable smart grid. 

Author profiles:

Rolf Adam is a principal in Booz & Company’s Munich office. He specializes in transmission and distribution, smart grid initiatives, and clean technology for the energy and utilities industry.

Walter Wintersteller is a partner in Booz & Company’s Munich office. He specializes in strategy projects for the energy and utilities industry.
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