Today’s electrical grid is like the telephone system of 1980s. It is engineered to supply more electricity than typically needed, because utility employees also have an 11th Commandment to “keep the lights on.” This excess supply is generally most pronounced in two areas: generation of electricity and distribution of low voltage electricity from substations to our homes and businesses.

What does this extra capacity look like in our electrical grid? It involves keeping power plants on standby, ready to deliver megawatts of electricity on a moment’s notice if a catastrophic failure shuts down an online power plant. It also means building expensive peak power plants that operate for a limited number of hours each year.

 
At the distribution grid, electric utilities today make educated guesses about how much electricity is flowing to any traditional electro-mechanical meter at any moment in time, and oversupply electricity to operate equipment and appliances. In other words, to ensure quality of service, utilities deliver excess quantity. That means that while our lights don’t flicker, we are also paying for more electricity than we would actually consume, and power plants are generating more electricity than we actually need.
 

Today’s grid operators are now challenged to deliver sufficient power for peak events, when the demand for electricity is exceptionally high. Peak events are often related to unusually cold or hot weather impacting sufficient numbers of customers in a region. If utilities continue to solve peak electricity needs with existing solutions, we will be funding construction of large power plants that operate for a limited number of hours in a year. If utilities continue to address quality of service through excess quantities of electricity at the meter, we’ll be funding construction of even more power plants for ongoing electricity consumption.
 

The Smart Grid introduces innovative technologies that offer new solutions to these challenges. New technologies like smart meters add intelligence to grid operations through communications capabilities that let utilities calibrate the flow of electricity to meters in realtime. Some utilities are testing voltage reduction procedures that slightly pare down the supply of electricity to homes and businesses without any adverse impacts to the quality of service. Utilities that deploy voltage reduction over their customer base enjoy sufficient reductions in overall electricity needs that can eliminate or postpone new investments in generation plants for ongoing or peak use.
 

Smart Grid technologies also enable placement of distributed energy resources like rooftop solar, energy storage solutions, and microgrids that obviate the need for centralized generation facilities. Distributed energy storage has the potential to reduce the need to keep large generation assets in standby mode.  Smart Grid technologies offer a new business model vision for utilities in which advanced communications, sophisticated software applications, and renewables generation innovations can significantly transform the distribution grid. Realizing this vision requires shifts in thinking on the part of utilities, policy-makers, and consumers. We’ve experienced and enjoyed similar magnitudes of change in the telecommunications sector, as evidenced with a variety of communications options for telling mom just how much she means to us on Mother’s Day. Just how differently will we produce and consume electricity on Mother’s Day thirty years from now? One thing seems certain – the Smart Grid will manage peak electricity needs very differently from today’s solutions.

So what does the wine business have to do with the Smart Grid?  It’s an interesting analog for how our electricity business models could evolve.  Our future could include electricity négociants that offer a range of services, and they could disrupt traditional investor-owned utility (IOU) business models as well as intermediate typical utility/consumer relationships.      

We already have the first few intermediaries between utilities and consumers in the form of Demand Response (DR) service providers.  DR service providers organize and aggregate large consumers of electricity, typically Commercial and Industrial (C&I) businesses that have operational flexibility to shift electricity usage to off-peak times.  They are found in both the wholesale and retail electricity markets.  One example is Constellation Energy, which offers services that help businesses function in DR as well as other energy markets.   EnerNOC is an example of a company that has expanded beyond traditional DR programs with energy efficiency and carbon emissions management services.  The electricity business model evolution has already begun on the consumption side.

A revolution will occur on the production side, with the introduction and adoption of cost-effective distributed energy resources (DER), which include electricity generation and storage.  These Smart Grid technologies are disrupters to our existing electricity supply chain, which is based on a flow of electricity from centralized generation controlled by utilities or regionally organized markets called ISOs (Independent System Operators) or RTOs (Regional Transmission Organizations).  Literally giving “power to the people”, DER products can transform this supply chain.  Power produced onsite can serve multiple purposes.  It can be used from a self-reliance perspective, which is what net-zero energy buildings aim to achieve by producing all the electricity necessary for their operations.  Or, DER-produced electricity could be sold back to the utility as is already done with net metering tariffs and deliver economic benefits to the asset owner.  

Electricity négociants could play interesting roles in this supply chain transformation.  An electricity négociant might contract to manage the electricity produced by a campus microgrid, and deal directly with the local utility to sell specific amounts of power to the utility at peak times while simultaneously organizing consumption reduction actions within the microgrid environment.  It might also deliver monitoring and maintenance services on all that microgrid generation capacity, offloading the responsibility from the onsite facilities management group.  For instance, some solar companies offer a range of services from insolation analysis and financing options to maintenance of a site’s solar generation equipment.  A segue into similar services for energy storage assets would be a logical next step.  A combination of consumption and production services offered by an electricity négociant would also be the next evolution in the electricity business model.  

These business models can intermediate the direct relationship that utilities have traditionally had with consumers.  And that should trigger some soul-searching in utilities – particularly the IOUs and the regulatory agencies that interact with them.    For IOUs, would it be strategically sound for electricity négociants to intermediate their consumer relationships?  Could IOUs become electricity négociants too?  What are the impacts of DER to their aggregated lifetime consumer valuations?  For regulators, how would they work with négociants to ensure that consumers continue to get safe, reliable and cost-effective electricity services?  Do DER deployments require a rethink of how utility rates are calculated? What policy shifts would encourage evolutions in electricity supply chains?

In the wine business, négociants provide consumers with a wide offering of wines varying in quality and price.   Could a similar range of blended electricity production and consumption service choices from electricity négociants be available to consumers in the future Smart Grid?

In the Smart Grid world, there are conferences, webinars, and articles focused on educating consumers about the Smart Grid.   This education is deemed necessary to arm consumers with knowledge to enable their full participation in Smart Grid benefits.  And certainly Americans in their multiple roles as consumers, voters, and taxpayers need to understand the importance and urgency of investment in grid modernization.  But why are we allocating most of our discussion focus and investment of time and money into consumer outreach and education?  Shouldn’t we talk more about educating utilities and preparing their employees for changes that the industry will experience? 

After all, utility employees are already dealing with some part of the electricity supply chain.  The Smart Grid is influencing profound transformations in operations at all points of this chain, meaning generation, transmission, and distribution.  Generation is changing from steady state fossil fuels to intermittent clean renewable energy sources like wind and solar.  Transmission of high voltage electricity is getting a communications makeover to provide realtime situational awareness.  Distribution of low voltage electricity to residential and commercial customers is experiencing the most change, including the introduction of distributed energy resources like rooftop-based solar power and energy storage; and vastly extended remote monitoring and controlling of distribution assets.  But most importantly, the old electricity supply chain is evolving into a new value chain that puts an emphasis on consumers.  Consumers can become prosumers, or producers as well as consumers of electricity.  That means that utilities’ relationships with consumers must change as much as consumers’ relationships with utilities will change.     

For utilities this new value chain means a shift in perspective from meters and ratepayers to customers and consumers. Here’s how we describe one implication of that shift in our consulting work at the Smart Grid Library:  A customer is the one who gets the bill.  That customer may be a sole occupant of a household, or there may be multiple occupants at that address.  All occupants of residential or commercial buildings are consumers of electricity (or gas or water).  If a utility is targeting all its communications and outreach to the customers who pay the bills, they are missing other consumers in those buildings. 

There are 311 million Americans.  There are 561,700 utility employees in the USA (this number includes water/water treatment and natural gas distribution workers).  Wouldn’t it be easier to first ensure that all utility resources were educated to understand and communicate the changes wrought by Smart Grid projects and the value chain roles/responsibilities evolution rather than reach a vastly larger number of people who aren’t paid to concern themselves about electricity?

The Smart Grid is much more than some changes in technology to make electricity and communications bi-directional.  It means deep, organizational DNA-level transformations for utilities.  It requires serious industry attention to prepare utility employees for new ways of doing business, interacting with consumers, and new roles/responsibilities to manage consumer education and communications.

These suggestions rely on voluntary individual actions to be effective.  We also need wholesale changes to our infrastructure to make significant reductions in the greenhouse gases that are warming our planet.  The electric grid is an important part of that infrastructure.  Grid modernization projects are leading the evolution to a Smart Grid, and these projects all help to directly or indirectly reduce CO2 emissions.  Earth Day is a good moment to review some of ways that the Smart Grid improves our local and global environments along with improving our domestic energy security:

1.  The Smart Grid integrates clean, domestic renewables like wind and solar into the grid to deliver electricity reliably and safely.  That reduces the need for electricity from coal-fired power plants, a major source of CO2 emissions.  And natural gas, while cleaner than coal or oil, still produces CO2 emissions in extraction and consumption.

2.  The Smart Grid can integrate distributed energy resources such as rooftop solar panels, EVs, and stationary energy storage into the distribution grid.  This reduces the need for remote generation and transmission facilities, which lose between 8% – 15% of their produced electricity in long distance transport.

3.   The Smart Grid can handle a vastly electrified transportation system and widespread use of electric vehicles (EVs), eliminating oil as the primary transport fuel and thus its considerable CO2 contributions and other pollutants to our atmosphere.

4.  Smart meters eliminate the need for utilities to drive around collecting meter data for billing purposes.  According to one estimate from General Electric,  one million smart meters reduces annual fuel consumption by 7000 gallons and 45 metric tons of CO2 gases. 

5.  Smart meters and other intelligent (ie capable of remote monitoring and/or control) devices in electric distribution grids can calibrate the demand and supply of electricity with much greater granularity than current practices.  Utilities routinely “oversupply” electricity to end users to ensure that everyone has all the energy they need at any point in time, but a Smart Grid can modulate that flow of energy to avoid oversupplies and thus reduce the amounts of electricity generated.  And when fossil fuels are the generation fuel, these calibrated reductions in supply also reduce CO2 emissions.

The Smart Grid has many benefits, and let’s remember as we celebrate Earth Day that it has significant positive impacts to make our world a more comfortable and sustainable place.

It has worked remarkably well for the past 130 years, but if the grid was a ship sailing in the Atlantic now, it has to dodge dangerous icebergs ahead.   Here are three of the most dangerous risks that electric utilities, regulators, and citizens must prepare for:

Catastrophic failure.  The existing grid lacks sufficient security tools and practices to defend against disruptions caused by cyber attacks, since it was built on “security through obscurity”.  As the grid evolves into the Smart Grid, obscurity fades away.  Devices that are capable of remote communications may fall victim to remote cyber attacks by lone hackers, terrorist groups, or unfriendly foreign governments.  There are multiple efforts underway to help secure the grid, and these activities will help “harden” the grid against cyber attacks.  However, the Titanic disaster could have been avoided if the crew had not been lulled into a false sense of complacency in their advanced ship designs and if the captain had not put a priority on speed over safety in iceberg-laden waters.   Smart Grid initiatives need to embed secure technologies and practices into their plans.

Lack of failover strategies.   The Titanic didn’t carry enough lifeboats to hold all its passengers and crew, because an unsinkable ship didn’t need them.  Our current grid is structured in a pyramid shape with the fewest assets, relatively speaking, in generation, more in transmission, and most in distribution.  Remove a source of generation and large numbers of customers may be impacted.  For instance, the nuclear power plant at San Onofre in southern California is indefinitely sidelined for safety reasons.  Southern Californians are facing the prospect of a long, hot summer without this reliable energy source.  The future Smart Grid can support a highly distributed renewables generation structure that reduces the impacts of loss of centralized sources.  We need as many “lifeboats” as possible to ride out any catastrophic failures. 

Inability to think the unthinkable.   Electric utilities have a fairly unique role to play in our modern society and economy that can be summed up in four words – keep the lights on.  They’ve done it well.  But the Smart Grid is changing the electricity ecosystem, and utilities have to create a number of new “what if” scenarios and test their responses to them.  Their scenarios have to include “what if a concerted cyber attack disables our main generation sources AND transmission facilities?”  This type of thinking exposes the unthinkable – the grid’s reliability is threatened by its lack of resiliency.  The US military has already asked this question, and we see their answer – microgrids.  They are building resiliency into their bases and operations through distributed generation with renewables, energy storage, and strategies to manage their electricity needs.  Smart utilities should adopt similarly aggressive microgrid plans and timelines for critical infrastructure such as hospitals, communications centers, industrial facilities, and government centers to ensure that a catastrophic event doesn’t wholly disable civil and economic operations.   

For many security experts, it is not a question of if, but rather when the grid will be the victim of a major cyber attack.   Will our electric utilities and policy makers learn to avoid or minimize failures based on the lessons from past catastrophes, or are we doomed to sit in the dark because we failed to think the unthinkable?

I recently moderated a panel discussion at a Smart Cities event about the technological and policy implications of big data created as more devices are enabled with intelligence to sense and communicate to other machines (M2M) or humans (M2H).  I have three observations to share with you. 

First, we need to think differently about decision-making and time.  Data analytics give us the opportunity to time-shift decisions.  Sophisticated analyses can be used in predictive and proactive decision-making.  In the Smart Grid world, we recognize that energy storage allows us to “time-shift” generation.   We can also time-shift electricity consumption through demand response and dynamic pricing programs that encourage or reward use at off-peak times.  A smart city working with data to predict traffic patterns could enable automated and realtime traffic congestion management instead of reactive activities.  Smart Grids and smart cities can reap significant benefits from data analytics.  But humans have to imagine the possibilities of how big data can be harnessed to really improve infrastructure management.  And the most insightful information derived from analytics is worthless if humans fail to take action on that information. 

The second takeaway is that the concept of privacy has the same plasticity that we see in our concepts of personal space.  Personal proximity definitions vary on several factors including culture and relationships.  Privacy, and especially data privacy, has similar plasticity in terms of our expectations of how much and what type of data we intentionally share with friends, family, acquaintances, businesses, and governmental entities.  There is a real need for well-articulated roles, responsibilities, and benefits of data creation and use as well as the perils of unintentional data sharing. 

Finally, we need a new law that helps us frame expectations around data.  Data can be created by machines or by humans.  Data will travel across networks to destinations, and may be transformed (anonymized), analyzed (correlated with other data), or stored in multiple locations.   Moore’s Law stated that processing power would approximately double every 24 months.  Metcalfe’s Law said that the value of a network grows as the square of the number of users grows.  We are missing a similar law that frames our expectations about data volumes and the privacy and security of that data.

We need big data from machines and humans, and holistic solution design methodologies to optimize our designs, developments, and management of smart cities and Smart Grids.   But we do need to increase our understanding of the promises and perils of data use in both types of complex infrastructures.  What are your thoughts about the equivalent of a Moore’s Law for data?

Cybersecurity – this $14B* category includes hardware and software and services for intrusion prevention, intrusion detection and data encryption for a dynamic proliferation of IP-enabled and interconnected generation, transmission, distribution, and consumption assets and devices. Utilities have traditionally relied on “security through obscurity”, but that won’t fly as M2M (machine to machine) communications and Smart Grid initiatives add monitoring and most particularly actuation (control) capabilities to equipment that generates, transmits, distributes, or consumes electricity. The 2010 Stuxnet incident illustrates how a targeted cyberattack against a software program can cripple industrial facilities.  Substitute a large generation facility or major transmission substation as the attack target, and you can imagine the economic disruption and threats to security and safety that result.  Utilities are now identifying cybersecurity concerns as business risks in their SEC filings.  Couple that with federal requirements to protect assets identified as Critical Infrastructure Protection (CIP), and the result is a huge market potential for solutions that “harden” networks, assets, and the data residing in them.

Grid Management – this $5B⁺ category includes software to manage converged, hybrid communications networks AND power grid operations.  Communications can be wireless (public or private spectrum) or PLC (power line communications) and since utilities average between two and nine communications networks to manage grid operations, it is highly likely that any utility will have a combination of network technologies.  Rather than manage each network on an individual basis, utilities will find their best opportunities to wring cost out of operations through combined network and device management.   Utilities will need solutions that can distribute intelligent controls throughout networks and converge management of them into holistic views of overall grid and network operations.  This category also includes software to manage microgrids, residential demand response, and individual components like energy storage or other distributed energy resource assets.  In addition to pure technology plays, there will be opportunities to invest in companies that have disruptive business models that intermediate the utility/consumer relationships, although these are relatively riskier investments. 

Analytics – this $2B** category covers all the software and services needed to manage the data produced by power grids, communications networks, and the equipment used in these grids and networks.   Just like the need for converged network management, there is a real need for solutions that have proven abilities to handle extremely large volumes of data – commonly called “big data” produced by various grid management applications and assemble it into human-comprehensible information.  That means cleansing data so that it is time-synchronized to develop accurate snapshots from previously siloed applications and melding it with existing business intelligence tools for effective visual displays and presentment of information.  The initial opportunities are in solutions that enhance legacy applications for outage management, distribution management, and workforce management, but analytics to develop consumer insights have significant promise too.  Utilities are discovering that their outreach to consumers is improved with information that supports segmentation strategies for marketing and education.   Look for analytics companies that have proven expertise in related business sectors like communications or retail and can leverage these experiences to the benefit of utilities. 

Of course, not all angel investment comes from Silicon Valley, but that’s where a lot of the money is, so entrepreneurs with promising Smart Grid solutions need to make it a destination in their quests for funding.

* Pike Research

+ Lux Research

** Utility Analytics Institute

What is missing from their study is information about grid resiliency, and that mirrors an absence of discussion in the electric utility industry.  Resiliency is defined in the Smart Grid Dictionary as the ability to resist failure and rapidly recover from breakdown.  It can apply to individual grid components or to systems.  Resiliency absolutely impacts grid reliability.  A more resilient grid is a more reliable grid. 

Building a resilient grid is accomplished by policy and technology.  On the policy side, the MIT study points out that there are no national standards in place for cybersecurity.  We lack benchmarks for regulators or utility executives to measure the effectiveness of cybersecurity strategies and tactics.  One important recommendation urges the establishment of national cybersecurity oversight, although whether that should reside within the Department of Energy or the Department of Homeland Security or another federal agency is left for lawmakers to decide.  The good news is that there are mature cybersecurity technologies and solutions that can be deployed in utilities to improve system-wide resistance and resiliency to malicious cyber attacks.  The bad news is that technology is, relatively speaking, easy to acquire and deploy.  Change – for people and processes – is hard.  Utilities must incorporate the appropriate skills, policies, and practices into their daily operations to maintain a cybersecure, and thus more resilient grid.

On the technology side, the study examines the challenges and opportunities associated with distributed generation (DG) and electric vehicles (EVs).  Poorly integrated DG and EVs could reduce grid reliability, and the study offers sensible suggestions to mitigate this concern.  But the opportunities for grid resiliency were shortchanged in the omission of Distributed Energy Resources (DER) assets like energy storage and microgrids.  The study notes that today’s energy storage technologies haven’t hit the price points that compete with traditional generation sources.  However, we’ve seen significant price drops in solar photo-voltaic technologies that are rapidly expanding market size and adoption rates.  The next press release could announce a game-changing technology in energy storage that completely revises existing cost assumptions. 

The absence of microgrids from this study is most troubling.  You can find a full definition of a microgrid in the Smart Grid Dictionary.  It is a microcosm of the electrical grid, minus transmission.  Microgrids contain generation assets – typically renewables, but can include co-generation and traditional energy sources too.   The electricity generated by these assets is consumed within the microgrid, or it can be sold back to the larger utility grid through interconnection agreements.  Distribution grids that have interconnected microgrids and other DER assets are more resilient to disruptions resulting from natural or human causes because they can reduce the numbers of homes and business affected by an outage.  Indeed, a DER strategy can be likened to a diversified investment portfolio.  You spread your assets across a range of investments to minimize the risks of failure. 

Grid resiliency through sensible cybersecurity and DER strategies will improve grid reliability.  Generation and energy storage assets must be distributed across the grid, along with the intelligent devices and software to securely manage these assets.  That means new policies and technologies are needed.  That was an important point of the MIT study.  The Smart Grid will require new software applications and services to manage the increasing numbers of devices that create, monitor, and control electricity across the supply chain.  That’s good news for Silicon Valley, which is very good at finding and funding innovative software applications.   This region should be a significant contributor of technologies and business models that help modernize our electrical grid.

Modernizing the grid can transform the energy agenda from oil as our primary transportation fuel to clean, domestic and renewable sources of electricity. Investing in a Smart Grid that integrates renewables also addresses future resourcing concerns. Do you think we’ll ever utter the words “peak wind” or “peak solar” like we use the phrase “peak oil?”

What would significant infrastructure investments in the Smart Grid do to gas prices? It would make them irrelevant for most American drivers. A modernized grid can support electrified transportation on a very large scale, and that has profound implications. Electric vehicles (EVs) can be refueled for pennies per kilowatt instead of dollars per gallon. Retail electricity prices do not fluctuate wildly like gas prices are influenced by Wall Street speculation.

The investment would not have to come at additional expense to taxpayers – the federal government could simply divert the billions in subsidies that currently go to enormously profitable multinational oil companies and redirect it to research and development (R&D) for the most effective materials and technologies in renewable energy sources, energy storage, and real-time energy management. Obama expects Congress to consider legislation in the next few weeks that would eliminate $4 billion in tax subsidies to oil companies. A vote would put politicians on record on whether they “stand up for oil companies” or “stand up for the American people.” Eliminating subsidies to the oil industry is a good start, but the federal government can do more to improve our economic and energy security.

Taking strategic steps to reduce the value that oil has to our economy is a much more effective way to “wage war” against unfriendly countries that base their wealth on oil than wasting American blood and treasure in military actions. Imagine the impacts to their economies if oil is rendered irrelevant by US-developed technologies that replace it with renewable sources of energy for transportation. It is big thinking, and it reframes the energy agenda to fit 21st century realities. Building a Smart Grid can provide significant acceleration to leaving the 20th century energy infrastructure, and all the visible and hidden costs of oil, behind us.

Why does the corporate culture of the IOU need to change?  Because the Smart Grid, (Grid 2.0) won’t look or operate like the current grid.  Grid 1.0 is a complex machine that manages to deliver electricity from centralized sources across the supply chain in a “just-in-time” format to meters.  It mostly relies on fossil fuels.  Utilities have been marvelously adept at running this machine.  Unfortunately, Grid 1.0 has reached its limits.  Grid 2.0 will have electricity flows back and forth across the distribution grid.  Grid 2.0 will have new participants in the electricity supply chain.  Fundamental shifts in thinking as well as in regulatory policy need to occur so that utilities and ratepayers can gain the most out of their Smart Grid investments.  We all benefit when IOUs can adapt and evolve as the Smart Grid becomes reality.

Here are three corporate culture and accompanying policy changes that will help IOUs thrive in Grid 2.0:

Support decoupling policies.  The Smart Grid Dictionary defines decoupling as a regulatory and market strategy that allows utilities to invest in and profit from efficiency-based capacity by assuring them a return that is equivalent to sales of electricity. Decoupling allows utilities to actually encourage consumers to use less electricity without taking a financial hit.  After all, what business would ever spend money to encourage you to use less of their product or service.   But with decoupling, there is no penalty for utilities to have successful energy efficiency programs (which reduce bills for consumers).  Decoupling frees utilities to become trusted advisors to their customer base, and that sets the stage for new programs such as residential demand response.  There are 30 states that do not have decoupling in place for electricity and/or gas.  Utilities and state regulators should create sensible decoupling policies as soon as possible to spur energy savings for their ratepayers. 

Embrace Distributed Energy Resource (DER) strategies and programs.   DER includes customer-owned generation (like rooftop solar) and energy storage (like EVs or stationary batteries) that can substitute or supplement the traditional utility assets that deliver electricity to end users.  Microgrids play a similar role.  Utilities can leverage DER as cooperative, not competitive resources, and offer services to help customers manage DER assets.   IOUs do have one challenge about DER that needs to be addressed with policy changes.  Today’s regulatory policies reward utility investment in assets.  We need to consider a form of “asset decoupling” to help utilities be rewarded for successful participation in DER programs using customer-owned assets.  

Redefine consumer relationships.  Consumers are evolving to prosumers or producing consumers who can produce or store electricity that can offset any distribution grid’s electricity needs during periods of intensive use (also known as peak demand).  Prosumers can help utilities avoid investment in expensive peak power plants or peak power purchases.   However, prosumers are not just limited to people or businesses with the right equipment to make or store kilowatts of electricity.  Any participant in a demand response (DR) program is a prosumer – they are producing negawatts of electricity.  Acceleration of net metering and Feed in Tariffs (FiTs) policies, as well as deployment of residential DR programs promote this relationship redefinition.    

These three substantive shifts in thinking and in regulatory policies will have meaningful impacts on utility cultures.  It will also have impacts on the rest of us too as electricity consumers.  New business models that are encouraged by changes described here can help accelerate adoption of new product and services innovations.   In turn, these innovations can reduce electricity costs, reduce greenhouse gas emissions, and improve our energy security.