Part 4: Global Smart Grid Technology
MG: There are no specific factors that suggest you need a hair dryer that works in the US but not Europe, but that’s a reality is it not?
AJ: To me I think the Smart Grid will be won or lost on the consumers. I had this very 
disruptive discussion yesterday when I said that you really technically wouldn’t need to go much beyond the smart-meter. For example, you could do a lot of what the demand-side and customer-side want to achieve can be done through normal things like HomePlug and other technologies like that, which is essentially connecting devices to the internet. But, you don’t necessarily have to go deep down into the energy networks at least in the first phase. And that could be very disruptive. I mean you could at least conceptually achieve what the customers want without getting too far down. But of course you need the whole vision of smart grid to get the wider vision, the green vision, the electric cars etc. But the consumer’s needs, to reiterate your point, are global. That is pretty much IT standardization which has been around for a while.
GA: To just add in to that point. We’re trying very hard to not just have US standards. 
We’re trying very hard to pick international standards because we want to see the market develop globally and the reason is very simple. Most of the suppliers in this industry are global companies and if they have to make needless adaptations as they move from market to market it increases their cost, making the equipment more costly for utilities and electricity more costly for consumers. So our view is that everybody wins if we have global standards. The area where that is going to be difficult is that we do have imbedded infrastructure in terms of 110 vs 240 volts, and so forth, that will probably never overcome. But when you get to the information overlay and energy management aspects of the Smart Grid there is probably no reason why the standards need to be different.
MG: But still, NIST’s work in this area and the Obama administration’s initiative to work on interoperability in the Mart Grid is a US initiative?
GA: We are very actively reaching out to other countries that are working on similar issues so that we can all be at the table as we work through the use cases and what the requirements are. We set up something called the Smart Grid interoperability panel that I think over time will become something like the internet architecture board is for the internet. We have the governments of Japan and Korea participating in that and we’re developing a relationship with the EU though CEN-CENELEC and ETSI. I think at the end of the day, everyone needs to look at what they need to do to serve customers in their country or state. But we can all work through the design of the system together and hopefully maximize the commonality.
MG: There are some that argue that the customer experience, or at least how they perceive the Smart Grid, is not all that great so far and there is an awful lot of criticism from the consumer side. What would explain this kind of sentiment and how is this problem going to be resolved. What is needed in terms of solving this problem?
KD: I think you’re right that it’s been a mixed reaction from the fairly embryonic roll-out to 
today from the consumer’s perspective and I think that there is a largely an experiential and educational deficit from the consumer’s perspective when it comes to Smart Grid. Which is to say that the value proposition for Smart Grid in terms of what it can do for the consumer both in terms of energy awareness and savings, when it comes to their utility bill, has not been fully explained or appreciated by consumers largely. And to some extent utilities are to blame for this, but to some extent their not because utilities themselves are going through the experiment of working out what this idea of Smart Grid means for the consumers.
There is also a kind of chicken and egg situation here too. For the consumers, in many instances, to fully appreciate the impact of what the Smart Grid can bring to them, you need to have some sort of dynamic pricing. In order to have dynamic pricing you need to have a sufficient number of consumers in a state participating in a program so that this makes sense.
So in many instances we have this experimental roll out of Smart Grid and we have some 3rd party vendors that are trying to provide information to the consumer were we don’t have a full package where the public utilities commission has authorised a program of some sort of dynamic price signals so that people can really start to appreciate what those signals mean to their bottom line. I think this is going to happen in a haphazard, organic, incremental and somewhat painful way as we go forward, and there is no real way to solve that issue smoothly.
MG: I think there is one issue that I am struggling with and that is the fact that the Smart Grid may deliver great efficiency and benefits in terms of savings of resources that are not necessarily priced at the current state. For instance, if you take the impact of fossil fuels on the climate or on the environment, those costs are not priced within the current system. If the Smart Grid delivers a value in terms of saving those costs, it’s going to be of great benefit to society but it’s not going to end up in any substantial savings for the customer. How do you deal with the fact that the greatest benefit of the Smart Grid may well be something that is not showing up in monetary savings that is evident to the consumer?
GA: Well that’s an issue. There’s no question that having a price on Carbon will make the economics of the Smart Grid much more transparent and quantifiable. But I think absent that in the US, as Congress hasn’t done that, we do have the in most of the states in the US have set renewable portfolio standards. That in effect means that since most renewables are more expensive than traditional forms of generation, through these standards that they have set their not going for the least cost energy, their going for energy to meet certain environmental goals.
MG: How do you deal with the problem, that even if you distribute some of the gains to customers, it may well be so small that it is not material to the decision?
GA: This is where the business model and the regulatory model are going to have to adapt to the future. In many of the Smart Grid investments, the entity that has to make the investment is not the one who reaps the financial reward. So you don’t have the right incentive to make the investment. One of the benefits we have in having fifty different states dealing with this is that their trying different approaches to find the right way to provide the economic incentives to do the right thing. And we do have an organization where the state regulators get together and discuss best practices.
MG: Isn’t there a risk that some of these states will then invest themselves into something that is really suboptimal or inferior?
GA: Well hopefully they will find that out before it’s too late by looking at the results of other states that are taking different and perhaps better approaches.
KD: I think that your point as to the fact that some of the savings of customers’ perspective are going to be fairly small and whether that is enough to really incentivise them to participate fully in the Smart Grid is a very good question. Which is to say that we still haven’t worked out the business model from an average consumer’s perspective of: these are the gains you’re going to make for Smart Grid, and given those gains, how much time and energy are you willing to invest in making sure that your energy is managed optimally?
That said I think that it would be a mistake to cabin all of the benefits of Smart Grid into financial remuneration from a consumer’s perspective. There are lots of non-financial reasons and drivers of why a customer would want to participate in Smart Grid. Some of this has to do with these larger global or national externalities which you were talking about, that don’t reside on any specific consumer but reside on the shoulders of all of us. Whether it’s a public consciousness or a zeitgeist, there are lots of other reasons to participate in something like this, in terms of managing their own energy.
AJ: I’d just like to add to this thing about this value. I mean in a sense of where I the value created in many ways for the customer or somebody else. While the Smart Grid is a new type of network, networks themselves are very old and they behave in a very predictable way, basically by getting value to the edge of the network. You see this in telecoms and in IP and so on and so forth. Where I think this would be interesting is that somebody who is an innovator would be kind of utilising the Smart Grid to create something that none of us would see today.
This is my point. About three weeks ago the Sony Walkman was discontinued after 20 years, and today Apple is the dominant player and Apple is not exclusively hardware unlike the Sony Walkman, Apple is hardware plus software. So clearly the value created by these players is the mixture of the intellectual property plus the physical stuff. And that is because you then have this network and these players who are creating new innovation. I think that the whole question of value when it comes to Smart Grids has to also consider the side of these new 3rd party players who are actually software players or integrated players or innovators or start-ups. You can call them many names but that is the value to society and the community and the grid itself.
GA: Getting back to the economic picture from a consumer’s point of view. You have to look at the big picture and consumers are going to have difficulty in grasping this because in the US the asset face of our utilities currently about a trillion dollars and over the next 20 years, to replace retiring coal plants and upgrade coal plants to produce cleaner energy – investments in transmission and distribution, etc. – something in the order of two trillion dollars will have to be spent. That is a huge number especially when you consider that there a trillion dollars in assets today.
The result of this is that there is going to be upward pressure on electric rates just to keep the lights on, it’s inevitable. So if we don’t have the Smart Grid, the costs to consumers are going to be increasing much more than they would otherwise. So if we had a Smart Grid that could shave 20% of the peak generation that’s needed as we retire coal plants, perhaps some of them don’t need to be replace. The Smart Grid would enable that. Consumers are not going to want to hear this, but the fact of the matter is that the Smart Grid will result in rates going up but less than they would otherwise, just in order to keep the lights on.
MG: So essentially what you’re saying is that the price per kilowatt hour may go up, but the total cost may go down?
GA: It’s not clear that the total cost will go down because the rates today are based on an asset base which is very largely depreciated. Transformers are typically about 40 years old. Coal plants are nearing the end of their lifespan and when you’re operating on rates based on fully depreciated assets, that really understates the cost.
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The discussion is continued in Part 5 which can be found here:
www.talkstandards.com/the-us-smart-grid-future-part-5
.For the video of the discussion and profiles of discussants see here:
www.talkstandards.com/interview-with-george-arnold
Part 1 of the discussion can be found here:
www.talkstandards.com/the-us-smart-grid-future-part-1
Part 2 of the discussion can be found here:
www.talkstandards.com/the-us-smart-grid-future-part-2
Part 3 of the discussion can be found here:
www.talkstandards.com/the-us-smart-grid-future-part-3
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