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Summary:

Despite my skepticism I now believe there are some significant opportunities for the smart grid, especially technology in the 400Hz power space. But before we look at these technologies we must take into consideration several points with regards to the smart grid market.

I often meet with VCs and entrepreneurs who want to learn more about the revenue opportunities for the smart grid. It is seen as the hot new technology that will create vast fortunes for the next generation of entrepreneurs. For a long time I have been extremely skeptical of many of the wild exaggerated claims made about the current generation of smart grids and the opportunity to make a return on investment.

However I now believe there are some significant opportunities with upcoming technology, especially technology in the 400Hz power space. But before we look at these technologies we must take into consideration several points of reality with regards to this smart meter and digital power grid market:

1. Price of Electricity Falling: The real price of electricity in most of the world, but especially in North America has been declining over the last 30 years. If the price of electricity has been dropping why do we suddenly need smart meters and/or grids? Why has this become so hot an issue?

2. Surplus Generating Capacity: Most utilities, perhaps excluding those in the U.K., have surplus generating capacity. This surplus capacity has largely arisen from the de-industrialization of our society in the past decade. Much of this heavy industry has decamped to Asia and the third world and is unlikely to ever return. Why would utilities want to reduce demand for energy when they have surplus capacity?

3. Shale Gas Boosting Desire for Power Plants: New shale gas discoveries are significantly lowering the capital and operating cost of new power plants, especially those used for peak power demands. At one time the argument was made that demand side metering would eliminate the need to build power plants for peak demand.

4. Conservative Nature of Power Industry: The power plant utility culture is extremely conservative. Their whole ethos is built around selling more power. Although they will pay lip service to various green strategies such as smart meters and grids, fundamentally they need to respond to the demands of their owners –- whether they be government or shareholders and make as much money as possible selling power.

5. Few Studies: There have only been a handful studies on the potential energy savings of smart meters. Savings of 10-15 percent are claimed, but this is usually with highly motivated individuals and communities. Real world deployment may result in significantly less savings. Look back at the early 500 channel broadband deployments that were done in Florida which failed after the initial enthusiasm, in the face of real world economics. I suspect today’s smart grids are going through the same peak of enthusiasm before the inevitable trough of disillusionment.

6. Stand-by Gadget Power: According to the International Energy Agency, consumer electronics is now the biggest consumption of power in most home as opposed to traditional appliances. A lot of this power draw is from stand-by power consumption which could have little effect on peak load demand. Demand type metering will have little effect on this type of load.

7. Non-Energy Consumption Fees: The largest portion of most consumer’s electric bill is not consumption, but fixed charges such as debt retirement, infrastructure upgrades, transmission line charges etc. Smart meters or grids will have little effect on these non-consumption charges.

But it is important to note that there are at least 3 primary markets for Smart grids/meters:

1. Smart grid backbone infrastructure: This technology allows the utility to monitor phase, power factor, transformer efficiency etc. This market is dominated by companies like Eaton, and Johnson Controls

2. Demand Management systems and meters: This technology allows utilities to manage HVAC (heating and cooling) and other systems in order to reduce peak demand. Most smart meters being installed by utilities today are to implement demand management.

3. Load Management systems: This technology allows customers to more effectively manage their own load and hopefully reduce overall energy consumption. This is where most entrepreneurs and VCs hope to make vast fortunes.

My suggested investment strategies for the smart grids:

1. Use the Internet model of technology development: The Internet only came about because brilliant engineers realized that a new type of network could be deployed as an overlay over the existing telephone infrastructure without requiring any of the existing complex telephone control and signaling mechanisms. The same lesson needs to be adapted for next generation power systems.

Avoid dealing with the utilities at all costs. The utilities are extremely conservative and fundamentally it is not in their self interest to deploy any technology that reduces demand for their basic service. We need technologies that will allow us to build a power distribution overlay network on top of the existing power infrastructure without requiring the approval of the utilities.

Such a technology already exists and it is called 400 Hz power systems. They are used in aircraft and military systems. They can easily be adopted to run over existing power infrastructure at most institutions and campuses by multiplexing with existing 60 Hz systems. Four hundred Hz power systems are ideal for distributing power from renewable energy sources such as on campus wind mills and solar panels, and for connecting to information and communications equipment which has steady but low volume power draw and can be easily adapted to variable power conditions. Four hundred Hz technology also is useful for disrupting power without being caught up in the complexity of interconnecting to the utility, and can help manage feed in tariffs, and for small community grids that are adding renewable power.

2. Focus on carbon not energy. Energy costs are getting cheaper and likely to continue in price because of surplus power and advent of shale gas power plants. One of the main things that will make electricity more expensive is some sort of price on carbon. Despite the failure of Copenhagen and the latest machinations of the US Congress a price on carbon is inevitable.

Regardless of whether it is a carbon tax or a more sensible cap and reward, or perhaps cap and dividend, electricity generated by fossil fuels will go up in price. Technologies and smart meters that can differentiate and negotiate between different sources of power will be important.

3. Focus on working with energy too cheap to meter: Remember that old slogan? Believe it or not it is possible to produce electricity that is too cheap to meter. But you ain’t going to get that kind of power from your local friendly utility. On-campus windmills can produce very low cost power, although not free, in many cases it makes no sense to meter.

The problem is the high degree of variability in power. Developing technology solutions (in addition to storage) that are adaptable to highly variable power will be attractive. Besides most proposed cap and trade plans call for at least 30 percent of utility power to come from highly variable renewable sources as well. The utilities will be desperate to find customers who can use this type of power

4. Focus on ICT: Computers and networks are the adaptable technologies to using 400 Hz and/or variable power. Reliability can be achieved through numerous ways such as clouds, and distributing computing. ICT does not need a 5 nines reliable power system, just like the Internet never needed a 5 nines telephone system. If ICT composes at least 30-50 percent energy consumption in a typical building then removing this load from the 60Hz utility supply will have a big impact.

In summary these are the technologies I look for:

  • 1. 400/60 Hz multiplex power systems
  • 2. Renewable power systems and electronics that can feed 400 Hz power
  • 3. Adaptable ICT equipment that can use fluctuating power sources
  • 4. Smart meters that can negotiate power from different sources such as renewable power, 400 Hz power and finally utility power

This article originally appeared on Bill St. Arnaud’s blog Green IT/Broadband and Cyber-Infrastructure

Bill St. Arnaud is the former Chief Research Officer for CANARIE Inc. Canada’s Advanced Internet Development Organization. Currently, he is involved with a Green IT broadband and cyber-infrastructure initiative to build a “zero-carbon” next generation Internet, intended to help reduce global warming by reducing CO2 emissions. He is also leading a Green IT initiative of encouraging carbon rewards rather than imposing carbon taxes to help reduce output of green house gas emissions, through the provision of free fiber to the home and other free Internet services and applications.

Image courtesy of numstead’s photostream. For related research on the smart grid check out GigaOM Pro:

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  1. Could you please elaborate or provide links RE: the real price of electricity falling and the excess supply? I have wondered what the increase in renewable energy will do to prices since it is more expensive but at the same time will add so much more capability. It seems to me that this combination will benefit those utilities that buy almost exclusively coal power.

    1. Bill St Arnaud N8 Tuesday, April 6, 2010

      Please see EIA data on price of electricity corrected for inflation. Since 1960 real price of electricity has remained unchanged or even declined – http://www.eia.doe.gov/cneaf/electricity/page/fact_sheets/retailprice.html
      Some renewable energy is expensive – such as solar panels. But windmill and micro-hydro generated electricity can be cheaper than coal, as long as you dont connect to the utility grid. Interconnection and wheeling charges significantly raise cost of renewable enery

  2. Fascinating article, Bill. Don’t necessarily agree with all of the first 7 points, such as the claim that the real price of electricity is falling, that is, if one takes into account the rising costs in energy, facilities, generators, transmission, labor, maintenance and taxes, for example, along with low inflation rates. I follow you on the 3 primary smart meter markets, but might question some of the potential with regard to at least one of those. For example, our local electric co-op has been providing for over 20 years what you describe in 2, and has been doing this with old technology in the form of low-cost FM receivers for load management. As an active stock market investor in energy and the power grid, I especially appreciated your suggestions regarding investing opportunities. Good work, thanks.

    1. Please see EIA data on price of electricity corrected for inflation. Since 1960 real price of electricity has remained unchanged or even declined – http://www.eia.doe.gov/cneaf/electricity/page/fact_sheets/retailprice.html

      For an electric co-op, demand management may make sense as they dont have to buy peak power from outside sources. But if they have their own generating plant with surplus capacity the incentive for demand management disappears

      Bill

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  4. I am not a techie and my first reaction was to close the window of this blog. But one phrase “Investment Strategies for smart grid” in the header caught my attention. I am a new investor who has a lot of hope on future development of “alternative energy industry”. I try to read almost anything on this topic, and what happened; I came across this gem of an article.

    The way Bill has explained his skepticism on smart grids, then his change of notion and understanding in favor of smart grids and at the last his own ideas to the entrepreneurs to build focused investment strategies for development of power grids is excellent.

    The relationship between prices of electricity falling on supply end and on the other end the fossil fuels getting scarce each day (leave aside their ever increasing price) is making the margins to fall to even negative levels.

    This article has showed an excellent vision for smart grids to start measuring power by distinguishing the “source of power”.

    An extremely futuristic content. thanks.

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  7. The DOE data you refer to only shows the price of electricity adjusted for inflation up until 1999. If you look at the data since 1999 – http://www.eia.doe.gov/cneaf/electricity/epm/table5_3.html – prices have risen (across all sectors) 49% from 1999 – 2009. And inflation over those 10 years (using data from – http://www.inflationdata.com/inflation/inflation_rate/CurrentInflation.asp) was 29%. Hence electricity prices have increased faster than inflation over the past 10 years, and my understanding from all the smart grid conferences I have attended over the last year, the expert opinion from those in and monitoring the utility industry, is that trend is expected to continue, or even accelerate.

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  10. Thanks Bill. These are some great ideas and tips. I’ve always thought that we need to embrace nuclear energy. The amount of accidents in regard to it are VERY low, and the output of energy is extremely great. Sorry, I don’t have the time to find links and such, but we talked about it at school with one of the professors.

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