Creating an Efficient SmartGrid Eco-system

Creating an Efficient

Smart Grid Eco-System

23/11/2009

INSEAD GEMBA 2009 Artemy Voroshilov, Josephine Paschalidou Muller

Summary

Energy sector accounts for a quarter of world’s greenhouse emissions. Often called the “Network of networks” or an “Energy Internet”, Smart Grids are the hottest application of distributed computing & communication tech in the improvement of ageing power grids. Smart Grids may push grid efficiency by 15%, cutting CO2 emissions (2Gte globally by 2020) and helping integrate distributed sources of renewable energy. They are a significant economic growth engine, expected to create a $100bn market by 2030.

Smart grids come out of a marriage between energy sector and IT/telecom. They are a turbulent eco-system comprising multiple actors - governments, regulators, financial and societal institutions, industry giants & start-ups, and end-users - each with its own, often conflicting interest.

Macro-economic efficiency of a transient eco-system is disturbed; left to market mechanisms, such eco-system takes decades to mature. Key obstacles blocking scale roll-out of Smart Grid are:

• Inconsistent regulation • Barriers to end-user adoption of Smart Grid infrastructure & services • Scarcity of capital • Technology interoperability, lack of standards

Accelerated take-off of Smart Grids requires concerted efforts of all eco-system actors. A range of macro-level alignment measures is proposed, of which visionary leadership in regulation & consumer engagement are seen as fundamental first steps.

Creating an Efficient Smart Grid Eco-System 2009

2 of 34 Artemy Voroshilov, Josephine Paschalidou Muller | INSEAD GEMBA 2009

Table of Content

Summary ................................................................................................................................................1 1 Introduction - What’s wrong with Smart Grids? ..................................................................................3 1.1 Who needs Smart Grids?..........................................................................................................3 1.2 What is Smart Grid, actually? ...................................................................................................4 1.3 What is wrong with Smart Grids? .............................................................................................4 1.4 Methodology & paper structure ................................................................................................5

2 Industry in transition - dynamics & projections ..................................................................................6 2.1 Expectations on the rise...........................................................................................................6 2.2 Driving forces..........................................................................................................................6 2.3 Global demand-supply .............................................................................................................6 2.4 Market size & growth projections..............................................................................................7 a) Vast benefits expected.............................................................................................................7 b) Growing revenues in sight........................................................................................................8 c) Rising investment pattern ........................................................................................................8

2.5 Technology & service roadmap.................................................................................................9 2.6 Trends & impacts .................................................................................................................. 10

3 Mapping the Eco-System ................................................................................................................ 11 3.1 Terminology.......................................................................................................................... 11 3.2 Energy sector before Smart Grids ........................................................................................... 12 a) Value chain and impact of regulation ...................................................................................... 12 b) Sector in transformation ........................................................................................................ 13 c) Balance of power in the traditional eco-system........................................................................ 13

3.3 Smart Grid eco-system & its actors......................................................................................... 14 4 Analysing the Eco-System............................................................................................................... 17 4.1 Eco-system interdependence model........................................................................................ 17 4.2 Obstacles & challenges at macro level .................................................................................... 18 a) End-user adoption of Smart Grid infrastructure & services is pivotal ......................................... 18 b) Technology & inter-working – open standards needed............................................................. 19 c) Scarcity of capital inflow ........................................................................................................ 19 d) Inconsistent regulation .......................................................................................................... 19

5 Aligning the Eco-System................................................................................................................. 21 5.1 Creating frameworks for stakeholder alignment....................................................................... 21 5.2 Design criteria....................................................................................................................... 21 5.3 Practical steps ....................................................................................................................... 22

6 Conclusions ................................................................................................................................... 24 Acknowledgements................................................................................................................................ 24 Appendix 1 – renewables in primary energy consumption, EU 2005.......................................................... 25 Appendix 2 – Electricity & gas rates in Europe (June 2009) ...................................................................... 25 Appendix 3 – Eco-system actors ............................................................................................................. 26 Appendix 4 – Leading players by market segment ................................................................................... 33



“Smart grids are emerging as the next strategic challenge for the energy sector and as a key catalyst to achieve the vision of a low-carbon economy”

Ignacio S. Galán, Chairman & CEO, Iberdrola

Smart grid network will be “100 or 1,000 times larger than the Internet”

Marie Hattar, VP, Cisco

1 Introduction - What’s wrong with Smart Grids?

The world needs ever growing energy supply to sustain economic growth and development. But fossil fuels are scarce and CO2 emissions already threaten our climate. What options do we have in accelerating a more efficient energy future?

1.1 Who needs Smart Grids?

Induced climate change is one of the most acute global issues of the past decade1. Today’s electrical grids date back to times when electricity was cheap, environmental concerns non-existent and consumers’ role negligible. As a result, the world’s generation and distribution of electricity is outdated and highly wasteful.

Energy sector accounts for some 25% of global emissions today and could be responsible for 14.26 Gt of CO2 emissions a year by 2020

2. Much of this damage is incurred on generating power flows that never even reach a light bulb. A mere 5% efficiency increase in the US grid alone would equate to the elimination of greenhouse gas emissions from c.a. 53 million cars3.

Smart Grids have emerged as a collective response to raise the efficiency of power grid and optimise electricity consumption. First in history, a sharp demand for massive technology deployment is driven by both economic interest and the concern over global environmental sustainability.

Traditional Grid

Intelligent ICT infra +

Smart Grid

The merger of energy and ICT4

Nations need Smart Grids to reach compliance with international targets of clean energy and low-carbon technology. Utilities need them to enable migration from outdated and wasteful infrastructure towards a flexible, sustainable and cost-efficient one. Consumers need them for insight in their energy consumption, but also as a means of own carbon footprint reduction. Service providers need them to design energy



services with a finer knowledge of consumers’ needs and habits. Energy traders, operations and distributors will benefit from the near-real-time information for balancing supply and demand. Technology suppliers recognise a tremendous opportunity to capture value from the emerging international Smart Grid market. Investors too wish to have a piece of the lucrative cake.

1.2 What is Smart Grid, actually?

There is no single definition of Smart Grid. Its foundation is the electricity grid itself. Add communication between the players, flexibility to integrate new sources of energy, storage options, innovative services for new markets and you obtain an intelligent or ‘smart grid’. Its intention is to intelligently integrate the actions of all users connected to it – from generation to consumption - to efficiently deliver sustainable, economic and secure supply of electricity. The Smart Grids aim to:

• reduce pollution generated by existing power plants - through greater grid & energy efficiency

• integrate distributed sources of clean energy production (renewables) and storage (electric cars)

• provide consumers with transparent information and choice of supply, and allow them to play a

role in optimisation of electricity system

• enable a potentially significant economic growth engine

20th Century Grid 21st Century SmartGrid

Electromechanical, analog Digital

One-way communication (if any) Two-way communication

Built for centralized generation Accommodates distributed generation

Radial topology Network topology

Few sensors Monitors and sensors throughout

Manual restoration Semi-automated restoration - self-healing

Prone to failures and blackouts Adaptive protection and islanding

Check equipment manually Monitor equipment remotely

Emergency decisions by phone Decision support systems

Limited control over power flows Pervasive control systems

Centralized billing Trading by software agents

Consumer demand uncontrolled Optimal use of energy by intelligent agents

Grid transformation5

The Smart Grid aims to change consumer behaviour, enabled by equipment, around variable electric rates. Its goal is to infuse the existing ‘dumb’ grid with intelligence of distributed IT and communication technologies, akin to the Internet, to help balance energy demand and supply. As the market is huge, it attracts all sorts of global and local players trying to capture value of the forthcoming ‘gold mine’.

Smart grids are not a radically new idea, but collectively represent a disruptive concept unifying multiple interconnected systems, each with its own architecture. It is a breathing eco-system, involving multiple actors such as international institutions, governments, electricity producers, municipalities, utilities, environmental agencies, high-tech providers, venture capitalists and consumers.

1.3 What is wrong with Smart Grids?

The problem with Smart Grids is that, yet, they do not “function” economically.

As in any emerging industry, there is a lack of alignment between actors, disparity of interests and a conflict of economic models. For now, the only thing in common is that eco-system actors are positioning to deliver a product or a service capturing a piece in the value chain.



There have been attempts to-date to regulate, formalise and fund a coherent development of Smart Grid (i.e. the EU Smart Grid project and Barak Obama’s 2009 stimulus package in the US); industry consensus however is that they have been partial or slow.

Reductions in energy-related CO2 emissions in the climate-policy scenarios by International Energy Agency6 7 rely on a radical progress in energy efficiency. Left to market self-regulation, Smart Grids are likely to take decades before reaching economic maturity8 9. The aggressive targets of Kyoto10,11 and Copenhagen process12,13,14 initiatives to cut developed nations’ CO2 emissions by 50-85% below 1990 levels by 2050 are thus in serious danger.

Given the urgency to reduce greenhouse emissions, letting the industry self-regulate to grow effective is risky and may be too late. Synchronising multiple players in an emerging industry involves collaborative efforts across the whole eco-system. Our study looks into the macro-alignment measures that will help jump-start the functioning of the economically efficient Smart Grid eco-system.

1.4 Methodology & paper structure

We have relied on literature analysis and interviews with industry experts to aggregate first-hand information on key developments, dependencies and risks pertaining to Smart Grid. We have further employed Ron Adner’s framework15 to extract the key industry obstacles and risk mitigation measures for the successful, economically efficient and system-wide adoption of Smart Grid.

The structure of our paper is as follows: Industry dynamics and driving forces are analysed in Chapter 2. Smart grid eco-system is introduced and studied in Chapter 3, with the analysis of key actors and their role in the value chain. Chapter 4 outlines interdependences and risk factors across the eco-system at macro-level, while Chapter 5 captures key alignment measures proposed. Our paper concludes with the recommendations in Chapter 6.



2 Industry in transition - dynamics & projections

Smart Grids are in transition. From a virtual non-existence few years ago to an avalanche of media coverage, analytical reports and company press-releases as of mid-2009, Smart Grids have come under public attention16, 17. Forecasts vary, but the unanimous opinion is that of all CO2 abatement measures Smart Grids feature the lowest marginal cost of CO2 reduction

18 and are a sector of high growth.

Where are they heading? What is driving the explosion? Is it all hype?

2.1 Expectations on the rise

Until 2009 Smart grids have been a playfield of start-ups and VCs. Now, numerous industry heavyweights - from the traditional energy players like Siemens, GE and ABB to ICT giants like IBM, Accenture, Cisco, Ericsson, ALU, Oracle, Verizon, Sprint, Microsoft and Google - have all lined up for a piece of Smart Grid pie. With so much industry excitement about Smart Grids, are we not overly hyped? What is the ‘right’ time?

The Smart Grid is perceived a panacea in a long-term, but truth is that market adoption will be phased. Gartner identifies several distinct stages of a technology maturity (aka Hype cycle19 20), and like any other new technology, Smart Grids will follow the curve. After a peak of inflated expectations, there comes a “trough of disillusionment” before the technology reaches the “slope of enlightenment”. The steepness of the curve will be a function of a combined play of governments, industries and the society.

A 2009 Gartner study21 identifies Smart Appliances, Consumer Energy Storage, Distributed Generation, Home-Area Networks, and Electric Cars on the rising slope of hype-cycle, while placing Advanced Metering Infrastructure (AMI) and Demand-Response, the buzzwords of early 2009, as sliding Into the Trough. Altogether, Smart Grids are probably reaching the peak of public expectations now.

2.2 Driving forces

With some country variation, major forces shaping the industry are:

• Ever-growing demand for energy, that is particularly acute in the developing economies

• Rising energy prices stimulate consumer appetite for cost control

• Increased environmental concerns in OECD+ countries lead to an increased institutional pressure, (i.e. the Copenhagen process), the enforcement of policies and rising social awareness

• Moore’s law of ICT sector is making technology ‘cheap’ enough for scale deployments.

• Greater demand for reliability and security of electricity supply incentivises utilities to invest into the upgrade of ageing grids. In the US this is assisted by Obama’s economic stimulus.

• Sheer economic potential of energy sector modernisation, seen as a new frontier for ICT vendors

2.3 Global demand-supply

Let us examine the demand-supply relationship, where several concurrent processes take place:

• Electricity can seldom be stored, and only in large quantities and in other energy forms. As a consequence, demand and supply must be balanced in real-time. Daytime demand is considerably higher than that at night; in many countries demand is highly seasonal.

• The world needs ever increasing energy supplies to sustain economic growth and development. Worldwide economic activity in 2050 is estimated as approx 4x that of 2005.22 World electricity generation is expected to double from 17,3Tr kWh in 2005 to 33,3 Tr kWh in 203023.



• Much more electricity is produced than is ever needed. The grid loss varies across countries (5-25% in transmission and distribution), suggesting that efficiency gains are achievable. Losses are significantly higher in developing countries, yet the US and EU feature the highest losses in absolute terms.

• The average age the US grid infra exceeds 40 years, many components were designed and installed before World War II24. With little or no intelligence to balance loads and monitor power flows, grid loss worldwide is enough to power India, Germany and Canada, according to an IBM study25.

• Globalisation moves manufacturing (and its electricity consumption) to developing countries. There, decision-criteria for electricity generation are likely to be economic rather than environmental, so investments into proven low-cost fossil-fuel technology are prevalent.

• Increased variability distorts the demand-supply equation - energy supply used to be driven by the nearest plant’s capacity. Emerging small & mid-size producers add to supply capacity with dependences on number of producers, consumers & consumption habits, tariffs, geography, and climate

• The grid needs to accommodate integration of renewable sources with varying supply capacity. So the balancing of supply & demand shifts from control towards multi-party coordination. Managing complexity needs highly reliable data from an increasing number of players in the supply–demand value chain.

• There is a progressive misbalance between energy demand and supply world-wide

World 2006 Energy demand26 World 2006 Energy supply27

While world’s energy demand is associated with the degree of industrialization, future consumption will mainly depend on GDP and the extent of technological advance. Energy supply will likely evolve with the network infrastructure development, availability of RES on geographical spot and government orientation.

2.4 Market size & growth projections

The Smart Grid is widely perceived a panacea in a long-term, reality is that market adoption will be phased, A range of analytical studies is available aiming to project the development of Smart Grids.

a) Vast benefits expected

Improving grid efficiency is ‘the lowest hanging fruit’ in efforts to reduce greenhouse gas emissions. For the US, which in 2009 became the focal study point, predictions vary but the estimated savings are colossal:

In terms of environmental savings, in the US alone, “improving the grid’s efficiency by 5% could save 41 GW of power (equivalent of ~25 coal-fired power plants)”claims S. Fludder, GE’s VP of Ecoimagination. Or the elimination of greenhouse gas emissions from c.a. 53 million cars[3].

• Reducing peak demand in the US alone by mere 5% saves $66bn over 20 years says the Brattle Group28. But the best in-home smart grid tech can reduce peaks by up to 25%. Another study29 estimates the US-alone impact of Smart Grid $15-$35bn in gross energy savings by 2020.

• Global Environment Fund reports that a Smart Grid “could send 30 to 300% more electricity through existing corridors”



b) Growing revenues in sight

So where is the money? Several estimates are available:

• Overall ‘clean energy’ sector revenues have risen 53% from $76bn in 2007 to $115.9bn in 200830.

• Deloitte report31 estimates Smart Grid revenue in 2009 at $25bn, the biggest and fastest growing sector in Clean Tech (and possibly the whole technology market), a 50% growth from 2008.

• Deloitte and GP Bullhound32 forecasts suggest that the total market will continue to grow at 11% CAGR, reaching $42bn by 2014. Morgan Stanley predicts growth of the Smart Grid market to $100bn in 2030, that is over 8% CAGR annually.

c) Rising investment pattern33

Even if money is there, what is the investment climate? The US market is again in spotlight:

• The US Electric Power Research Institute (EPRI) has estimated the cost of building a Smart Grid at $165bn over the next 20 years –approximately $8bn a year.

• According to Deloitte, Smart Grid are the second largest VC investment chunk after the solar34. Roughly $1.3bn in venture capital was invested in the Smart Grid sector in 2005-09 (through June 2009), ca $105m in the 1st half of 200935.



• Obama’s US Recovery & Reinvestment Act of 2009 includes over $70bn in direct spending and tax credits for clean-energy & transportation, including $11bn towards smart grid.

• GridWise Alliance report forecasts that the deployment of smart grid tech over the next four years would generate $64bn in investment activity, creating 280,000 new jobs, of which half would be permanent beyond the initial deployment program.

In the US, Smart Grids have become the fastest growing asset class fuelled by federal incentives and a rise in climate change awareness in 2009. In late Sept 2009 Clean Edge & NASDAQ launched a Smart Grid Stock Index (QGRD), a benchmark for the smart grid & electric infrastructure sector36.

Investment programs elsewhere have been announced (see inset). It is believed that OECD countries possess sufficient capital, while for many developing countries this is a challenge. China for example, is looking at RMB 150bn smart grid investment. Bloomberg reports suggested capital costs of $10bn annually in 2011 -20, with a total project cost of $590bn37.

The development of data networks, in many economies, is inseparable from the growth of economy. The roll-out of data networks for Smart Grids is expected to follow similar pattern, and telecoms infrastructure will form a large part of the total investment. The surge of investment has already caught an eye of ICT giants such as Cisco, IBM, Google, Oracle, AT&T, Verizon, Microsoft, etc. Cisco, for example, predicts that the underlying communications network will be “100 or 1,000 times larger than the internet”.

2.5 Technology & service roadmap

Smart Grid technology & end-user services roadmap is highly dependent on policy targets. A

snapshot of the 2009 view by Trilliant38 (adopted) is shown:

Smart Grid v0.0 Smart Grid v1.0 Smart Grid v2.0 Smart Grid v3.0

Networked meters (isolated meter networks)

Asset Connectivity & Control (tility operations)

Efficiency Subscriber Services

Dynamic Automated solutions

Proprietary meter data management

Enterprise operation

Demand response, device programming, enterprise data management

Smart grid services

Control thermostats, grid-wide enterprise services

Sustainability

Supply-balancing, time allocation, eco credits

Proprietary narrow band networks

IP sensor networks

IP, public WANs, low cost wireless

Multi -service networks

Broadband, HANs, Mobility

Max Capacity

QoS, load balancing, energy storage

Proprietary advanceв meters

Utility managed

Peak pricing, read meters, load controls

Consumer-oriented grid

Smart appliances, 1-way electric cars (charging), consumer energy efficiency

EccoComunity

2-way electric cars, retail services, eco-social networks



2.6 Trends & impacts

IT, software and communication players are staging an offence into the world of electrical engineering. Power generation companies and utilities feel pressured to invest and modernise. Will this be a marriage of equals? How will this marriage be shaped?

Several trends are impacting the emergence of a new industry:

• Manufacturers are cutting energy consumption within their product design, making energy a marketing argument. Environmental compliance will be widespread norm shortly.

• In recession, investment goes to projects that are smaller, proven, and efficient. Experimentation is limited and there is a disincentive to be a “first mover”. As a result, there is slow down of VC investments in Smart Grids in 200939. Yet, given milder technological advance (compared to eg renewables requiring clean tech breakthrough) and overall benefits increase over time (progressive obsolesce of the current grid) investment is to resume at the signs of recovery.

• Industry heavyweights - from the traditional energy players like Siemens, GE and ABB, to ICT leaders like IBM, Accenture, Cisco, Ericsson, Verizon, Sprint, Microsoft and Google - have smelt the money. Clearly, consolidation and M&A activity are expected with focus on software-intensive companies.

• The grid is most outdated in the US, where ICT sector is traditionally the strongest. For the EU (and some parts of Asia where grid is new) the situation is symmetric. The European vendors are entering the play from the ‘left’ (or power utility side) while the American companies are massively attacking the “right” side of Smart Grid.

• Energy sector life-cycles (i.e. decades) are in sharp contrast with the Moore’s law of ICT domain. One should expect shifting roles of the players, an opportunity sought by many, leading to fights.

• Emergence of Smart Grid shifts emphasis from the supply- to demand side. Given radically increased number of individual actors downstream, this raises the challenge of coordination and importance of empowered end-users that are now a critical force in the eco-system.

There is a hierarchy of players – old and new – in the emerging value chain; let us methodically analyse the key actors and examine their relationships and individual incentives.



3 Mapping the Eco-System

In most countries the electricity sector is probably one of the most complex and (in liberalised markets) fragmented of all. A major challenge is how the electricity supply chain can develop in a coordinated and coherent manner in the absence of clear overall direction.

Ecosystem view40

A traditional structure of the industry with generation (centralized), transmission, distribution, end-users (both industrial and residential), provides a framework to identify each of the stakeholder groups needed and involved for Smart Grids deployment.

Understanding the eco-system and its driving forces requires methodical assessment of participants, their current position, relative power and insight into barriers and incentives for a transition towards Smart grid.

3.1 Terminology

Let us introduce the three features of traditional electrical gris:

• Availability (or electrification rate). In most developed countries electrification ratios reach nearly 100%, while in developing world the ratio varies greatly, down to some 2% in African countries like Chad and Burundi41.

• Reliability (or inverse frequency of power outages). Age of equipment and lack of maintenance increase the risks of outages, often constituting an obstacle in country’s economic development. One of the worst outages affected nearly 100m people in Indonesia in 2005; it led to a 200 MW energy loss and caused damages to transport and hospital services42. A similar California incident left the high-tech state in a blackout.

• Proportion of renewable energy. Canada, for example, is leading the trend with 60% of renewable energy (mainly hydropower) compared to a 7% EU average (Appendix 1), China’s 16% (world’s largest hydro base) and India’s 3% (solar & wind).

Let us term a grid “efficient” when it enables ‘to respond reliably to electricity demand while at the same time reducing the costs of pollution’ i.e. satisfies:

• Energy efficiency: reduced loss using end-to-end demand-supply matching

• Sustainability: ability to integrate distributed energy sources, storage options, products, services and markets (when the technologies become economically efficient) to help achieve environmental targets

• Power reliability, quality and security (fewer outages, self-healing systems etc)



3.2 Energy sector before Smart Grids

Today’s grid was designed with the primary goal of delivering electricity to buyers in a reliable way. Electricity utilities delivered the bulk of value chain activities, from generating power to distributing electricity at the electricity meter of the consumer.

Historically, electricity supply has been a sector of strategic importance. Because the industry is capital intensive, vital for economy and important from both the social and environmental point of view, it has traditionally been closely regulated.

a) Value chain and impact of regulation

Whereas most countries employed indirect regulation through public ownership, countries with private ownership relied on some form of a direct regulation. In the mid-1980s it was noticed that public ownership and a high level of government control had resulted in an industry characterized by overly costly generation technologies and a lack of competition. Much emphasis had been put on engineering excellence, with little cost minimisation and or improvement in customer service.

Traditional electricity value chain

By 2001, the shape of the sector changed with deregulation of markets, restructuring and privatization43. Deregulation split the role of a traditional utility into four activities - Power generation, Transmission, Distribution and Sales (or Retail). Some utilities still hold all activities along the value chain (e.g. French Legacy Utility EDF: Electricité de France) while new entrants may compete within one or several segments.

Competitive patterns differed from country to country. The most radical liberalization was accomplished in the UK with a full supply competition by 1998. In Scandinavia deregulation brought competition in the generation and sales while transmission and distribution remained a local monopoly. In the US utilities were allowed to charge market-based rates for generating electricity, creating the financial incentive to build more power plants. But the transmission over high-voltage lines and the distribution into homes and buildings remained regulated. Power companies received a limited, government-set return on their investment in the grid, so they allocated far less to improving transmission than to building power plants44.

Deregulation came with different objectives all over the globe. The EU targeted to create a more efficient market allowing the consumer to choose its electricity supplier. The US aimed to enhance the quality of delivered service. India, on the other hand, intended to expand electric generation capacity while alleviating public funding by switching the investments to the private sector.

In the EU it is uneasy to correlate the price of kWh to the extent of market deregulation45 (Appendix 2). While deregulated market in Helsinki features the cheapest rate to households (11.11€/ kWh), the regulated market of Paris offers prices lower than the markets of the UK or deregulated Sweden (12.32€ /kWh, 13.74€/kWh, 13.93€/kWh respectively). Net of taxes and distribution, the picture is even more skewed – Paris’ rates are lower than Helsinki’s (4.75€ vs 5.12€ per kWh). In the US, about 70% of an electricity bill cover power generation; transmission costs make up 10-15%, and the rest goes to the distribution46.

Policy &

Regulation

Power

generation

Transmis-

sion

Distribution

Buyers Electricity Utility

Market deregulation

Sales

The Grid



b) Sector in transformation

Differing patterns of global deregulation have led to variance in the map of relative power among the players of traditional energy sector (see Appendix 3).

An EU 2005 initiative created the European Technology platform Smart Grids, with the goal to create a joint vision of European networks by experimenting with the energy efficiency concepts and clean technologies, trying to build a smart grid culture. By 2007, ‘smartening the EU grid’ meant bringing together, for example, solar power from the south of Europe, wave power from the Atlantic coast and wind power from northern Europe to blend with large-scale hydropower, clean coal or gas fired generation. Despite EU push for integration and compliance, progress has been slow. Duncan Botting, head of technology at ABB, and vice chairman of the Smartgrids Technology Platform claimed that the technology for EU interconnectivity was available but ‘the problem was in harmonizing regulations”47.

Power Generation

Transmis-sion

Distribution

Sales

Buyers

By 2007, environmental concerns have become a centrepiece of a politician’s discourse. Green policies were a cornerstone of the 17th national congress of the China’s Communist Party in 2007. They were fundamental in the election of German Chancellor Angela Merkel and the French President Nicolas Sarkozy.

At the same time, technology R&D in the US received little attention or governmental support before the 2008 elections. Both candidates acknowledged that alternative energy would not only prevent global warming but also create millions of green jobs and help break US’ dependence on foreign oil48. The story is markedly different in India where priority has been on energy security and achieving self reliance rather than combating climate change (though recognising it as a co-benefit)49.

At the national level, some countries are ahead of the others. Italy pioneered smart metering worldwide. In the early 2000s Enel, Italy’s biggest utility, completed national smart meter roll-out so that it could clamp down on theft and cut off non-payers remotely. Sweden has now become the first country to mandate smart metering at every home. In the US, Texas and California lead the way50 while city of (Colorado), takes pride in becoming the first American integrated smart grid city and the playground for reality check of technologies and smart grid services51.

c) Balance of power in the traditional eco-system

Electricity markets are in transformation around the world (SWOT shown below).

• Transmission and Distribution players have a relatively high power in the value chain, thanks to the installed base and capital-intensive investment. These are commonly run by natural monopolies (national or regional bodies) under utilities’ control. Distribution faces a challenge of integrating electricity flows generated by the distributed RES or end-users back to the grid, causing the need to modernise the grid Up to now, utilities argue that available smart grid technology is yet immature to ensure sustainability of equipment in the grid’s lifecycle.



• Generator’s position is weakening with growing threat of entry (open competition at the generation side) with similar nature power plants, substitutes from renewable energy sources (solar, wind farms, wave, geothermal) and increasing prices of fossil fuels from their suppliers.

• Sales / retail players have a relatively low power as they are highly dependent on distribution, which is often a local monopoly, and they face increasing competition from new entrants who use the only instrument available: the price level. Existing electricity meters require a platoon of meter readers and paper work to track electricity consumption. Additional power flows introduce a new level of complexity in metering and managing the bill. Under regulation and without any premium service, Sales have a disincentive to promote energy efficiency that may directly impact their revenues.

New dynamics in the electricity value chain

• Consumers have a low but rapidly increasing power. They have increasingly more options to churn for more competitive offers, they can produce electricity for their own consumption with micro-generation sources (solar panels, mini-turbines) and even sell the excess capacity back to the grid.

3.3 Smart Grid eco-system & its actors

What are the missing ingredients in the exiting grid?

• Active consumer involvement

• Communication system for information collection and exchange across players

• Ability to integrate renewable sources of energy and to store electricity in excess

Limited communication flow between bulk generation and transportation no longer meets the requirements of liberalised markets. Tomorrow’s grid needs decentralised ways of information sharing, coordination and control. Multiple organisations, such as governments (national, regional and local), regulators, traders, suppliers, manufacturers, academia & research institutes, construction, service, ICT, and financial institutions play a role in the Smart Grid deployment (see Appendix 3).

Domain Actors

Bulk Generation The generators of electricity in bulk quantities

Transmission The carriers of bulk electricity over long distances.

Storage Emerging players, may store energy for later distribution

Distribution The distributors of electricity to and from customers



Domain Actors

Connectivity providers ISPs & telecom operators - entering market (Telco 2.0)

Trade The operators & participants in electricity markets

Retail B2B and B2C electricity retail to consumers

Operations & Control Managers of electricity flows (from national to municipal)

Service Providers The organizations providing services to electrical customers and utilities

Smart-metering Intelligent sensing digital infrastructure for consumption

Consumption

The end users of electricity: households, commercial/building & industrial, increasingly becoming sources of small-scale, distributed generation & storage

Technology eco-system Tech for various chunks of the value chain – HW for electrical and SW for Control. Includes various players – from established incumbent companies threatened by Cleantech or taking advantage of it, to MNC, startups, SW houses, system integrators, VCs, private investors, etc etc

Institutions & Society Layered regulation & legislation, societal structures – media, education system, research organizations, labour

Electrical interface plane

Bulkgeneration

•Various sources•Gas, wind, solar etc

Consumption

Distributedgeneration

Transmis-sion

Distribution

• Households• Cemmercial• Industrial

Layered regulationKyoto protocol / regional (EU or US) / national / municipal

Bulkstorage

Civil & Social structuresmedia, labour, education, etc

Technology platforms (HW, SW, service) & business model innovationMNCs, startups, VCs, private investors

Service & Control

Electric cars,Fuel cells

Trade,Wholesale

ServiceProvision

Network Operations &

Control

Smart appliances

Technology & Standards

SW, AnalysisData mining

Xx TechRenewable energy Tech

Lighting

Institutions & Society

<---------------- Integrators ---------------->

Transport Tech

RetailB2B & B2C

Smart metering

Connectivityprovision

Smart Grid Eco-system: a Network of networks

Technology vendors, notably from ICT sector, are a new turbulent force disrupting traditional value chain (see Appendix 4 for competitive map of eco-system technology providers). Vendors are active players in the eco-system, attracting investment and leveraging established partnerships. Apart from their own eco-system, they bring along an extensive pool of resources, competencies and funding muscle, all of which benefit the emergence of Smart Grid.

From the policy & regulations point of view, country-level and international initiatives have contributed to progress in the green technologies. Germany‘s pioneering policy in 2000 to reduce nuclear production to the benefit of renewable energies gave tremendous incentives to German vendors to develop greener platforms. The European smart grid initiative in 2003, created a pilot platform to experiment with the



energy efficiency concepts and clean technologies, while at the same time building a smart grid culture. The Obama’s 2009 stimulus in the US created the incentives for specifying common standards of communication and further research and implementations of the smart grid. The Copenhagen agreements, expected in Dec 2009, may set the grounds to accelerate the pace of Smart Grid adoption.

Smart grid ‘power map’

The distribution of power in the eco-system is distorted with the appearance of new players.

• Utilities have medium to high power, the new market requires capital-intensive investments but it also offers high potential for more efficiency in operations (reducing operational costs), and the new revenue through innovative services.

• The consumers are gaining ground as dependence on the grid is diminished with distributed individual generation. Their bargaining power rise on the increased competition among service providers. The economic crisis has made them more cost-aware. They are increasingly aware, have access to information, participate more and more in social networks, hence acquire the power to influence policy & regulations. As smart-metering requires end-user adoption to smarten the grid, the eco-system becomes consumer-centric.

• Green / Clean technology vendors have low to medium power due to industry fragmentation and need for funding. Creation of industry alliances helps them exercise influence over policy makers / regulators. ICT vendors in particular bring along vast Internet experience to sense and deliver on consumers’ expectations, an asset missing from other eco-system’s participants

• Investors have high power given the capital intensive modernisation effort as well as vendors’ dependence on funding for R&D projects. They have been the engine of smart technologies well before politicians and regulators took active interest in the smart grid.

• Regulators are the driving force behind consistent CO2 reduction effort. Utilities and technology vendors expect them to create alignment frameworks and facilitate public and private investment.



4 Analysing the Eco-System

In a developing eco-system, individual interests of numerous populating actors are often in conflict. Macro-economic efficiency of the eco-system is disturbed; its market stabilisation takes time. Ron Adner studied formation of several eco-systems around technology innovation. He introduced a framework of mutual interdependence52 that will help assess what is affecting emergence of Smart Grids from within.

4.1 Eco-system interdependence model

The success of innovation, measured by the extent of adoption, depends on the efforts of others in the broader innovation environment. That is, one needs to analyse environment according to the structure of interdependence in the eco-system to deduce a ‘critical path’ for an innovation.

In the assessment, three fundamental risks are distinguished: initiative risks - the uncertainties of managing a project; interdependence risks - the uncertainties of coordinating with complementary innovators; and integration risks - the uncertainties presented by the adoption process across the value chain. Ultimately, a ‘what needs to happen before what’ ladder is mapped and a mitigation strategy can be devised.

At the initial stage, an actor needs to identify which risks are best handled internally, and which are better handled by a partner. The effectiveness of vertical integration as a strategy to manage external interdependence increases over the course of the technology life cycle53 and is thus ineffective at the beginning.

Bringing your piece ahead of competition may not yield any advantage if complementary products are not ready. Smart Grids present an interesting case for the analysis of first mover’s advantage since underlying technology is essentially non-disruptive. Classically, the driver of first mover advantage is the opportunity to gain production or market experience to advance a learning curve. Given that Smart Grid technology is largely developed, but application standards for shared infrastructure are missing, one predicts a surge of activity for system integrators (i.e. IBM, Accenture etc) or system-wide vendors (e.g. Silver Springs Networks, Trilliant, Gridpoint etc), see Appendix 4 for competitive landscape.



With the paradigm shift from the supply- to demand-side, the billions of consumers who used to have no market power in the energy value-chain are now becoming an empowered force. Power companies are inherently reluctant to invest into smart grid - their traditional business models view consumption as a revenue driver, the end-user savings are not propagated back. Furthermore, their investment capability is limited. Our argument is that analysis of eco-system alignment should start from the consumption and move upstream, identifying and clearing the obstacles, rather than downstream from the utility.

4.2 Obstacles & challenges at macro level

Advanced metering has been on the market for over a decade, but technology proliferation has been slow. Several groups of macro-level issues can be identified. Of all, end-user adoption is the most critical.

a) End-user adoption of Smart Grid infrastructure & services is pivotal

Incentives for power companies to drive deployment of Smart Grid infrastructure are insufficient; regulatory activity alone will not stimulate efficient propagation of Smart Grid services ‘downstream’.

With Smart Grids every person and business are affected. Creating and exploiting the pull from increasingly aware end-users is seen as the only sustainable adoption engine and startups (notably YelloStrom54 of Germany) are pioneering the thinking.

The idea is that, much rather than burying billions into a subsidized geographical smart meter deployment utilities could aim for those willing to pay for smarter energy use. YelloStrom aims to profitably turn the spikes of consumer interest into a socially-networked community of early adopters who will spread the trend55.

But, fundamentally, the pull is yet to be created:

• Although situation is changing, there is fundamental lack of awareness on the side of consumers of the potential energy savings and environmental impact [17].

• There is strong legacy pattern of electricity usage that is culture and country-specific. A prevailing common view is about the ease of increasing supply rather than reducing or spreading demand curve.

• Privacy concerns over disclosure (and potential misuse) of electricity usage data are to be overcome.

Next, adoption in developed economies is hampered by the wealth effect. Why bother saving if kW is cheap? In general, will economic incentive stimulate reduced consumption? Two aspects should be distinguished:

• Change in consumer behaviour - will people change behaviour and reduce usage when made aware of how much they are using? And how will they react to dynamic pricing?

• Willingness to pay – what is the trade off between economic savings and added complexity (such as extra hardware, tariffing, service agreements etc)?

Demand Response is the method of managing energy consumption devices by directly supplying pricing information to consumers. Studies by the Brattle Group have shown consistently that direct feedback motivates behaviour change, resulting in energy savings ranging up to 20%56,57. Other studies claim an average 7% reduction in usage, and up to 15% reduction during peak demand with added incentives58. Another study by IBM59 identified the 18-24 age group as leaders in willingness to pay for Smart electricity services (see inset).



b) Technology & inter-working – open standards needed

Moving upstream, the next set of blocking issues relates to technology and technical inter-working.

Until recently, advanced metering (AMI) and Demand-response have been perceived the critical drivers of Smart Grids, almost reaching the tipping point. Despite seemingly successful pilots (even national rollouts such as in Italy by Enel) technology proliferation has been slow.

Cost reduction for scale deployment that will stay for years. Manual labour significant portion of cost

Scale deployment of smart meters (i.e. AMI) is a pre-requisite for the emergence of Smart Grids economics. However, significant portion of manual labour involved in the roll-out of smart meters plays a prohibitive role and cannot be offset by rapid erosion of technology cost. Another major barrier here, unlike in the Internet, is the lack of open technology standards, particularly in the home60. In the US, the National Institute of Standards and

Technology (NIST) has been tasked with drafting standardisation framework for the entire system of Smart Grid technology61. The set of first drafts, ‘the metric and the backbone’ is gradually becoming available62, but the international alignment on standards is lagging63.

Next comes the sheer complexity of interconnected energy and communication grids and the need to handle huge amount of data streams – both in real time and in post-processing. The issues of system design, scalability, reliability and information security come into play.

The technical inability to distinguish conventional power presents the further challenge. Current uni-directional distribution system is seen as the bottleneck for renewable energy development. Its congestion is inevitable at a certain critical de-centralised generation mark and will have to be prevented. How will distributed generation flow from renewables be integrated into the grid?

c) Scarcity of capital inflow

Smart meters will require national deployment that takes time and money. Huge infrastructure costs (estimated e.g. as $165bn over 20 years in US alone, EPRI) and the lack of consistent investment framework present then next fundamental obstacle to Smart Grid deployment. Much is linked to the regulatory policies that are to define ratemaking treatment for Smart Grid investments and set depreciation rules.

Given Obama’s targeted stimulus package (though small and capping grant to $20m / project) the US is ahead of the EU in centralised funding. The contribution by the VCs and private investors is hoped for (see Chapter 2.4) but the VCs feel unnatural to invest into regulated markets, a risk that needs to be overcome.

Finally, for the private investors it is unclear where ‘the biggest bang for the buck’ will be in the developing eco-system, creating the need for centralised funding and policy making.

d) Inconsistent regulation

Without regulatory intervention markets fail to value environmental benefits of Smart Grids. Regulatory pressure and international alignment are critical in jump-starting the market eco-system mechanisms.

Regulation is layered and needs cascading. Establishing the harmonised, ambitious and fair post-Kyoto framework for global CO2 abatement is the goal of the world leaders’ UNFCC summit in Copenhagen in Dec



2009. But even with the positive outcome, its national, regional and then domestic enforcement is poised to take time, particularly outside of OECD community.

At present, subsidies to fossil fuels which encourage wasteful inefficiency are estimated at $600bn annually. Reduction and elimination of subsidies to fossil fuels is a major priority, potential conversion of these subsidies is identified a significant source of public funding.

Current regulatory regimes originate from ‘as is’ environment, encouraging energy supply and protecting the customers. The very goal of regulatory measures needs adjustment to i) stimulate behavioural change, ii) incentivise private investment to Smart Grids and eliminate subsidies to fossil fuels and iii) harmonise infrastructure standards.

In the domain of social capital barriers can be identified too. Power engineering is out of fashion these days, which limits the pool of special engineering skill required (power system engineering, power electronics, engineering economics & finance). Critical skills needed to design and build smart grids will be in deficit. Luckily, adjacent IT and telecom operation industries will be able to feed the demand.



5 Aligning the Eco-System

Scale deployment of ICT can make electricity grids much less wasteful, but the individual interests of eco-system actors pull the system in opposite directions. There is a lack of shared incentive among participants:

• Consumers are largely unaware or uninterested

• Regulatory pressure for environmental commitments is mild or inconsistent, grid modernisation frameworks and standards are conflicting or immature. Technology providers rush to establish own de-fact standard

• Centralised funding is unallocated, yet private investors await commercialisation of products to ensure the return on investment

• Utilities are driven by cost-reduction so incentives for grid modernisation are weak; utilities’ business model is unsupportive of Smart Grid

• Societal institutions are incapable of generating social pressure or delivering skilled resource base

Facilitation of eco-system take-off requires concerted efforts of governments, regulators, financial and societal institutions, industry players and end-users’ involvement. Where do we start? What are the common incentives? What policies should we enforce?

5.1 Creating frameworks for stakeholder alignment

The role of regulators and policy makers is vital. On one hand, formal implementation model is rather straightforward:

• Create & share the vision

• Align system-wide incentives

• Formalise implementation roadmap & metrics

• Allocate resources

• Enforce compliance & monitor progress

On the other, the challenge will be in designing a forceful framework that is flexible and can embrace future, unforeseen, and unimagined business models. Indeed, one cannot possibly predict the multitude of Smart Grid services in 20-30 years from now, just as we did not know what one would do with home PCs in the 1980s. A natural human response to any ‘new’ way of a traditional activity – be it electricity consumption – is to do same in a ‘better’ way. Thus, AMI and demand-response optimisation have seen the peak of public attention recently. The cost burden and investment restrictions of a traditional utility business model, however, have hampered the scale roll-outs of smart metering infrastructure.

Emergent industry needs to start generating revenue fast to keep the momentum and investment sentiment. But within the current utility model, the economic incentive is insufficient and cannot be shared with the demand side. Economic adoptions need to exploit the pull from the most engaged end-users willing to invest, facilitated by distributed socially networked innovation, and incorporate emergent business models, forming a sort of pull-and-see strategy. In search for a new business model utilities (such as e.g. YelloStrom) are experimenting to embrace a customer-centric strategy to exploit the market pull from the early adopters. A wave of service and product innovation, if facilitated, is poised to emerge.

5.2 Design criteria

The Smart Grid blends technology, operators and connectivity into a Network of networks. Its ambition is to enable new services and business models in a way similar to the Internet, but a lot more complex. The



fundamental design questions arise - do envisaged measures enable markets? Do they include the end-users and motivate behavioural change? Do they stimulate investment & market interaction? Are they fair?

Our design framework will therefore incorporate:

• Alignment of actors with a common vision and a set of consistent incentives,

• Increased awareness of the Smart Grid across the board with the shared vision for future grid,

• Allocation of central funding and stimulation of private investment,

• Build in flexibility to encourage emergent business models & facilitate transformation of utility business

• Enforcement of open standards with no protectionism; layered architecture with separation of function and loose coupling,

5.3 Practical steps

A set of fundamental blocks is proposed:

1. There is an urgent need to implement a range of policy measures to create clear, profitable, long-term economic incentives for CO2 reduction in the energy sector. Visionary leadership of Energy Efficiency is a universal unification platform for all stakeholders

o Continued Copenhagen process will define layered policy and energy sector regulation with emphasis on macro-economic incentives. Extensive planning, international collaboration and coordination across whole eco-system are required

o Governments will need to lead public opinion, the drive needs to be radical and urgent. Utilities must be directed to energy efficiency (e.g. taxation for the energy losses in the grid)

o New technologies have higher costs than the incumbents. It is only through technology learning as a result of market deployment that these costs are reduced and products are adapted. Governments must enhance their roll-out programmes

2. Customers are a critical force in the adoption of smart grids. Consumer participation &

behavioural change must be encouraged – to capture the pull from demand side

o Create a favourable aura around smart grids through funded public sustainability campaigns.

o Stimulate public awareness through simplified, non-technical communication, articulate the environmental benefits of smart grids, reward early adoption of smart-grid meters and services

o Enforce eco-compliance for energy, stimulating demand for cleaner and more flexible services; simplify supplier switch procedure towards those offering RES integration and access to more innovative, focused and value-added products. Procedural complexity in service plane (tariffing, service agreements) must be reduced (i.e. on-stop shopping)

o Direct feedback in retail electricity markets is needed to start adjusting consumer behaviour. Next, dynamic pricing legislation will be needed to redistribute consumption towards off-peak

o Consumers may have tax refund upon investment on energy efficiency measures or individual clean energy generation

3. Stimulated funding & private investment are required - Smart Grid companies need to start generating revenue

o Tax reductions to investors for financing energy efficiency projects

o Increased subsidies for utilities (in form of tax credit, grants) to promote their investments

o Cost recovery policies and favourable depreciation rules to increase incentives for green investments (recovery of book value for assets retired early for ‘smart grid’ reasons)

o Ramping down fossil fuels subsidies is a major priority; their redirection is a significant potential source of public funding



4. Utilities potentially create a push for smart grids from the supply side, but for a radical progress utilities business model requires transformation

o Current generators’ revenues are linked to energy consumption, so model need to reallocate the savings from energy efficiency among players upstream.

o On supply side smart grid deployment is driven by demand-response. It is often geographical and loss-making given the cost structure. A different, customer-centric roll-out strategy is required to capture the spikes of consumer interest in smart grids (similar to YelloStrom).

5. Formalise unified open standardisation in the interworking of electricity and ICT sectors. “Open-standards based network could give birth to a thousand new companies” (Silver Spring networks)

o Major acceleration of R&D effort is needed including stimulus for early pilots, field trials and spearhead projects

o Enforce collaboration between the US National Institute of Standards and Technology (NIST), the EU Smart Grids Technology Platform, and the Asian bodies (notably State Grid Corporation of China, SGCC).

o Set a timetable with commonly agreed technology roadmap and interoperability testing process analogous to that by ETSI (and later 3GPP) alliance of GSMA members

o Specify alignment on end-to-end aspects such as QoS, traffic prioritisation, security, provisioning, activation

6. Social capital in electrical engineering is eroding – to develop the skills base for electricity networking higher education and skills fostering are required.

Awareness & Consumer participation

Push common vision & Active regulation

Transform utility business model

Embrace emergent business models from demand side innovation

Endorse behavioural change

Visionary leadership of Energy Efficiency

Stimulate funding &private investment

Align demand-to supply-side

Open standardisation

Steps to Smart Grid



6 Conclusions

The marriage of energy sector with IT and telecom, termed Smart Grid, aims to make electricity grids much less wasteful. Smart Grids enable higher consumption efficiency and better balance of supply to demand, the integration of distributed sources of renewable electricity and storage, and are a significant economic growth engine.

Of all CO2 abatement measures, Smart Grids are a ‘lowest hanging fruit’ in terms of incremental cost. The acceleration of Smart Grids is vital to the creation of low-carbon economy. Such acceleration requires alignment across a broad range of stakeholders - governments, regulators, financial and societal institutions, industry players and end-users’ (consumers and businesses).

Smart Grid adoption is facing numerous obstacles of which i) end-user adoption ii) technology inter-working, iii) scarcity of capital, and iv) inconsistent regulation are key. We believe that unifying visionary leadership and end-user engagement unlocking behavioural change are vital steps In eco-system alignment. Alignment measures proposed include:

• Align the players with a shared vision and common incentives through active leadership and regulation

• Raise uniform awareness of the smart grid. Encourage end-user involvement and momentum

• Build in the flexibility to integrate emergent business models arising from demand side innovation

• Build the transformative utility strategy. Set up financial incentives reducing the cost burden for AMI deployment and facilitate the pull from demand-side

Acknowledgements

We would like to thank Fares Boulos, our project supervisor, for his encouragement, committed support and a great practical help in shaping the smart grid story. We are indebted to expert opinion and stimulating discussions with Badri Raghavan, Albert van Lawick van Pabst, Ronald van Selm, Jean-Luc Dormoy, Said Abboudi; our EMBA mates Sander van Ginkel and the ‘EDF musketeers’ Frederic Weiland, Arnaud Dumas and Olivier Bard. Last but not least, we would like to thank Charles Galunic for an insightful advice on eco-system balancing that inspired this project.



Appendix 1 – renewables in primary energy consumption, EU 200564

Appendix 2 – Electricity & gas rates in Europe (June 2009)65

Total Price Rankings (prices including energy, distribution and taxes)



Unit Price Rankings (energy prices excluding distribution and taxes)

Appendix 3 – Eco-system actors

Bulk generation

Generation is the first activity in the value chain delivering energy to the customer. The first electricity plants ran on coal and hydropower. Nowadays diversified energy forms are used such as petroleum, natural gas, chemical combustion and nuclear fission. Renewable energy sources such as wind, tidal, geothermal or solar energy are used to a smaller extent. The boundary of the Generation is typically the Transmission.

The electricity production system, inherited by the 19th and 20th centuries has been reliable in fulfilling consumers’ expectations and centrally coordinated. The tight technology coupling between production and transportation has led to create vertically integrated utilities which ensure both activities in the value chain.

The top-down central control of the grid no longer meets the modern requirements of liberalisation of markets and spread of local and intermittent renewable sources of energy. Tomorrow’s grid needs decentralized ways of information, coordination and control to better serve the customer.

Production plays a major role in the electricity chain with high standards of security, reliability and power quality; generators usually have a monopoly position. The increase in energy needs will require an increased and a more adaptable production of electricity. The critical dependence is on the energy source side – rising petroleum price - may have sizeable effects on the production. Technology obsolescence may cause the member to exit its position.

Traditional plants Coal, nuclear, petroleum, chemical combustion and natural gas employ mature technology and thus reduced yet significant construction costs. They are built to a designed supply level and so are exposed to the risk of over- and under-capacity depending on the demand level. In contrast, bulk renewable energy plants Ontario Hydraulic power generation

Kohlekraftwerk Scholven, Germany



(hydraulic, wind, solar and tidal energy) are natural-resource-dependent and thus generate variable, intermittent output.

• Opportunities - Optimise asset utilization & operate efficiently; availability of grid intelligence to build what and when is needed, prevent faults, manage workforce and thus reduce OPEX and CAPEX - keeping downward pressure on prices

• Cost - The traditional business model opposes the idea of energy conservation as revenues are driven by end user consumption

Transport or Network

Transmission is the electricity transfer from generation sources to distribution through multiple substations. It typically connects a power plant to multiple substations in populated areas. A transmission network is typically operated by an Operator whose responsibility is to maintain stability on the electric grid by balancing generation (supply) with load (demand) across the transmission network.

A power transmission network is usually referred to as “a grid”. Multiple redundant lines between points in the network provide routes from any power plant to any load center, based on the economics of the transmission path and the cost of power. The transmission may contain such resources as storage or peak generation units. Energy and supporting ancillary services (i.e. capacity dispatched when needed) are procured via Trading and operated by the Operations; they are delivered via Transmission and Distribution to the Consumption.

Transmission networks are wasteful and feature varying degrees of loss around the world. With little or no intelligence to balance loads and monitor power flows, grid loss worldwide is enough to power India, Germany and Canada, according to an IBM study.

The transmission may contain such resources as storage or peak generation units. Energy and supporting ancillary services (i.e. capacity dispatched when needed) are procured via Trading and operated by the Operations; they are delivered via Transmission and Distribution to the Consumption.

Network is an intermediary between two powerful players. It already has control of information which may help design the complement infrastructure. From this position it may provide more intelligence to its suppliers and customers, thus gaining power in the eco-system. However, it has no power to bring changes in the eco-system on a standalone basis.

Multiplicity of suppliers and distributors within the smart grid requires bi-directional exchange of information, distribution of control and higher degree of coordination. The function of the network, and consequently its organization, become more complex with the number of interactions increasing. Monopoly/Oligopoly position is likely to remain.

• Opportunities – new efficiencies through substation automation & advanced components (superconductivity, storage). Technical advance associated with Super Grid initiative (10% loss reduction over transmission)66

• Cost – high capital cost for modernisation to reduce energy losses.

Trading

Traders are energy market participants i.e. aggregators for provision, consumption and curtailment, and other qualified entities. There are a number of companies whose primary business is the buying and selling of energy. Free trade is facilitated by open markets, harmonised rules and transparent trading procedures. Congestion management and reserve power must be resolved for a fully integrated trans-national market e.g. in EU.



Retail

Retailers sell power to end customers (B2B or B2C) and may in the future aggregate or broker energy between customers or into the market. Most are connected to a trading organisation to allow participation in the wholesale market. The Retail Market clears bids and offers, or otherwise sets retail prices.

Distribution

The Distribution is the electrical interconnection between the Transmission, the Consumption and the Smart-metering points for consumption, distributed storage, and distributed generation. The electrical distribution structure can radial, looped or meshed. Historically, almost all communications are performed by humans – a customer complain triggers the dispatch of a crew for fault restoration.

The Distribution will be linked in real-time with the Operations & control to manage the power flows associated with a more dynamic Retail, other environmental and security-based factors. In turn, distributed generation & storage of Consumers will have electrical & structural impacts on the Distribution and the larger grid. Such impact will require a change in the role of Communications infrastructure providers.

The Distributors additional functions cover Smart sensing, distributed management system, geographic information gathering systems, advanced protection & control, advanced outage management.

• Opportunities – physical sensors (synchrophasors) & digital relays will enable near-real-time monitoring, and self-healing, resulting in an increased efficiency and reliability

• Cost –high CAPEX required for re-balancing Distribution grid to accommodate a growing flow of energy from sources of individual generation.

One expects increased complexity of synchronising Advanced distribution technologies with the adoption and rollout of Smart-meters (downstream), and time dependent tariffing.

Service providers

These players perform services to support the business processes of energy producers, distributors and customers such as billing & customer account management, installation & maintenance, management of energy use and home energy generation.

Communications with the Operations are critical for system control & monitoring; communications with the Retail and Consumption are vital for economic growth through the development of ‘smart’ services. The Service Providers may e.g. provide the interface for customers to interact with the market(s).

Service providers will need to:

• Support the choice between individual generation (with re-sale of surplus back to the grid), and the purchase of electricity from supplier companies.

• Address the growing needs of consumers seeing ‘turnkey’ solutions. Cost savings will need to be monetized and accompanied by a fuller support, e.g. in system maintenance.

Emerging services are an area of significant new economic growth. Service providers are the source of innovative services to meet the requirements & opportunities of the evolving smart grid.

The challenge is to develop interfaces and standards that enabling a dynamic market-driven ecosystem while protecting the critical power infrastructure. These interfaces must be compatible with a variety of networking & service provision technologies while maintaining consistent content.

• Opportunities - Rate of return, operational benefits, improved customer satisfaction, potential co-ordination of distributed generations / storage

• Cost - Risk of cost recovery, competition from a growing market of 3rd parties in value-added services



Smart meters

Smart equipment refers to all field equipment which is computer- or microprocessor-based, including controllers, remote terminal units (RTUs), intelligent electronic devices (IEDs). It includes the actual power equipment, such as switches, capacitor banks, or breakers. It also refers to the equipment inside homes, buildings and industrial facilities, typically owned by the distributor or service provider.

Smart Meters include sensors & controls used to monitor state, transmit that state to an external analysis point, and execute control commands returned from that point. Some of these carry local intelligence, used to carry out analysis and instructions when remote analysis is unnecessary or not economical. Given the life-span, this gear must be robust to handle future applications for many years without replacement.

Smart meters have been rolled out with considerable success across a number of international marketplaces such as the US and Italy and more recently Australia and Sweden. They play a critical role in the evolution of the eco-system.

Given the life-span, this gear must be robust to handle future applications for many years without replacement. The question is whether the technology is consumer-friendly enough.

Opportunities involve huge volumes (massive nation-wide deployments). Costs relate to high CAPEX required for re-balancing Distribution grid to accommodate a growing flow of energy from sources of individual generation.

The relative power of the member is linked to:

• Linked to market adoption, consumption pattern, degree of smart appliances readiness

• Critical importance for Distributors & Service Providers due to i) better control, ii) visibility of outages, iii) easier maintenance, iv) remote power up / power down and v) reduced electricity theft.

• Crucial for Consumers through variable demand-dependent tariffing

Technology is gradually becoming cheap to justify scale deployments67

• Worldwide installed base of smart meters - ca 76m, increase to 155m by 2013 (source ABI research), biggest deployment in Italy by Enel

• The US has some 8.3 million smart meters (>6% of total residential electricity meters). Obama stimulus package of 2009 earmarks $4.5bn for Smart Grid, there is a major push among governmental agencies to finalize interoperability and security standards.

• Oncor, the largest regulated transmission and distribution system in Texas, is scheduled to replace 3.4 million meters with advanced meter systems by 2012. IBM contributed to Oncor's significant milestone in summer 2009: the reporting of 15-minute interval, billable quality data to the Texas market.

The member has a critical role in the evolution of the eco-system. Smart meters (also referred to as advanced metering infrastructure, AMI) will track electricity use in real time and transmit data over Connectivity networks (wire-line or wireless) to Service Provider (service layer) and Network Operations & Control (physical layer). This infrastructure is to minimize consumption of higher-priced energy at peak conditions.

• Opportunities – huge volumes (massive nation-wide deployments)

• Cost –high CAPEX required for re-balancing Distribution grid to accommodate a growing flow of energy from sources of individual generation.



Connectivity providers

Communication systems refer to the media & communication protocols. These technologies are in various stages of maturity (from established wireline / wireless telcos to new media). The role involves:

• Communications network - planning, operations and maintenance of all communications networks to support Operations and to enable bi-directional communication between all parties in the chain.

• Security management - management of security policies, distribution and maintenance of security credentials, and centralised authentication and authorisation.

With small but increasing relative power in helping the smart grid to develop, Telecom operators bring increasingly carving value in the eco-system (Service and Operation domains). The so called Field Area Networks (FANs) is an exciting emerging arena where heavyweights (operators and IT/telecom vendors) will play a consolidating role with technology innovation and heavy competition from all angles.

Many of the functions and assets required are core parts of the legacy telecom operators:

• capacity to deploy & manage connectivity, monitor and manage energy production and consumption throughout the value chain in real time

• existing human resources with vast experience at installing, troubleshooting, repairing and replacing networked devices and CPE

• customer care, billing, and support capabilities for end customers • managed service capability for desktop and back office applications throughout the value chain

For Connectivity providers:

• Opportunities – telecom companies revival as ‘Telco 2.0’, leveraging installed base of terminal equipment in the homes. Security vulnerability is increasingly the primary concern in the industry, promising the emergence of network security industry analogous to that in the Internet ($30bn+ market)

• Cost – grid complexity, cost of integration with energy Service providers models and smart-metering

Consumption domain (also distributed generation & storage in the future)

The domain of Consumption terminates the power flows from the Distribution. It communicates with the Distribution, Operations & Control, Smart-metering, Retail, and Service Provider domains. Consumption is segmented into sub-domains for home, commercial/building, and industrial. The needs are typically <20kW of demand for Home, 20-200kW for Commercial/Building, and >200kW for Industrial.

Consumption domain also hosts Distributed Generation (or Distributed Energy Resources, DER), which consists of small-scale generation (Wind or Solar) or storage (electric car, PHEV). This is in contrast to centralized or bulk generation and/or storage of electricity discussed earlier.

Opportunities involve choices and clever tools for managing electricity costs / usage; more reliable service; energy bill savings; help in managing charging of electric vehicles; information, control and options for engaging in electricity markets. Resale of individually produced electricity back into grid requires formation of markets and trading. Costs relate to ‘Consumer always pays” pragmatism, added complexity, and sacrifice of privacy.

A decrease in power consumption and an increase in power generation, with an enabled trade mechanisms, makes consumers active participants in the power supply chain.

• Opportunities - choices and clever tools for managing electricity costs / usage; more reliable service; energy bill savings; help in managing charging of electric vehicles; information, control and options for engaging in electricity markets

• Cost – ‘Consumer always pays’, complexity, sacrifice of privacy



Consumption has ultimate power in the alignment of all players up the value chain. Resale of individually produced electricity back into grid requires formation of markets and trading. But are the opportunities compelling enough? Will variable pricing incentivise installation of own infrastructure?

Network Operations & Dynamic Control

Operations manage services for the distribution of electricity to and from customers and may serve customers who do not choose direct access. Operations also include dynamic near-real-time monitoring and control techniques for power security, quality, reliability and availability - advanced analytics in real-time.

Majority of Operations today are the responsibility of a regulated utility. The smart grid will enable more of them to be outsourced to service providers; others may evolve over time. No matter how the Service Provider and Retail evolve, there will still be basic need for planning & operating the service delivery. Operations & Control will be important in balancing individual energy consumption with the real time supply of energy

Majority of Operations today are the responsibility of a regulated utility. The role is somewhat secondary; however, importance of smart peak-demand-dependent control will grow.

Data flows from distributed automation and customer information are huge. Data management methods for small amounts of data do not scale, so entirely new models (e.g. data-warehousing / data-mining) handle synchronisation / reconciliation between large databases. Data management is among the most time-consuming and difficult task must be addressed in a scalable.

• Opportunities - valuable data on habits / patterns of individual energy usage; data management

• Cost – investment in technology that will reduce consumption (even if there’ are other benefits)

Technology platforms & models eco-system

Manufacturers produce and service the components composing the Smart Grid. Domain includes providers of technology (HW, SW, and services), business model innovation and integrators for various parts of Smart Grid value chain with the traditional sources of funding (VCs, private investors). Collaborative platforms (e.g. Cleantech Forum68) are also a part of family.

Equipment manufacturers are the driving engine in developing innovative solutions and their field deployment. Fragmented players (from large MNCs to start-ups) will provide end-to-end security, privacy, resilience, demand-matching, knowledge and interworking, and end-to-end management capability.

A shared vision is fundamental to facilitate development with open access, long-term value and integration with installed base. Innovation will be needed in relation to networks, demand, and for generation, both distributed and centralised, as grid system operational characteristics change.

• Opportunities - Enormous opportunities with innovation in products, services and business models

• Cost – investment into failed innovation; sunk cost due to end-to-end misalignment It is the driving engine of technological and business model innovation

Investors

The term implies a that party purchases and holds assets in hopes of achieving capital gain or cash flow, not as a profession or for short-term income. Investor types include:

• Individual investors (including trusts on behalf of individuals, and umbrella companies formed for two or more to pool investment funds)

• Angel investors, either individually or in groups • Venture capital funds, which serve as investment collectives on behalf

of individuals, companies, pension plans, insurance reserves, or other funds.

• Investment banks



• Businesses that make investments, either directly or via a captive fund • Investment trusts, including real estate investment trusts • Mutual funds, hedge funds, and other funds, ownership of which may or may not be publicly traded

(these funds typically pool money raised from their owner-subscribers to invest in securities) • Sovereign wealth funds

Smart grid presents revenue opportunities for investors. The opportunity usually translates in multiplying gains if the technology takes off but also presents risks in case of unpredicted context changes in regulations, trends, consumer habits, etc. Investors are reluctant to bet in theoretical concepts, regulated markets and early stage ventures.

The eco-system member has high power given the capital intensive modernisation effort as well as Vendors’ dependency on funding for R&D. They have been the engine of smart technologies well before politicians and regulators took active interest in the smart grid.

Policy makers, Institutions and Society

Society is the fundamental basis of the eco-system. Institutions promote participation, openness, accountability and transparency; ensures a balanced stakeholder representation and communicates & enforces standards. Other parties include environmental & educational groups (universities, knowledge parks).

Smart Grid socio-economic regulation is layered; it should have aligned incentives and a clear investment remuneration system. Effective and efficient innovation should be rewarded. New legislation needs to consider apparently contradictory goals - increasing competition expected to keep pressure on energy prices, versus cost challenges of cleaner energy.

International framework is set out by Kyoto protocol to “Stimulate sustainable development through technology transfer and investment” with cap-and-trade market engine and the ongoing Copenhagen Process Smart Grid socio-economic regulation is layered, it should have aligned incentives and a clear investment remuneration system. Effective and efficient innovation should be rewarded.

New legislation needs to consider apparently contradictory goals - increasing competition expected to keep pressure on energy prices, versus cost challenges of cleaner energy. The role of regulation and societal institutions is to act as Ignition engine for the end-to-end Smart Grid interworking, and source of funding.

• Opportunities - Downward pressure on electricity prices, improved reliability reducing consumer losses, increased grid robustness improving grid security, reduced emissions, new jobs and growth in GDP, opportunity to revolutionize the sector, reliable ‘cleaner’ power that is interruption-free

• Cost – consistent funding & consistent policy creation

Education & labour - power engineering is perceived as old-fashioned. Particular attention will need to be addressed to solve the shortage of skilled staff with manufacturers, grid operators, regulators, etc. A multidisciplinary approach (engineering, economic, regulatory legislation) is required.



Appendix 4 – Leading players by market segment69

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