Power policy

Will the American public embrace smart grid technologies or will it be a waste of millions of taxpayers’ dollars?

“We’re looking for operational readiness and innovation”
-Matt Rogers

How exactly the federal government will execute its overhaul of US America’s energy infrastructure is a well-worn debate, and nothing less than controversial. The ambiguous ‘smart grid’ has become a symbol of America’s cleaner, greener future and the Obama Administration has made great strides with an early announcement of funding for installation of both grid upgrades and advanced customer meter systems.

Yet, despite the incessant buzz, there is much uncertainty as to how this shiny new technology will fit into the current infrastructure's allegedly aging and broken system. More importantly, there is great speculation as to whether it will be understood by the American public; will they care enough about its benefits and want to use it? Despite public opinion so far measuring low in terms of interest, the federal government is plowing on, certain of public enthusiasm once they will have seen the benefits for themselves.

Federal funding
The American Recovery and Reinvestment Act (ARRA), passed earlier this year, paved the way for the development of a smart electricity grid, promising an $11 billion fund. Following the historic blackout of August 2003, the government was keen to revitalize its reliability and empower consumers, reiterating its commitment during the GridWeek 2009 Conference.

In a keynote speech at the conference on September 21, Energy Secretary Steven Chu provided some long-awaited details for the smart grid program. He announced a portion of the ARRA funding to be allocated to utilities for smart grid: more than $144 million would be provided for the electric power sector, $44 million of which was to be awarded to state public utility commissions and $100 million for smart grid workforce training programs.

"America cannot build a 21^st century energy economy with a mid 20^th century electricity system. This is why the Obama Administration is investing in projects that will lay the foundation for a modernized, resilient electrical grid," said Chu. "By working with industry leaders and the private sector we can drive the evolution to a clean, smart, national electricity system that will create jobs, reduce energy use, expand renewable energy production and cut carbon pollution."

However, how exactly this money was to be portioned, to whom and how much became a much talked about question. With almost every utility wanting a slice of the pie and submitting proposals, the Department of Energy (DOE) became inundated with requests, and in a situation out of its comfort zone. Utilities across the US are excited about the future of smart grid, and rightly so, but this is a competitive playground, the entrants are multiple, and more importantly, involve a lot of big players. And it's not just utilities competing for the prize; large solution providers, such as IBM, Accenture and General Electric have also bid for funding, making the smart grid programs three times oversubscribed.

So how will the funding be apportioned? The Obama Administration announced 100 smart grid grants on October 28, with an expected investment of more than $3.4 billion into development of the grid. The Department of Energy followed by stating that grants between $400,000 to $200 million will see the installation of more than 18 million advanced digital meters, bringing the nation's total to approximately 40 million.

Prior to the announcement, Steve Mitnick, a partner with Oliver Wyman's energy and utility consulting practice, predicted that the allocation of funding would be based on a combination of the innovation of the utilities' projects and politics. "You can't leave the politics out of this, no matter how hard the DOE is endeavoring to," he explained. "Naturally, the funding will be spread among states, among different types of utilities, of different geographies and different sizes."

He was right. Out of the 400 projects that applied for funding, 100 received awards, spread across 42 states - in a clear attempt to diplomatically distribute the funding. Electric systems distribution funding is generally scattered across the northern states and integrated and/or crosscutting systems funding generally along the south; and those central and southern parts of the country not awarded funding for electric transmission systems, are provided with advanced metering infrastructure investment grants.

However, the development stage of the projects was also a major influence in determining who required what. Matt Rogers, a colleague of Mitnick's during their years at McKinsey & Co. and senior advisor to Steven Chu, describes these innovative projects as being "shovel-ready": projects that are up and ready to go, needing only funding to move forward. However, Rogers explains that in return for funding, it is also the company's responsibilities to raise a certain proportion of capital, depending upon the company's net profit and size.

"We're looking for technological readiness. A number of folks have great ideas but don't have technologies that are ready to scale. We're looking for market acceptance," says Rogers. "We're looking for operational readiness and innovation."

Returning to Mitnick's discussion of political influence, it is not necessarily those companies that are shovel-ready that have been awarded the government funding. In an attempt to keep the peace, the project awards appear to have been distributed on a geographic basis; but spreading the money thin may have a diluted effect on those breakthrough projects in need of greater funding and lessen technological progress.

"If all you cared about was shovel readiness and 'moving the needle' then you would come up with one set of winners. If you throw politics into that mix you come up with a different set; realistically it will be a little of both. For example, it's not politically doable for the list of awards to come out and there to be very few winners in Republican-leaning states," says Mitnick.

The question arises as to where this leaves the smaller utilities. The precedent seems to have been set that the more capital raised, the more money will be awarded. The DOE's funding to Solyndra of $535 million was only given after the company raised $198 million, with a similar request to A123Systems. Analyst Eileen O'Grady reports that a dozen large utilities, including American Electric Power, CenterPoint Energy and Consolidated Edison, are asking for more than $2.6 billion, which exceed the $2 billion set for 'big' grants of $20- $200 million. Mitnick also notes that most large awards went to large utilities, but several large utilities did come up empty. Smaller utilities did receive funding too, but many lost to larger neighbors within their states.

The rolling out of funding has been a relatively short process, surprising many, who believed it would be a long and arduous process for the DOE. Despite the DOE's commitment to announce the funding in fall 2009, many believed it would take longer because there was no precedent for a program of this scale. The DOE has never handled so many proposals or had so much money to be awarded at this pace in such a short timeframe.

Criticism
It is less than a year since Obama's inauguration and the number of those waiting for him to trip up remains high, which he noted in his awareness of the presence of opposition to the scheme: "The closer we get to this new energy future, the harder the opposition's going to fight, the more we're going to hear from special interests and lobbyists in Washington whose interests are contrary to the interests of the American people," he said.

The opponents of the stimulus package are watching to see what blunders will be made in handling such a huge task. Among them are Republicans but also the general public. The Republicans in Congress and the states have criticized the administration for various reasons - as Mitnick puts it, "they're looking for red meat, for serious missteps." The DOE is certainly well aware of this. Moving fast whilst remaining cautious is a very hard balance to strike.

Criticism of the program does not remain only within the walls of Congress, however. The polls have shown that the public is becoming increasingly skeptical of the stimulus programs, not just within the energy sector but also in healthcare. A poll by Real Clear Politics taken in October 2009 showed that the number of average Americans who believe Obama is leading the country in the right direction to have dramatically fallen to 38.6 percent. So is the administration doing the right thing pushing this smart grid program through? The end result of providing the funds for the smart grid initiatives is, after all, the increasing of green consciousness in America's homes and businesses, educating the country's public in a bid to change how they consume power at different points of the day.

"We can go through with all this great technology at the distribution level with advanced meters and smart appliances, but if at the end of the day the end-users in households and businesses remain relatively indifferent, then all that great information is not going to have much of an impact on consumption and peak demand," explains Mitnick. "That's the mega question. The question is out and there's reason for some cynicism and skepticism, although there is going to be a lot of money spent trying to make this work."

Green collar
Having the public visibly see the benefits of the stimulus program is Obama's golden ticket for approval. Tagged onto the end of the billion-dollar utility fund is the federal commitment to expand employment opportunities, adding greater weight to the President's plans for a greener America, whilst simultaneously fighting the unemployment rates caused by the recession. During his unveiling of the 'New Energy for America Plan' in December 2008, Obama pledged to 'strategically invest' $150 billion into creating five million new green collar jobs.

Mitnick notes that the money for these projects will be available within different sectors of the energy industry and for a number of years to come. The complete stimulus package funding will not be spent solely on smart grid. "Undoubtedly there are going to be a lot of people working in different parts of the value chain, and you are certainly creating jobs through the energy efficiency monies. There are over $5 billion from ARRA funds for energy efficiency, as well as some of the other project areas, which amounts to a number of jobs," he explains.

Tom King, Director of the Energy Efficiency, Renewables and Electricity program at the Oak Ridge National Laboratory, explains that a number of individuals can be trained to install PV panels on commercial buildings or residential homes. King advises that Obama's $150 budget for green collar jobs would best be spent on smart grid implementation: "If there were the initial funding to look at smart grid operations and deploy these technologies, then consequently staff would have to be trained to install those. This would work hand in hand with an increase in manufacturing demand, so there would also be such companies having to produce the smart meters."

But whether the creation of green jobs will ease the American public into consuming energy more efficiently remains to be seen. There is no knowing for quite a number of years if Obama's Administration is revolutionizing the country's energy infrastructure and changing the philosophy of how energy is perceived and used, or, to borrow a phrase used by Mitnick, whether they are simply building bridges to nowhere. When the speeches have died out and the policies have lost their novelty, only then will the value of all the money that has been spent be properly evaluated. What was the value of adding so much intelligence and information at the distribution level available to customers about their energy consumption? Did customers make use of that information and significantly change their energy usage habits?

"Those are the big questions," explains Mitnick. "The price of natural gas has moderated in the US. Natural gas prices dictate the price of electricity to a large extent, especially how the price of electricity varies from the peak of the day to the middle of the night. If you have moderate natural gas prices, then the price of electricity won't really vary as much between the peak of the day and the middle of the night. Consumers will see this information, but will that make them even more reticent to change their habits and moderate their energy use during the peak of the day?"

Obama's smart grid policy is no longer the issue; it has been approved and will be implemented soon enough. However, not everyone is convinced. The jury is still out and only the American public themselves will decide whether or not the program has been a waste of millions of their tax dollars. How well the program is implemented is also very much the responsibility of the state regulators who will deem whether or not the utilities can charge different prices for electricity in the peak of the day versus at other times. So far, regulators have generally been reluctant to allow variation in electricity prices, and as Mitnick notes, "You can have all the advanced meters you want, but if the price of electricity doesn't vary, the customer can do little with that meter information."

How the smart grid stimulus program will fare is not an analysis or judgment that can successfully be made right now. Unfortunately the Administration must implement in full its program before we can see if it is understood and accepted by the public. More unfortunately, however, is that during this time, it is not only the Republicans in Congress that will be watching to see if the Obama Administration is successful but also the entirety of America and the rest of the world.