Betting Smartly on the Smart Grid

Making the nation's electric grid "smart" has become a passion of the
Obama administration. Already $4 billion of American Recovery and
Reinvestment Act (ARRA) money has been committed to the endeavor. With
a complete makeover for the U.S. grid projected to cost $165 billion,
it is imperative that future allocations are made more judiciously
than how ARRA has divvied up the pot so far.

ARRA has allowed for the rollout of 18 million smart meters. With each
smart meter costing about $200, in total nearly $4 billion would be
needed. ARRA is providing half this amount with utilities expected to
foot the rest. Emerging smart grid technologies such as smart
transformers, automated substations, and in-home energy devices take
home the remaining $2 billion of ARRA money. Such a large allocation
for incipient technologies seems unwise, given that out of all
available smart grid technologies only smart meters have proven
themselves to be cost-effective in scale.

Consider the Italian utility Enel's rollout of 30 million smart meters
throughout Italy. The project, launched in 2001, was completed in
2006, and cost nearly $3 billion or about $100 per consumer. Economies
of scale helped Enel lower its expenditure. The utility believes it is
saving $750 million every year through its network of smart meters,
recouping its investment in just four years, with mainly upside
potential from then on.

Contrast this with Xcel Energy's SmartGridCity project in Boulder,
Colorado. Xcel, a major U.S. utility serving eight states, started
deploying in 2008 a wide variety of smart grid technologies similar to
those funded by ARRA to Boulder's 50,000 residents. With project costs
ballooning almost three times from an initial estimate of $15 million
to over $40 million now, i.e. $800 per consumer, the utility has had
to raise customer rates to help fund the project. Unclear is when
costs will be recovered. In fact state regulators have started
scrutinizing the project to ascertain its performance. Even the
utility admits that it has embarked on an experiment, some parts of
which will work and others that will not.

Nearly 40 million smart meters have been deployed globally, much more
than other smart grid technologies such as smart transformers,
automated substations, and in-home energy devices. As such, the smart
meter business model has been vetted in the field. A critical mass of
vendors, many of them based in the U.S., have through years of trial
and error been able to arrive at proven fare. Almost 180 million smart
meters are expected to be in place worldwide by 2014, a four-fold jump
from today, opening up a huge market for U.S. goods and services. By
accurately tracking electricity demand and helping correlate it to
available supply, the technology substantially meets the energy
independence and climate change alleviation goals of the
administration. The European Union is so convinced about the
technology's environmental and operational benefits that it has
mandated eighty per cent of its 300 million households to have smart
meters by 2020, with blanket coverage in another two years. The U.S,
already trailing markedly, will fall even further behind at current
rates of adoption.

No such market validation or technology ruggedness substantiates the
claims of other smart grid technologies. Field deployments today in
their case are no more than in the tens of thousands. Time alone will
tell whether these technologies will scale, how much they will cost
and how much fruit they will bear. As Xcel's project illustrates, much
learning is in store. Well-intentioned while is the administration's
effort to promote their use, allocating a couple of billion dollars to
them at this stage, as ARRA has done, could well boomerang. And, with
the smart grid projected to absorb tens of billions of dollars of
public money in the coming years, why not more fully ride a proven
horse such as smart meters, while helping the other stuff get ready
for prime time with smaller, less risky levels of investment. Being
all things to all people can be counter-productive.