Smart grid faces implementation hurdles

March 11, 2010

smart gridSmart cities need smart buildings connected to a smart grid. The business opportunities associated with Demand Response, smart buildings, and smart grid have been gaining a lot of attention recently, with articles just last week in The Economist and Barron’s. Last summer a Cisco executive caused some ripples by forecasting that the convergence of IT and power systems would present a bigger opportunity for the company than the internet. Barclays Capital recently forecast that smart grid revenues from metering, monitoring devices and communications technology could reach $40 billion a year by 2015, compared with less than $10 billion today. Smart grid ought to yield substantial carbon reductions at negative cost, i.e. the investments pay for themselves with a relatively high IRR.

Yet there are substantial behavioral, institutional, and financial barriers. As I’ve discussed in this blog post, there may well be free lunches available, but they are hidden away behind misaligned incentives, inertia, and market barriers. Consumers are often unaware of the potential cost savings, cannot afford the upfront costs, or fear that home efficiency upgrades will not add much to the market value of a home. For renters, new construction, and commercial property, the people who pay energy bills are often not the same people as those who design buildings or invest in efficiency. At our university, capital budgets for buildings and operating costs come from two separate pockets that don’t necessarily communicate. In the corporate world, few have traditionally paid much attention to potential energy savings because nobody was paid to do so.

Demand response systems raise some particular issues relating to fears regarding privacy and corporate intrusiveness. The Economist article highlights a survey by Parks Associates, a Texas-based market-research company, that indicates that only 15-20% of US consumers would be willing to sign up for DR programs that enable utilities to control their thermostats. Yet the survey also shows that over 80% of households would pay up to $100 for cost-saving equipment if it chopped at least 10% off their monthly electricity bills. Utilities, however, are still in the business of selling electrons, and incentives for energy efficiency, such as California-style rate decoupling, is only making slow progress toward adoption in other states.

Real-time feedback to customers on the price and quantity of electricity they are using can help cut consumption, and new devices can give an analysis by appliance, illustrating the savings from cutting usage or running appliances on lower-cost night-time power. Google announced last year that it’s developing software package called Powermeter to provide real time information about home energy usage by communicating with household devices. But few appliances are ready for smart meters, standards don’t yet exist for Google or other smart meter devices (Google just released the API in early March 2010), and systems will cost several hundred dollars per home. Moreover, as The Economist points out, trying to run a home using this information could become a complex and time-consuming job.         

The next stage in smart buildings is to move from real time information to direct control of power consumption, from devices to heating, and cooling. Companies such as PassivSystems are developing intelligent home controls using multiple sensors, but they are expensive and would still require a lot more programming regarding preferences and trade-offs between cost, convenience, and comfort than your average consumer might be willing to take on. And as the surveys indicate, consumers are wary about ceding control of their homes to computer algorithms. Commercial and industrial buildings are likely to be more lucrative markets than residential in the early stages of this new market, because of the larger scale of opportunities for saving energy, not just in HVAC and lighting but in industrial processes that have some flexibility in load and timing, such as water treatment. Nevertheless, target markets are fragmented by sector and solutions frequently need to be customized.

In my MBA class on Business and Climate Change, several student groups are working with regional companies interested in demand response and smart grid. From my conversations with firms active in the area, a major problem is finding the right channel to potential customers. Facilities managers tend toward a conservative outlook and generally lack the funding and also the authority to implement systemic controls that affect operations. As with other areas of clean energy, the gadgets are cool but the implementation requires overcoming a host of organizational hurdles.

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