October 13, 2010

The Biggest Smart Grid Hurdle? The Regulators

About a year ago, a venture capital managing director confided that he had 400 companies in one year alone pitch him on some sort of smart grid innovation and yet had no idea where to even begin due diligence. At GreenBeat 2009 , Vinod Khosla claimed he was not investing yet in smart grid because he couldn't get a bead on it. Several other VC's came to me with the same issue: what is smart grid and where should we invest?

The "What is smart grid" question has become demystified over the last year. We have gained a much better understanding of the array of digital ICT technologies that function all along the electric grid from power plant to home and comprise a smart grid. The new question is "How to invest in smart grid?" Major clean tech investors have been supporting start-ups most of which are negotiating contracts with utilities. It's happening, but slowly. Many start-ups — even those with brilliant solutions — still don't have a positive balance sheet. Another model is the large information and communication technology company acquiring start-ups and using existing utility relationships to include those innovations in the system.

Either model requires collaboration with manufacturers that already have working relationships with utilities and/or with the utilities directly. But because of their regulatory construct, utilities are loath to take risk. Hard to even tell which is the chicken and which is the egg here.

The issue remains of how these innovators (large or small) will do business with the utilities — not because utilities are indisposed to innovation. I worked for a utility in the '80's when growth exceeded power supply and we were quite creative in meeting demand, with aggressive demand side management programs; thermal storage rates coupled with ice energy; TOUand real time pricing with standby generation. It's less about creativity and more about hard numbers.

For the utility, the entire proposition hinges on making the case to their regulators. They have to prove that the cost to consumers is offset by benefits delivered; that's where smart grid is having trouble. Smart grid is not a typical capital expenditure project like building a power plant where the output is a known quantity. Smart grid is an investment over time for benefits over time, some of which are difficult to quantify. Smart grid does not produce power; it enables power production to come on line more efficiently and effectively.

Convincing a utility to risk cost recovery by investing in a technology that does not have quantifiable benefits may be next to impossible, but getting a regulator to approve a project for which there are no definable benefits is worse.

What do we do now? Hate to get all geeked out about it, but it's about the data, stupid. And smart grid provides that data. Once we are able to quantify benefits all along the stream from power plant to refrigerator and electric vehicle, we can begin to make the case to utilities that they can make to their regulators. Keep in mind that smart grid is just enabling technologies—which will help those renewable and energy efficiency investments begin to make sense within the entire grid system. Clean tech investors, then, should invest in the suite—renewables (whether grid or distributed technologies), energy storage, and those technologies that make everything work together holistically—smart grid.

Katherine Hamilton is President of GridWise Alliance, a coalition of over 150 companies advocating to transform the electric grid for a more sustainable future.

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