March 2013

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Smart Grid Business Thrived in 2012

Framework to make it sustainable still not in place.

Allan McHale

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World Smart Grid sales at installed prices climbed to $36.5 billion in 2012 a growth of 30% on 2011 and M&A activity reached $19.5 billion almost doubling the value of deals in the previous year according to our latest report –

The report shows that solid progress has been made in the last three years to take Smart Grid out of its embryonic stage into its infancy; but other findings show that all is not well. The regulators & policy makers in the developed markets of the world are struggling to find the framework on which Smart Grid can be effectively built and in some cases are losing site of the most important reason for developing a Smart Grid and that is to build a system that will accept as much Variable Renewable Energy (VRE) that is practical to meet the needs of the low carbon economy in the 21st century.
A New Model is Needed and Quick
A new model is needed because it’s been clear for some time that the fundamental central architecture of today’s electricity grid, based on the concept of a top down radial transmission system with unidirectional energy flows from large centralized power plants, is not appropriate to meet either the needs of the low carbon economy.

Micro-generation and micro-grids need to be incorporated into the electrical supply system because they can generate from VRE, help balance out supply and demand, deliver locally and make the system more flexible, reliable and efficient.

We have no choice but to work around the present central system and gradually move to a hybrid decentralized model, but that will require the regulators to oblige the electric utilities to work within such a system that benefits all the stakeholders and not just themselves. Through inbuilt software technology, you can also operate a market based system which not only manages electricity supply and demand but also allows for economic value through markets, rates, contracts or other value based mechanisms.

Even if this could be organised through the electrical utilities and they could acquire the skills and manage the new technology in most countries they could not raise the $2,000 billion needed to build the world Smart Grid.

Our report suggests that a new business model for the development of Smart Grid in many countries, particularly the UK, could be based around capital investment coming from sovereign / state owned investment and pension funds; possibly from the Middle East and Asia. The day to day operation of balancing and operating  Smart Grid would still be the responsibility of the utility companies whilst the IT and Communication companies would supply and operate IT infrastructure and the billing and pricing mechanism.
Foundations in Place now Refine the Business Plan
One of the most important issues now being strongly debated is how much VRE can be accommodated by a Smart Grid. The old thinking is based on the premise that even a Smart Grid has a limit to how much can be accommodated and some authoritative bodies have published reports saying that in the US the tipping point for benefiting CO2 emissions from wind power could not exceed 20% of the total central power generated. Over this limit, spinning reserves will create more CO2 emissions and nullify any benefits which are the sole reason for installing wind power in the first place.

Germany is now pressing ahead with the new model which claims VRE can in time deliver almost all the power they need and do not require conventional base load generation provided you have a Smart Grid that can balance supply and demand; and also has a mix of renewable generation with some storage on its PV solar content.  The proof of this is going to be played out over the rest of this decade when they plan to have renewable sources providing 35% of its electricity by 2020 and 80% by 2050. If this model is proven then it opens up much wider options on which countries can base their energy policy, trading cost with long term availability, security and safety of energy supply.

In Germany their grid, which is not yet smart, is currently accepting 15% with wind providing over 9% of the country’s grid power while solar PV has more than a 5% share. But penetration rates can be much higher in real time as solar production went from zero to 15.6 GW on the 30th September, at which point it was meeting 30% of total demand and renewables supplied about 40% of Denmark’s power in 2011. Both countries have robust grids and the lowest rates of outage in the world.

Irrespective of which strategy is adopted the need for a Smart Grid goes without question with the prime requirement being to concentrate on automating demand response on the transmission and distribution lines, building on an existing but robust system, whilst taking in distributed power from independent public and private sites. This as we have already noted is also a game changer because it requires the structure of the electrical utility industry to morph from a central to a decentralized hybrid model and that will require Smart Grid ownership and operation to be shared amongst some new stakeholders.
Technology is in Place and the Supply Industry can Deliver it
Reliable Controls Our report shows that the supply side is changing to meet the challenge; with billions of dollars being invested in Smart Grid supplier companies through M&A and Venture Capital funding for new starts and their continuing development. The structure is changing with a perceptible move away from the dominance of the international majors to the medium and small companies who are increasing their share of the business.

A significant number of new entrants from outside the industry from the IT & Comms business are increasing competition and strengthening the industry. The industry is still too fragmented with hundreds of companies below minimum economic size. We are confident that the supply side will not hold back Smart Grid’s development. The supply structure is taking on a new shape as the traditional electrical transmission and distribution suppliers are competing with or forming alliances with the new boys from the digital world of IT, Communications and Controls. The traditional players certainly have a major role to play, although not a dominant one across all fields of pure Smart Grid.

The technology is in place and there are no known bottlenecks here that will restrict Smart Grid’s development although in some areas a full working prototype at a utility scale has yet to be proven.  The new technology surrounding communications and “Big Data” has yet to be proven in the Smart Grid environment however it is already being used in other industries and at the electrical utility scale.

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