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Power Grid 2.0: Will the Information Technology Fairy Kiss and Wake the Electric Utilities?

Power Grid 2.0: Will the Information Technology Fairy Kiss and Wake the Electric Utilities?

27 February 2008

On 27 February 2008, an Ecologic Dinner Dialogue was held in honour of Suedeen Kelly, Commissioner at the U.S. Federal Energy Regulatory Commission (FERC). In her initial remarks, Suedeen Kelly pointed out that many electric utilities in the United States are indeed aware of the potential new grid technologies have – the “fairy kiss” by information technology seems to be happening. However, the deployment of smart grids is not going to happen on its own.

“Smart grids” have multiple advantages: real-time information helps cut peak demand, which reduces the need for generation capacity. This in turn allows for more time to further develop new, low-carbon energy technologies to replace old installations. Furthermore, smart grid technology opens up new possibilities for electricity storage and for feeding in energy from different sources, including renewables. It also enhances the reliability of electricity networks, e.g. by allowing the repair of service interruptions from remote locations.

In the U.S.A., leading utilities are optimistic that the time is right for the deployment of intelligent grid technologies, the costs of which have decreased dramatically. Transmission infrastructures, which have seen little investment over the last 40 years, need to be modernised in any case. From the customers’ side, the recent sharp rises in energy prices have increased readiness to pay more for the benefit of higher efficiency in the long term. Increased awareness of climate change also has become a factor of pressure from consumer groups.

Despite these favourable circumstances, not all utilities see smart grids as an advantageous investment. For vertically integrated companies, there is a disincentive for installing smart grids as these may curb the volume of sold electricity. The case is easier when utilities are unbundled, but even some vertically integrated companies are developing long-term visions that include new business opportunities, such as plug-in stations for electric vehicles. Another condition for success is that state regulators must be convinced to allow utilities to raise tariffs. In this context, co-operation between state and federal regulators is crucial. To this end, a Collaborative Dialogue on smart grids was recently launched.

Finally, attitudes vary considerably among states. California is a leader not only because of its traditional inclination to adopt cutting-edge technology, but also because of its precarious energy supply situation: in recent years, no new capacity was installed while the economy boomed, so the utilities are not interested in selling more electricity but rather in delaying the need to build new installations by curbing demand.

The conversation over dinner explored the similarities and differences between market dynamics in the U.S. and Germany/Europe. One assertion was that the lack of competition and the persistence of vertical integration in Germany provided little incentive to invest in the new technologies. Smart metering, for instance, is already mandatory in Italy (as it is in California), whereas in Germany the application of the concept has so far been limited to a few regional pilot projects. Most utilities do not see their advantage, and some of them are reported to fear that prices will become too transparent. Electricity suppliers, in turn, pointed to a discrepancy between the political will to modernise grids and the reluctance of regulators to allow companies to pass on the costs to the consumers.

In spite of this, a number of participants saw considerable momentum for smart grids in Germany as well. When the Federal Ministry of Economics and Technology launched a funding programme for smart grids research and development last year, the response in terms of applications for projects was overwhelming. Dramatic innovations were predicted for Germany and the EU in the coming decades. Demand response may lead to an evolution of tariff systems: cheap tariffs may be coupled with the risk that certain appliances are cut off at peak loads, while more risk-averse consumers may be guaranteed full choice, but at higher prices. As a future vision, one could imagine private households selling energy on an internet platform similar to eBay. However, it is an open question how much enthusiasm German consumers will show for this type of market. Aside from concerns about data confidentiality, it was asserted that in the absence of certain particularly energy-intensive processes, such as air-conditioning, the volume to trade might be too small to make the concept appealing.

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Sponsor: Ecologic is grateful for the generous support of the United States Diplomatic Mission to Germany.

Suedeen Kelly
27 February 2008
Berlin, Germany