The “Smart Grid”: An Overview

By David Niebauer

The electricity transmission and distribution grid in North America is awe-inspiring.  Often called the “world’s largest machine”, the Grid connects huge power generating facilities with end users (both residential and commercial) in a system that would have been considered magic only 150 years ago.

The big news of the 21st Century is that the Machine is getting a significant upgrade.  The electricity grid was designed to distribute power, and power only, in one direction:  from generation to end-user.  This system worked fine when electricity was a novel resource and relatively abundant, but it is rife with waste and inefficiency. Because there is no practical way to store electricity, the Grid was built with a capacity to meet the absolute peak demand.  And because utilities are paid to sell electricity, they have historically had little incentive to find ways to conserve.  Today, the accumulated hit to environmental quality caused by this inefficiency, together with the cost of constructing and operating generation assets, has reached the limits of what is tolerable.

The new “Smart Grid” is being designed to allow information flows, as well as energy, to reach all parts of the system.  The information available to system operators at present is limited.  When and how the power is used, where congestion might occur, how usage might be curtailed at critical times  – the system is essentially blind to these and many other important data points.  A more intelligent system, enhanced by developments in telecommunications and information technology, will allow the system to operate more efficiently, with corresponding benefits to society.

It is estimated that electricity transmission infrastructure investment will exceed $600 billion by 2020.  In addition to spending by utilities, the venture capital community investment in the space is accelerating, and large U.S. companies such as Microsoft, Google and Oracle are beginning to stake claims.  The vision is of a more sentient Power Machine that organizes the flow of energy and information through all of its limbs for the benefit of all who touch it.  There is even a nascent movement calling for the interconnection of a global power grid.  Essentially, the Smart Grid will allow utilities to proactively manage demand, re-route power around disturbances, integrate distributed renewables and electric transportation and continue to offer reliable and affordable electricity into the foreseeable future.

Following the excellent work of David J. Leeds of Greentech Media in his report The Smart Grid in 2010: Market Segments, Applications and Industry Players we will divide this discussion into four segments:  Advanced Metering Infrastructure (AMI), Demand Response (DR), Grid Optimization and Energy Storage.

Advanced Metering Infrastructure (AMI)

Advanced Metering Infrastructure, as its name suggests, is focused on the meter – that is, at the point of consumption.  AMI deployment is replacing mechanical meters with digital meters that allow for two-way communication.  By providing information as well as energy, the consumer is empowered to shift consumption patterns away from peak-demand periods when prices are high and system reliability is low.  Utilities are also able to collect usage data that can be used to provide more efficiency and less waste.
The Obama administration famously called for the installation of 40 million Smart Meters in US homes and businesses by 2015 and has backed up this pledge with funding from the American Recovery and Reinvestment Act.  AMI has received the lion’s share of venture investment to date and leads the Smart Grid deployment.

“AMI can best be seen as a transformative application since the AMI/FAN [Field Area Network] communication network necessary to run advanced metering applications can also be used to transport data for all kinds of other emerging Smart Grid applications.” Leeds, p.7.

Demand Response (DR)

Because electricity must be used when generated, providing sufficient power for “peak” demand periods is an ongoing problem for utilities.  The problem has been traditionally addressed with so-called “peaker plants” that are brought on-line only when needed – when demand is expected to spike, such as during a hot summer afternoon when air conditioners are sucking energy to keep things cool.  Peaker plants are generally old, inefficient, expensive and dirty to operate.  Demand Response is an alternative solution that is enabled by the Smart Grid.

DR allows a customer to reduce its use of energy during these peak periods, lowering cost for the consumer and allowing the utility to re-route the electricity where it is needed – without having to rely on starting up its peakers.  DR is cheaper, faster, cleaner and more reliable.

To date, most DR solutions have been deployed by large commercial energy users.  But with the widespread integration of Smart Meters, the practice can now begin to be rolled out for residential consumers as well.

DR is implemented by third party aggregators who enter into contracts with consumers that allow the aggregator to reduce the consumers’ energy usage during peak hours (using thermostats and intelligent grid-aware devices).  The aggregated “virtual peak power” is then sold to the utility.

Grid Optimization

Grid Optimization is all about making the distribution network more efficient through the use of information management and system controls.  Rather than focusing on changing consumer behavior, which is essentially the goal of AMI, Grid Optimization enables utilities to clean up their side of the street – distribution from the substation to the point of use.

There are a wealth of devices and technologies that are contributing to Grid Optimization, and more will be developed as the Smart Grid is built out.  Some of the many benefits include monitoring grid assets, decreasing faults and outages, rerouting power to maximize efficiency, minimizing congestion, determining when to bring renewables online and generally allowing proactive management of generation and distribution assets.  (Leeds p. 60-61).  Leeds anticipates that Grid Optimization and its cousin, Distribution Automation, will be the fastest growing market segment over the next five years.

Energy Storage

Anyone working in the renewables field (solar, wind, etc.) can immediately see that a breakthrough in energy storage would revolutionize the industry.  Renewables are referred to as “intermittent” resources because they only generate some of the time – when the sun shines or the wind blows.  If only we had an economical way to store electrons, renewable energy could begin to supply base load, and that would change the game forever.
But this is going to require a true technological breakthrough.  The available options at present are woefully inadequate.  Energy storage, such as pumped storage (hydro and air), thermal storage and flywheels, provide the best solutions, but even they have severe limitations (cost, scalability, geography, etc.)  Electricity storage –batteries (Lead Acid, sodium-sulfur, Lithium ion, etc.) and supercapacitors are worse:  expensive and inefficient.

What is needed is a distributed storage solution allowing energy to be stored at the point of use and relayed through Smart Grid management when and where it is needed.  Energy storage is getting the attention of investors and major players (such as GE and AEP), but clearly more can and needs to be done.


The Age of the Smart Grid is upon us.  Huge amounts of capital are being and will be deployed over the next decade and beyond in upgrading the nation’s power grid.  Both the political and financial will appears to be behind Smart Grid deployment.  Fortunes will be made in this arena, and our lives will all be changed for the better through the intelligent delivery of more efficient and cleaner energy.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on clean energy and environmental technologies.