I had a chance to meet Peter Fox-Penner, the Chairman Emeritus of the Brattle Group the other day, when he was announcing the launch of his new book, Smart Power. Brattle Group is a long time economic consulting group to the power industry. Smart Power is about the emergence and issues around the smart grid. I’m a huge proponent of intelligent energy systems, having cofounded one company building superconducting fault current limiters, and recently cofounded another one still in stealth commercializing distributed power flow controls for transmission lines. Rather than just hammer out a book review, I’ve asked Peter to opine on a number of questions about electric power, and share some of his thoughts. Hope you enjoy!
Peter, exactly where do you think the trillion dollar need laid out in your book is going to come from? How much higher is it than our current spend? What is the source of capital- IOU or private financial investors? New Entrants? Munis?
In 2008 The Brattle Group studied investment challenges for the utility industry and found that between $1.5 and $2.0 trillion was needed from 2010 to 2030 to maintain current levels of reliable energy service. Several other sources have independently projected a similar level, most recently Credit Suisse. For more information, see slide 4 here:
In our Brattle study, the majority of the investments were in generation and distribution. Without taking carbon prices into account, around $500 billion dollars of investments were needed in both generation and distribution, while transmission investments came in at almost $300 billion. The remaining investments were needed to implement advanced metering, energy efficiency, and demand response.
These are significant increases compared to our current levels of spending. Investments in the utility industry have been steadily declining since the 1970s. What will be particularly challenging for the industry is that investments must be made as the electricity sales trend line goes flat. Consequently, we can expect the financial health of utilities and the price of power to suffer if we don’t plan for these conditions. While the industry is seeing an influx of new entrants, especially in the smart grid area, utilities are still going to provide the capital for these investments and will have to ultimately pass the costs onto ratepayers through higher prices.
Our T&D grid has been underinvested for a long time. We all know it, but still it’s underinvested. What will make that change?
The transmission side of the grid is one of the industry’s areas experiencing rapid increases in investment. In the 1990s we were investing $2 billion a year and now investments are around $8 billion a year. Looking forward, these investments are expected to triple to support the development of 3,000 miles of lines per year through 2017, compared to about 1,000 miles of lines per year over the last decade. Many of these investments center on reliability projects and future transmission investments will yield more projects that support public policy goals. (For example, RPS will require new lines to reach renewable resources).
On the distribution side, new end-use technologies, including advanced metering and plug-in hybrid electric vehicles (PHEVs), will require new investments. While the costs of smart meters are relatively small compared to the total industry investment needed, smart meters are the building blocks of smarter grid systems and an important trend to watch. Policy goals, such as the administration’s target to deploy 40 million smart meters and recent ARRA funding, have been instrumental in supporting these investments.
California botched deregulation badly, and despite successes like Texas, that debacle chilled the deregulation push for a long time. Without a new drive, can we really get the capital mobilized into new generation and T&D?
There isn’t a clear relationship between the two – deregulation on the retail side doesn’t necessarily equate with investment. Utilities in California, which is still integrated, are investing; so is Texas, which is deintegrated. In Smart Power I explain the complex interplay between vertical integration, deregulation, and the future regulation of the industry.
It is worth noting that historically large amounts of transmission investment are underway and planned – over $100 billion of new projects, by Brattle’s estimates, in North American. The FERC is already creating “a new drive” for this investment.
As to distribution (i.e. low voltage grid) capital, the constraint on investment is mainly the financial health of state-regulated utilities. This is not looking very good and this is a primary concern in Smart Power. Note that deregulation of either transmission or distribution wires is unrealistic and unwise for the foreseeable future.
Do you see AMI rolling out faster in IOUs or in Municipals? Domestic vs. overseas?
The amount of AMI investment is greater for IOUs than municipal utilities only due to scale. The actual percentage of customers with AMI is higher among smaller municipal utilities, public utility districts, and electricity cooperatives. The FERC’s 2008 Assessment of Demand Response and Advanced Metering reported that cooperatives had reached an AMI penetration rate of 16.4 percent in 2008 while IOUs were at 2.7 percent.
Smart meter deployment recently reached a high of 25 percent of U.S. residential accounts. AMI deployment in the U.S. has seen a surge due to ARRA funding, but EU countries may deploy faster by enacting regulations that make smart meters mandatory. The UK government plans to put smart meters in every household by 2020. France, Ireland, the Netherlands, Norway, and Spain are projected to have close to 100 percent smart meter installation by 2020 as well. Generally, the EU is not ahead of the U.S. today and may not be for some time.
For more information on AMI and dynamic pricing potential see: http://www.brattle.com/_documents/uploadlibrary/upload805.pdf.
What do you think are the top 3 business cases that will make smart grid/AMI fly?
At the moment there aren’t three business cases that have made Smart Grid or AMI “fly”- in every case so far there have been elements in proposed plans that experience pushback from either regulators or customer groups. The best smart grid business cases incorporate robust pilots and show clear evidence of substantial favorable bill impacts.
Without fundamental changes in the lines, switch gear, transformers, et al that actually make up the grid, how much good can better two way communications with the meter actually do? What is really needed underneath?
First of all, when utilities implement smart grid systems they typically upgrade more components than just the meters and their communication system. The transformers, switches, etc., are all being gradually upgraded to be “smarter” incrementally at most utilities — it is a question of how quickly the old gear is turned over. But more importantly, many of the direct customer benefits of the smart grid do not require substantial change-outs of the distribution system hardware you allude to — not at all. These benefits come from much more customer and utility control over customer energy use, including dynamic pricing, and this doesn’t rely on the hardware items you mention.
We’ve been talking about wind and DG causing problems on the grid for a long time. Are they really? Where in the world can we point to examples and the solutions of that?
The intermittency of large wind and photovoltaic resources continue to provide operational challenges. One example occurred in Texas where a combination of events caused a disruptive decline in the system frequency. Wind production dropped from over 1,700 MW to 300 MW over three hours and emergency procedures were activated. At the time of emergency procedures, non-wind resources were under-producing by about 300 MW. To further complicate matters, demand was at a high that day and exceeded the day-ahead forecast. Wind intermittency has also been known to disrupt energy prices (creating negative electricity prices in places like Texas and New York) but this is a far smaller issue than reliability of generation. Having noted this, the variability of renewable is not a huge, impenetrable road block – – it is steadily being addressed.
Since we already have an effective carbon price embedded in supporting our wind power markets of c. $40-80/ton, what price of carbon do you see being needed to make the difference?
The carbon price needed to make wind comparable to other generation types (gas CC, coal, etc.) after all of the subsidies/incentives for wind generation would depend greatly on the region. There is also quite a bit of range depending on your options on projected gas prices, plant costs, and wind capacity factors.
How big a deal is it /how much does it cost to actually roll out AMI? It seems as if every project takes forever and gets huge flack.
I don’t agree with the premise of your question. Many utilities have rolled out AMI systems and they are working extremely well. There is a lot of press lately about a few smart meter installations that have had problems, but the actual technical problems with these rollouts (as opposed to the PR problems) have actually been extremely small.
Credit Suisse has estimated utilities will need to invest approximately $22 billion in AMI equipment – which is only about 1 percent of total industry revenues. While this sounds like a small investment, the average all-in cost of a smart meter in the U.S. is approximately $200.
If we see more linkage with power and transport fuels through increased natural gas and EVs, what do you think the future and role of OPEC is in this debate?
Charles Ebinger, Director of the Brookings Institution Energy Program, who is an OPEC expert, believes that OPEC is very aware of EVs and will respond to them somehow. However, it may be a long time before EVs put a large enough dent in global oil demand to cause OPEC to worry a lot about them in terms of contemporaneous actions. The demand for oil from Asia is still rising rapidly, and oil is trading in a range OPEC claims to be very happy with.
Shale gas vs. wind vs. nuclear – where will our key coal power replacement come from?
I think replacement power for any potential coal retirements would mostly come from gas natural gas plants. With the current low expectations for gas prices, wind and nuclear do not have much chance to compete even with new gas plants.
How concerned should we be that low cost dirty coal power in China gives them a fundamental advantage in trade that leaves us playing catch-up?
I would argue that China’s recent clean energy investments pose a greater threat to our global competitiveness going forward. China is becoming one of the biggest wind markets in the world, with 40 GW of capacity and expected growth of 150-300 GW by 2020. Chinese companies are seeking to expand abroad and their wind and solar exports to the United States have increased dramatically. Many argue that this exponential growth has come at the expense of the U.S., whose exports of wind turbine sets and gears fell by 67 percent in 2009. China’s strength in clean energy surpasses just these wind power examples- China’s total clean energy investments increased 50 percent last year to $35 billion. This is twice our current level of investment. There has also been a steep decline in U.S. wind and solar technology exports to Europe, illustrating our clean tech competitiveness is at stake on a global scale.
DR. PETER FOX-PENNER is a principal and chairman emeritus of The Brattle Group and author of Smart Power: Climate Change, the Smart Grid and the Future of Electric Utilities (www.smartpowerbook.com). The views expressed in this article are strictly those of the author.
Interviewer Neal Dikeman is the longtime chief blogger behind Cleantechblog.com and Cleantech.org a partner at cleantech and alternative energy merchant bank Jane Capital Partners, Chairman of ecommerce company Greenhome.com, and previously cofounder of Zenergy Power and founding CEO of Carbonflow.
 2008 Assessment of Demand Response and Advanced Metering, FERC, 2008. http://www.ferc.gov/legal/staff-reports/12-08-demand-response.pdf
 Peter Fox-Penner, “The Smart Meter Backslide,” Harvard Business Review Insight Center, October 4, 2010, http://blogs.hbr.org/cs/2010/10/the_smart_meter_backslide.html
 Judith B. Warrick, The Power of an Idea, Morgan Stanley, Energy Insights, October 27, 2010.
 Worldwide: USTR Initiates Section 301 Investigation into China’s Subsidies and Restrictive Practices on Green Technology Sector, October 19, 2010. http://www.mondaq.com/unitedstates/article.asp?article_id=113220