Smart Grid Challenges and Opportunities (CEG, CNP, DUK, NEE, PGN, EXC, HON, ED, WHR, GE, ELON, MTZ, GRID)

Of the $787 billion federal stimulus bill passed in 2009, more than $3.4 billion was targeted at modernizing the US electricity transmission and distribution systems and promoting investments in smart grid technologies. When corporate investment is added to the stimulus spending, more than $8 billion is about to be invested in making improvements to the US electricity grid.

A variety of utilities and companies have received federal grants to implement various pieces of the smart grid. Constellation Energy Inc. (NYSE:CEG), CenterPoint Energy (NYSE:CNP), Duke Energy (NYSE:DUK), NextEra Energy (NYSE:NEE), Progress Energy (NYSE:PGN), and Exelon (NYSE:EXC) have all been awarded the maximum $200 million stimulus grants. Honeywell International (NYSE:HON), Consolidated Edison (NYSE:ED), and Whirlpool Corp. (NYSE:WHR) have been awarded grants for projects related to customer systems, electric distribution systems, and equipment manufacturing, respectively. General Electric Co. (NYSE:GE) also recently announced a $200 million investment in smart grid. Two other companies, Echelon (NASDAQ:ELON) and MasTec (NYSE:MTZ) have been working on partnerships in smart metering and energy management (Echelon) and building out transmission and distribution lines (MasTec). There’s even an ETF play available, the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index ETF (NASDAQ:GRID).

The concept of the smart grid is to open a two-way, real-time communications path between utilities and consumers. The current grid is not able to handle real-time events, such as lower prices at certain times of the day when electricity rates are in less demand and therefore lower. Smart meters, sophisticated and scalable demand response systems, and meter data management all need to be able to communicate with one another as well as with utility companies and customers over all kinds of networks.

By comparison with today’s grid, the smart grid is a supercomputer replacing an abacus. Utility companies now get monthly meter readings and batch them up before sending them to the billing system. Under a smart grid system, the utility company will be able to handle millions of data transactions every day.

One research firm estimates that for every million smart meters a utility company’s smart metering operations must support every day over 2,000 meter sways, more than 1,000 customer moves, 10,000 missing reads, 20 meter failures, and more than 97 million meter reads. This is a sea change on an order of magnitude that utility companies have never faced before.

So let’s assume that the smart grid is in place. What are the benefits, both the utility and to the customer? The chief gain to a utility will come from its ability better to balance supply and demand, and to provide greater reliability by making their power purchases more rational. From a strategic perspective, better use of assets such as generating plants and other infrastructure will help utilities make better investment decisions. Operationally, load factors will improve and system losses and outages will decline. As a result, costs should fall.

For consumers get new tools that will help them see how much electricity they are using, when they are using, and how much it costs at exactly the time they use it. Savvy consumers will have far more control over their use of electricity, and once the initial cost of the smart meters and appliances is amortized, consumers will save money.

An almost forgotten benefit of the smart grid is the reduction in CO2 emissions. Because supply will be better fitted to demand, fewer new generating plants will need to be built. Electricity will be more efficiently used and, thus, less will be required. The federal government has targeted a 5%-8% improvement in energy efficiency by 2020 to go along with a 12%-15% renewable energy generation target.

Renewable generation projects using solar PV cost about $396/MWh, solar thermal projects cost about $257/MWh, and onshore wind projects cost about $149/MWh. Energy efficiency projects cost about $50/MWh. And energy efficiency is the goal of the push for a smart grid.

The US Energy Information Administration estimates that an investment of $520 billion in the smart grid will return $1.2 trillion in gross savings by 2020. No other technology even comes close to that kind of return.

Over the next four or five years investment in the smart grid could reach $215 billion, according to an analyst at the Bank of America. The total investment needed to revamp the US electricity grid could be into the trillions of dollars, according to the American Society of Civil Engineers.

The takeaway here is that smart grid technologies boost energy efficiency, which the most cost-effective way we have to reduce energy consumption and CO2 emissions. Nothing else comes close.

Paul Ausick