Investment Strategies for Smart Grids and Meters

[I often meet with VCs and entrepreneurs who want to learn more about the revenue opportunities of Smart Grids. It is seen as the hot new technology that will create vast fortunes for next generation of entrepreneurs. For a long time I have been extremely skeptical of many of the wild exaggerated claims made about the current generation of smart grids and the opportunity to make a return on investment. However I now believe there some significant opportunities with some upcoming technology, especially in the 400Hz power space. But before we look at these technologies we must take into consideration several points of reality with regards to this smart meter/grid market:

1. The real price of electricity in most of the world, but especially in North America has been declining over the last 30 years. If price of electricity is dropping why do we suddenly need smart meters and/or grids? Why has this become so hot an issue?
2. Most utilities, perhaps excluding those in the UK, have surplus generating capacity. This surplus capacity has largely arisen from the de-industrialization of our society in the past decade. Much of this heavy industry has decamped to Asia and the third world and is unlikely to ever return. Why would utilities want to reduce demand for energy when they have huge surplus capacity?
3. New shale gas discoveries are significantly lowering the capital and operating cost of new power plants, especially those used for peak power demands. At one time the argument was made that demand side metering would eliminate the need to build power plants for peak demand
4. The power plant utility culture is extremely conservative. Their whole ethos is built around selling more power. Although they will pay lip service to various green strategies such as smart meters and grids, fundamentally they need to respond to the demands of their owners – whether they be government or shareholders and make as much money as possible selling power.
5. There have only a handful studies on the potential energy savings of smart meters. Savings of 10-15% are claimed, but this is usually with highly motivated individuals and communities. Real world deployment may result in significantly less savings. We all remember the early 500 channel broadband deployments that were done in Florida which failed after the initial enthusiasm in the beginning waned in the face of real world economics. I suspect today’s smart grids are going through the same peak of enthusiasm before the inevitable trough of disillusionment
6. According to the IEA, consumer electronics is now the biggest consumption of power in most home as opposed to traditional appliances. A lot of this power draw is from stand-by power consumption which has little effect on peak load demand. Demand type metering will have little effect on this type of load.
7. The largest portion of most consumer’s electric bill is not consumption, but fixed charges such as debt retirement, infrastructure upgrades, transmission line charges etc. Smart meters or grids will have little effect on these non-consumption charges.

It is important to note that there are at least 3 primary markets for Smart grids/meters:

1. Smart grid backbone infrastructure. This technology allows the utility to monitor phase, power factor, transformer efficiency etc. This market is dominated by companies like Eaton, Cutler-Hammer, Johnson Controls etc.
2. Demand Management systems and meters. This technology allows utilities to manage HVAC and other systems in order to reduce peak demand. Most smart meters being installed by utilities today are to implement demand management.
3. Load Management systems. This technology allows customers to more effectively manage their own load and hopefully reduce overall energy consumption. This is where most entrepreneurs and VCs hope to make vast fortunes.

My suggest investment strategies for smart grids/meters:

1. Use the Internet model of technology development. The Internet only came about because brilliant engineers realized that a new type of network could be deployed as an overlay over the existing telephone infrastructure without requiring any of the existing complex telephone control and signaling mechanisms. The same lesson needs to be adapted for next generation power systems. Avoid dealing with the utilities at all costs. The utilities are extremely conservative and fundamentally it is not in their self interest to deploy any technology that reduces demand for their basic service. We need technologies that will allow us to build a power distribution overlay network on top of the existing power infrastructure without requiring the approval of the utilities. Such a technology already exists and it is called 400 Hz power systems. They are used in aircraft and military systems. They can easily be adopted to run over existing power infrastructure at most institutions and campuses by multiplexing with existing 60 Hz systems. 400 Hz power systems are ideal for distributing power from renewable energy sources such as on campus wind mills and solar panels. 400 Hz systems are ideal for interconnection to ICT equipment which has steady but low volume power draw and can be easily adapted to variable power conditions. 400 Hz allows the disruption of power without being caught up in the complexity of interconnecting to the utility, feed in tariffs etc. They are also ideal for small community grids using renewable power

2. Focus on carbon not energy. Energy costs are getting cheaper and likely to continue in price because of surplus power and advent of shale gas power plants. The only thing that will make electricity more expensive is some sort of price on carbon. Despite the failure of Copenhagen and the latest machinations of the US Congress a price on carbon is inevitable. Regardless of whether it is a carbon tax or a more sensible cap and reward, or perhaps cap and dividend, electricity generated by fossil fuels will go up in price. Technologies and smart meters that can differentiate and negotiate between different sources of power will be important.

3. Focus on working with energy too cheap to meter. Remember that old slogan? Believe it or not it is possible to produce electricity that is too cheap to meter. But you aint going to get that kind of power from your local friendly utility. On campus windmills can produce very low cost power, although not free, in many cases it makes no sense to meter. The problem is the high degree of variability in power. Developing technology solutions ( in addition to storage) that are adaptable to highly variable will be attractive. Besides most proposed cap and trade plans call for at least 30% of utility power to come from highly variable renewable sources as well. The utilities will be desperate to find customers who can use this type of power

4. Focus on ICT. Computers and networks are the adaptable technologies to using 400 Hz and/or variable power. Reliability can be achieved through numerous such as clouds, distributing computing etc. ICT does not need a 5 nines reliable power system, just like the Internet never needed a 5 nines telephone system. If ICT composes at least 30-50% energy consumption in a typical building then removing this load from the 60Hz utility supply will have a big impact.

In summary these are the technologies I look for:

1. Consumer or intuitional grade 400/60 Hz multiplex power systems
2. Renewable power systems and electronics that can feed 400 Hz power
3. Adaptable ICT equipment that can use fluctuating power sources
4. Smart meters that can negotiate power from different sources such as renewable power, 400 Hz power and finally utility power
Bill

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email: Bill.St.Arnaud@gmail.com
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