Smart grids move from research to early industrialisation phase

But serious obstacles still stand in the way of a real smart grid revolution

Smart grids move from research to early industrialisation phase

by James Osborne

There is widespread consensus that the transition to a "sustainable" energy economy requires the introduction on a large scale of "smart grids". At this moment, pilot projects with smart grids are multiplying across Europe. Indeed, according to most industry insiders, the smart grid is moving from a research and development phase to an early industrialisation phase. Still, as our Milan-based energy correspondent James Osborne found out when he dug into the matter, it is by no means certain that smart grids will become a success in the long term. For one thing, new regulatory frameworks are needed to provide investment incentives. In addition, new players need to be brought into the market: Google-type companies that can get consumers to start having fun with their energy consumption.

Demonstration projects are seeking to test a 'first phase of industrialisation', involving larger numbers of end-users as a way to find a 'consumer context'

The "good news" is that smart grids in Europe have moved from the first, R&D phase into a second stage that involves not just testing individual technologies but complete smart grid ‘solutions’. At any rate, that is what most experts seem to agree on. ‘Compared with two or three years ago, smart grids have moved from an academic phase to an early industrialisation phase,’ says Laurent Schmitt, vice president of smart grid solutions at Paris-based Alstom Grid. The demonstration projects under way now are seeking to test a ‘first phase of industrialisation’, he says, involving larger numbers of end-users as a way to find a ‘consumer context.’

It is no exaggeration to say that all over Europe an explosion of smart grid projects is taking place. The European Commission’s Joint Research Council (JRC) and industry association Eurelectric have published an inventory of all of the projects going on. They came to 300, which are all displayed on an interactive map on the website www.smartgridsprojects.eu. Some €5 billion is being invested in these projects, of which €3 billion is going into smart meters.

To give just one example of such a next-generation project: in Isernia in central Italy, Enelis investing €10 million in building what it calls a true smart grid – an electricity network in which production and consumption are integrated in real time through information and communication technologies. Several thousand customers will be equipped with a Smart Info, a device that, among other things, gives them real-time pricing information. The location was chosen because it is a centre of renewable energies, in particular solar power, hydroelectric power and biogas. The need to integrate intermittent renewable energy production and forms of decentralised power generation is of course one of the main drivers for the development of smart grids.

In addition, Enel is carrying out an €8.2 million project in Forlì-Cesena that also aims to maximise the integration of renewable energy. At the heart of this project is a control system that is able to connect via the internet the renewable generators with all the relevant facilities of the medium voltage network, including storage devices, to achieve maximum flexibility.

Bad news

But there is bad news as well. All of this activity does not mean that the smart grid is here to stay. It still has a number of structural challenges to overcome. The four biggest ones are:

• The need for a proper regulatory framework that provides the right incentives for investments
• The problem of standardisation
• The challenge of getting consumers to participate in the system
• The challenge of developing business models that will make it attractive for suppliers and consumers to become part of the smart grid transformation

We will take a look at each of those.

Challenge #1: Regulation and investments

At this moment, utilities operating in the highly regulated market for electricity distribution have little incentive to invest in innovation, especially in researching and developing technologies with uncertain outcomes. The reason is simply that they don’t get paid for it. Regulators set tariffs on the basis of costs, not with an eye to making large investments in technological innovation.

‘Over the last 20 years, distribution system operators (DSO’s) have faced little technological innovation in the way they plan, invest in and operate their networks,’ explains Eurelectric, the industry body, in a

report (“Regulation for Smart Grids”) on how current regulation hampers investment in smart grids. ‘Instead, innovation has been mainly about reducing operating expenditures or creating new, more efficient financial structures.’ Eurelectric notes that, as new technologies will need to be developed, ‘DSO’s will need appropriate incentives to innovate.’

‘Europe is the region most exposed to renewable generation in the world and this puts us three to five years ahead of other countries, including China and the U.S.,’ says Alstom’s Schmitt. ‘But we are behind in regulation and finding ways to move forward.’

The European Union does provide various support schemes. The 300 smart grid projects counted by the JRC received a combined €184 million from the EU’s so-called 6th and 7th Framework Programmes plus some €200 million from the European Recovery Fund, European Regional Development Fund and the European Energy Research Alliance.

And the European Commission is pushing for regulatory changes to encourage smart grid implementation. But it admits that progress is slow. ‘There is a considerable gap between current and optimal investment in Europe, which can only partly be explained by the current economic downturn,’ the Commission warns in its communication paper on smart grids of April 2011. ‘Unless a fair cost-sharing model is developed and the right balance is struck between short-term investment costs and long-term profits, the willingness of grid operators to undertake any substantial investment might be limited.’

Challenge #2: Standardisation

Another major hurdle lies in the development of common standards for smart grid technologies, including smart meters. The Commission called on European standardisation organisations to provide standards for communication by March 2010 and complete harmonised solutions for additional services by December 2011. But the process is well behind schedule. The reference architecture and first set of standards are now due to see the light of day at the end of 2012, even though some say that the broad outlines of smart grid technologies are already becoming clear enough for industry players.

‘Some utilities are taking a gamble and making wide deployment before standards are developed,’ says Scott Petersen of Honeywell Building Solutions. ‘But many are holding back.’ To get around this barrier, Honeywell has abandoned its usual approach of using proprietary technology and embraced open standards. This reduces risk for clients such as utilities, which are wary of getting stuck with a system that becomes obsolete or else find themselves unable to change smart grid solution provider, explains Petersen.

Challenge #3: Consumer behaviour

A key question is: how will people respond if they get the possibility to become smarter in their energy use? And will utilities be able to develop the more complex relationship with their customers which smart grids require?

While demonstration projects logically focus on ‘enthusiasts’ and early adopters, many users may not want to spend their days worrying about managing their ‘smart’ home. According to Christine Hertzog, a consultant based in Silicon Valley, author of the Smart Grid Dictionary and co-author of The Smart Grid Consumer Focus Strategy, a commercial space is likely to be created not just by utilities themselves but also by other players that are more finely tuned into consumer technology trends, such as cable TV providers, consumer electronics retailers, telephone companies and software developers.

These companies may be interested in proposing smart home offers alongside home security, home health and health-style applications, says Hertzog. ‘Many consumers don’t want to understand smart

grids better,’ she says, just as people don’t need to understand how the Internet works in order to use it. We should not expect everyone else to think as much about it as anyone in the industry. If we are smart, it will be just the same service they enjoy now with the possibility of more active engagement.’ A lot of the energy-efficiency work will be done instead by machine-to-machine applications.

Challenge #4: The right business model

The biggest challenge may be how to get all the players to do their part and put everything together so that the smart grid system can subsequently develop “spontaneously”.

The Joint Research Centre concluded in its report that most technologies are known, ‘but the new challenge that these projects are now confronting is their integration.’

The Paris-based International Energy Agency (IEA) concluded more or less the same in a recent in-depth “Technology Roadmap on smart grids”. ‘The broadness and complexity of the electricity system – technologically and from a regulatory and market perspective – and its importance to society in general, increase the necessity to understand who should perform the actions outlined in this roadmap. Neither the government alone, nor the private sector alone, can accomplish the goal of modernising the electricity system’, says the IEA. ‘Collaboration is vital.’

Frits Bliek, of the Dutch energy consulting and certification company KEMA, compares the situation to that of the early phase of the internet. ‘It’s like getting the Internet into place,’ he says. ‘Once the basic components are in place, it’s a question of moving into an area where all kinds of interactions come into place.’

Bliek is project leader of the Smart Energy Collective, a Dutch industry initiative that involves more than 30 companies from different sectors, including international ones like ABB, Philips and Siemens. They are doing what the IEA wants them to do: collaborating on developing intelligent energy concepts and innovative business models to take those concepts to the market. ‘We are trying to create models that allow for the integration of technologies across different parts of the value chain’, says Bliek. ‘Not just doing a demo for the sake of the demo.’

UK poised to take the lead?

Many industry observers believe that the UK is furthest ahead in providing the right framework to facilitate the development of smart grids. UK energy regulator Ofgem has created a £500 million Low Carbon Network Fund (LCNF) to encourage distribution network operators and other players to try out smart grid solutions. The aim is to get utilities to test new technologies, operating practices and commercial arrangements.

‘Ofgems's Low Carbon Network Funding projects are a best practice that other European governments should look at very closely,’ says Keith Redfearn, general manager for the Digital Energy business at GE. ‘Research and education on what a smarter grid can deliver to us as a society is crucial.’

Ofgem understands that the learning process is not just for individual utilities but for the whole energy industry, experts say. ‘Lessons learnt from the projects will be shared with all network companies and

other interested parties’, confirms Rachel Fletcher, Ofgem’s acting senior partner for smarter grids, governance and distribution. ‘The aim here is to ensure that the networks do not hold up the decarbonisation of our energy use, and that the cost of this transition is kept as low as possible for customers.’

The latest round of funding, announced in late November, saw Ofgem approving £57 million to six projects. They include installing electric storage batteries in homes, schools and an office to see if customers can be encouraged to use this stored electricity at times of peak demand. Other projects involve better use of existing network capacity to manage congestion on the grid and integrate new low-carbon generation without having to build new power lines.

The biggest recipient – £22.8 million – is an automated demand response project for commercial and industrial energy users, led by Scottish & Southern Energy Power Distribution. The system will allow the utility to work with its business customers to temporarily reduce or shift energy use when overall demand spikes. Big energy users such as shopping centres, offices and factories will be alerted to expected peaks in energy use and grid congestion. They will have contracts that provide incentives for them to reduce their energy use at such moments. Scott Petersen, marketing and strategy director for energy solutions Europe & North Africa at Honeywell Building Solutions says the system should be able to reduce companies’ energy demand by 10% with little or no impact on their operations.