By Kristopher Brown and Matthew Labovich, PricewaterhouseCoopers
The electric utility sector is at an inflection point, being driven primarily by the build out of advanced metering infrastructure (AMI). In the past year, a number of forces have been in play, including a convergence of political and economic events that has accelerated a national push to gain energy independence, conserve energy and mitigate greenhouse gas emissions. At the core of these efforts is a drive by federal and local governments to build the foundation for a smart electricity grid infrastructure.
The smart grid is an adoption of technologies to transform the existing electricity grid—which is fitted largely with 20th-century infrastructure—to 21st-century standards to create greater efficiencies, reliability and the integration of renewable energy sources. The backbone of the smart grid is the integration of two-way communications between utilities and consumers through AMI and sensors that provide real- or nearly real-time energy information regarding where and to what degree electricity is being consumed.
A New AMI Ecosystem
Clean-tech-related investments, industry alliances and technological advances are gaining significant momentum, creating markets and subindustries with electric utilities at the epicenter. This new ecosystem will impact electric utilities, regulatory bodies and the companies that look to build the smart grid infrastructure. AMI and the emerging technologies connected to it collectively represent a distinct smart grid industry.
Building these new AMI infrastructures requires massive investments and will spur change in the utility sector. The Electrical Power Research Institute estimates that a fully modern smart grid requires investments of $165 billion. As the build out gains traction, it has the potential to support a proliferation of sectors and applications analogous to what the semiconductor industry spawned decades ago and the Internet era initiated in the past decade.
A new wave of entrants has surfaced. These are the clean-tech players, and they include developers of batteries and energy storage, alternative and distributed generation technology, electric carmakers and a diverse group of businesses creating the smart grid ecosystem. It is premature to ascertain which players will emerge as clean-tech infrastructure leaders. The growth of these infrastructures, however, is opening opportunities for large incumbent players and relatively small start-ups eyeing opportunities to leapfrog swiftly from small and peripheral to central and significant players.
Convergences and partnerships among industries are emerging as businesses effectively cross-pollinate key skills and assets from one industry with those of new partners. The alliances are varied but broadly include those between utilities and automotive industries, and between communications and information technology industries.
These alliances will surprise and alter ingrained consumer behavior around electricity. Consider the strong likelihood of a national retail chain in partnership with an electric battery maker installing charging stations at its U.S. stores and what it means for utilities that provide the electricity for the stations and vehicles.
As the economy shows signs of recovery, clean-tech investments have rebounded sharply. Venture capital investment in clean-tech companies rose in the third quarter of 2009 to $845.8 million in 50 deals, up from $474.8 million in 49 deals the previous quarter, according to the MoneyTree Report, a quarterly survey produced by PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Reuters. This influx of capital into the utility sector has the potential impact AMI development. It may create strange bedfellows early on that ultimately produce remarkable results.
Anticipating the growth areas of these smart infrastructures and understanding the investment and consumer dynamics shaping them will help companies and utilities deal with this convergence of technologies and best leverage these opportunities.
Smart Grid Convergences
The smart grid infrastructure build out has formed a constellation of industries gravitating around electric utilities. There are also myriad alliances within industries as consortia of companies are seeking and are beginning to receive American Recovery and Reinvestment Act of 2009 (ARRA) grants and loans to build the smart grid. Smart grid growth already is enabling small start-ups to act as partners with established players in projects they might not have been able to win alone. Such partnerships likely will result in some clean-tech start-ups growing much faster than without partnering. For large, established players, these partnerships bring the speed, agility and new solutions to strongly vie for the smart grid project opportunities that require those capabilities.
Below are five areas of AMI convergence that will impact utilities and create opportunities for partnership and collaboration.
Communications technologies are being used in new ways to modernize power grids’ field networks. An array of communications technologies are connecting the smart grid. These comprise fiber-optic and wireless communications, which include traditional radio frequency mesh technologies for communication between grid-enabled appliances, for example, to smart meters—and potentially WiMAX and Wi-Fi. Software and computer networking companies, too, are integral for enabling the collection and analysis of the data flowing through smart meters along all points of the smart grid—from generation and transmission and distribution to industrial, commercial and residential end users.
Computer networking firms likewise have entered the smart grid industry as central players. Cisco Systems and IBM, for example, this year announced respective smart grid initiatives, each enlisting smart grid players as partners. Cisco estimates the communications segment of the smart grid alone will create a market of $20 billion a year during the next five years. This space also is spawning convergences and partnerships. Current Group, which produces smart grid networking applications including advanced sensors communications and analytics, has partnered with Tendril, which makes in-home smart grid hardware and other home energy management products.
As utilities begin gathering data from the smart grid ecosystem, the need to enlist players in data storage management and data centers will rise as precipitously as the amount of data that will be gathered. Pacific Gas and Electric Co. (PG&E), for example, expects to collect 170 megabytes of data annually from each smart meter it installs. When the smart grid infrastructure hits 40 million advanced meters, for example, some 6.8 billion megabytes will need to be stored and managed. Managing such a huge amount of data will require an industry unto itself with a network of data centers and data management and analytics required to best reach intelligent decisions on how that data is used.
Energy storage, too, is creating a union between battery makers and utilities as they endeavor to more efficiently connect renewable energy sources (such as commercial-scale solar and wind power generation) to the grid through more powerful battery storage to manage intermittent generation. Finally, companies centered on electricity transmission and distribution networks will help bring about the modernization and expansion needed to create new energy transmission corridors connecting renewable energy sources from where they are created (wind or solar farms) across long distances to where they are consumed (typically, urban areas).
Home area network:
Another major convergence is developing around the evolution of smart homes and buildings. At the end user side of the smart meter, players are emerging to support the buildup of the home area network (HAN), through which home products communicate with the grid. Entrants building out the HAN include makers of smart thermostats, in-home displays for monitoring and programming electricity and the communications needed to bring intelligence to electricity-using products such as water heaters, refrigerators, stoves and pool pumps.
The convergence of industries and technologies will not happen overnight, the electric utility industry will continue to go through a major transition for the next 20-30 years. AMI and the smart grid infrastructure are changing the way utilities generate power, interact with customers, manage load as well as manage strategic partnerships and business models.
Kristopher Brown is advisory director and Matthew Labovich is advisory principal in the utilities practice at PricewaterhouseCoopers.
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