Smart Grid Deployment: Transformative Change for the Electric Power Industry

By Edwin Feo and Henry Scott

In recent months, television ads from corporate titans like IBM, GE, and others have heralded transformative technology for the electric power industry: the smart grid. Congress has committed significant federal funds to expedite the delivery of a smarter, more efficient transmission and distribution system. The February 2009 American Recovery and Reinvestment Act alone invests $4.5 billion in advanced grid technologies. Smart grid adoption will impact the renewable power industry and cause the most viable smart grid technologies to emerge.

The smart grid is not a particular technology, but is described as a modernized transmission and distribution system that uses digital technology to increase overall system reliability, efficiency and safety; permits distributed generation; integrates intermittent renewable energy resources such as wind and solar power; and facilitates plug-in hybrid electric vehicles. At the center of the smart grid is a network of real-time, two-way integrated communications and sensing and measuring equipment, an improved national electricity “backbone” consisting of transmission superhighways, and additional distributed generation. The communication network is what makes the grid smart, while advanced superconducting, as well as diffused and more distributed generation enable the network to deliver power with greater efficiency and reliability.

Rather than simply a piece of improved hardware or wiring, the smart grid is a conglomeration of enabling technologies that work in concert to facilitate a more adroit transmission and distribution system. A more intelligent network should in turn permit the adoption of more advanced processes and technologies like advanced metering infrastructure, real-time electricity pricing, incentive-based load reduction signals and greater consumer choice. Much like the Internet, the smart grid is an enabling technology. But what technologies will the smart grid enable?

The smart grid complements the adoption of renewable electric power by permitting the integration of additional renewable energy sources located in remote regions of the country. Deployment of high efficiency, high capacity renewable trunk lines could prove to be among the most important features of tomorrow’s smart grid. These additional lines will ensure the flow of clean, renewable energy to load serving entities in an efficient manner. Obstacles associated with wind and solar intermittency and the difficulty of responding to peak demand are mitigated by the adoption of smarter networks that permit electric energy to flow freely to consumers across the nation. Morning winds in the Dakotas can power air conditioners in Chicago or Manhattan.

Although more of a policy than a technology, net metering could be the game changer. Net-metering refers to the metering of electricity where energy outflows are deducted from energy inflows. Thus far, net-metering rules have been fairly restrictive, limited to small renewable energy systems, often with subscriber caps. In addition, high up-front capital costs associated with residential and small-scale solar projects have acted as a significant barrier to entry. Soon, this may change.

A smart grid may accelerate the adoption of net metering by enhancing a consumer’s incentives. Advanced metering infrastructure (AMI) permits market rate net metering whereby a user’s energy is priced as a function of wholesale electricity prices. The enabling technology is a smart meter that monitors consumption in more detail than conventional meters and communicates that information to advanced appliances, the distribution network, as well as the local utility for monitoring and billing purposes. This, in turn, should raise the metered price paid for energy generated by distributed solar power systems which tend to produce energy during the daytime peak-price period.

Advanced metering also permits utilities to charge variable rates based on near-real time price signals relayed to smart home controllers. Consumers’ active response to price signals should lead to a flattening of the electricity demand curve. This, in turn, should support the integration of additional intermittent resources. Put in economic terms, greater elasticity on the consumer demand side can support more intermittency in terms of the resource mix.

Coupled with smart meters and net-metering, advanced smart grid technologies such as plug-in hybrid electric vehicles and smart appliances have the potential to transform the electric power industry. Electricity hungry appliances like washing machines, dishwashers, and dryers can be programmed to operate only when prices are sufficiently low. Plug-in vehicles can charge at night, when demand is low, and feed power back into the grid at times of peak demand (and at peak prices). Ultimately, an advanced grid maybe able to balance supply and demand at the device level.

Combined with improvements to the nation’s high voltage transmission lines, market rate net-metering may prove to be a highly efficient way to build a more resilient, green and intelligent electric power infrastructure, less dependent upon fossil energy sources. The smart grid will require consumers, utilities and other electric market participants to rethink their business strategies. The traditional emphasis on larger generation projects will give way to less capital intensive, distributed systems, as well as low capital software solutions. The smart grid as thus envisioned is a jump on the technology curve equivalent to the move in television from black and white broadcast via airwaves to high definition cable or satellite service; or the move in telecommunications from rotary phones to i-Phones.

Edwin Feo is partner and Henry Scott is associate attorney in the Global Project Finance Group of the international law firm Milbank, Tweed, Hadley and McCloy LLP. Feo co-chairs the firm’s project finance and energy practice group.

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