Exelon and Constellation Energy have won approval for their merger, but now they must live with the terms of the deals cut to win that approval and also deliver on the smart grid performance metrics imposed in a recent legislative contest of wills.
The political brawl that played out in Illinois from the legislative battle over smart grid is typical of the Land of Lincoln where everything is political and everything has its price. But while the outcome is not what was planned or predicted it may end up being an interesting lab experiment on whether smart grid can earn its keep.
In full disclosure I spent five years working for the Illinois Commerce Commission as Manager of its Public Utilities Division and then my last year as General Manager of the agency. I learned to navigate the Illinois political calculus including “freeze exceptions” for hiring state employees which served as a pretext to send me a list of patronage candidates to consider. If I agreed to hire one from the list I got my freeze exception. If not I had to wait. I was never forced to hire anyone but there clearly was a cost for not doing so.
I also learned that just because utilities were regulated by the Illinois Commerce Commission did not mean they were helpless subjects to be trifled with. There was always a political way to fix a problem. That is the situation with Exelon’s need to move forward with smart meter deployment and smart grid implementation. It was not a matter of whether this was a good idea only how much it would cost to implement—and to win the approval needed to do so. Ameren thought it could piggyback on a good deal and ended up being caught in the crossfire.
The problem was smart meter deployment got caught up in other issues including anger over power outages from storms that made customers mad and put politicians on the defensive. Then Governor Pat Quinn, an unabashed ratepayer advocate and frequent opponent of utilities for more than 30 years, played his role true to type. Then there was the utilities fear that the ICC might not approve their smart meter costs as “prudent” after the fact so they wanted approval in advance. No dice said the Commission. Add to that the political sparing between the Governor and Legislature and you have the classic makings of a Chicago-style food fight.
When the utilities went to the Legislature over the heads of the ICC to get legislative approval—the fight was on! Everyone who wanted or needed to score points found reasons and ways to do so. Governor Quinn scored by vetoing the bill. Take that!
But that enraged the Legislative leaders who cobbled together another political deal with a veto-proof majority and sent it back to the Governor. To get that veto proof majority the trailer bill, as these things are called, was loaded with favors for those who delivered the votes to rub the Governor’s nose in the mess.
But a funny thing happened–the bill finally passed sets performance standards for smart grid implementation! In street language this might be called “stink control” in the halls of the Illinois General Assembly this is getting the people’s business done.
So the utilities (Commonwealth Edison and Ameren) will get their smart grid deployment but the amount was reduced from $3.2 billion to $2.6 billion and they must spend one-half on upgrading the transmission grid to reduce power outages.
Yes customers will pay more—that was never in doubt. But while the performance metrics have more to do with predefining the terms of regulatory approval to reduce the discretion the ICC may exercise, they do make Illinois one of the few states with such bold, legislatively approved performance metrics. Stay tuned to see how this works out before judging whether Illinois is setting a model for anyone else to follow.
The price the utilities are paying for this new ‘model of smart grid accountability’ is that they must use the smart grid approved revenue to fix the outage problems that give politicians headaches AND THEN still perform to make smart grid work.
- EIA: Smart Grid Legislative and Regulatory Policies and Case Studies (bespacific.com)
- Top 5 Smart Grid Trends of 2011 (greentechmedia.com)
- Smart grid winners, losers (and fence-sitters) 2011 [Earth2Tech] (gigaom.com)
- 3 smart grid trends to watch in 2012 (zdnet.com)
The economic reports continue to trickle in and fears of a double dip recession are abating. Too bad it does not yet feel like recovery. Economists tell us that employment growth is typically a lagging indicator and so it is this time as well. There are enough data points for experts to characterize this recovery and compare it to past experience, and some things are different and worth noting.
The Good, the OK and the Still Ugly
The Conference Board Leading Economic Index (LEI) for the U.S. gained 1.4% in March, 0.4% in February, and 0.6%in January. The LEI rose at a 5.2% annual rate between September 2009 and March 2010, slightly slower than the increase of 6.2% (12.8% annual rate) for the previous six months. Meanwhile, the Coincident Economic Index (CEI) for the U.S. rose 0.1% in March, 0.1% increase in February, and no change in January. The Lagging Economic Index (LAG) grew 0.2% in March, following a 0.1%increase in February, and declined -0.3% in January.
That is good news according to John Silvia, Chief Economist at Wells Fargo Securities Economics Group writing in a newly released report entitled, “Character of Recovery II: Differences Persist”  is that while industrial production fell sharply in the recession the recovery which began last June is more robust than in the past seven recessions he studied. He said that the March Institute of Supply Management, one of those closely watched leading indicators, showed expansion in orders, production and employment along with longer delivery times suggesting spending on more durable goods. Over the first three months of 2010 manufacturing overall grew 8.7% and high tech spending was up double digits. Taken together the durable and longer term nature of spending suggests the threat of a double dip recession has abated.
Real manufacturing and trade sales are OK tracking the pattern of the past seven recoveries even though they are below the historic trend lines. The reasons are thought to be the deleveraging going on across the economy and the real or self imposed limitations of credit. Wells Fargo Economics’ forecast of 2010 real final sales growth is less than 2% compared to the pre-recession 2.5% in 2007 caused primarily by the drop in consumer spending.
Jobs growth remains the ugly spot in the economic prospect reports and here the demographics of the employment base do not necessary help since the US has had an oversupply of low and semi-skilled workers and become much more dependent on H1-B visa required science, math, engineering and quantitative talent for software and high tech jobs. This is different form past recoveries when is a less high tech market with more manufacturing jobs we produced more of the talented skills we needed. This supply and demand imbalance is a problem—big problem—going forward for the American economy and argues for a different approach to immigration to make the US more attractive for the skilled talent we need even while we manage the influx of low skill workers to create a sustainable balance. The impact on today’s recovery of this demographics change is that those unemployed will likely stay that way longer than the historic trend and when the market demand for high tech skills rebounds at a faster pace those workers with such skills will be in big demand.
So more than 40% of the work force of the typical utility including all those focused on smart grid deployment are approaching retirement age in the next five years. The good news is this provides a good opportunity to update the work force skills needed for the smart grid future as replacements are sought and we do have a younger overall demographic profile than many other countries including China. The bad news is there may not be enough of those new skills to go around when we need them most because we do not train enough high skilled workers for the digital transformation of our energy industry let alone our other high tech needs. From electrical engineers focused on power flow analysis, to software developers and data analysts for the tsunami of smart grid data coming our way, to applications developers and product managers to turn geek speak into simple English so that customers can turn “Huh?” into “Ah-Ha!” Work force readiness is a big problem not just for utilities but the entire technology sector. Smart grid technologies increase the demand but do nothing to improve the supply of talent needed to effect this transformation.
Our immigration laws are not our friend because they constrain our talent base (remember the hassles getting H1-B visas in the last boom period?) and our economic competitiveness is likely to weaken if the cost of the current entitlement programs like social security and Medicare fall on a smaller workforce of lower wage workers for the twenty years or more it will take for the Baby Boomer wave to pass. This is especially true if we don’t do something to reduce our looming national deficit.
The consequence of slow jobs growth in the period ahead will make this talent deficiency more acute and the practical impact is that we will become more dependent on other countries for the technical skills that have traditionally driven American’s economic competitiveness. The answer is to make America a magnet for high tech skills, well educated foreign workers eager for the American way of life, and to reinvest in science, math and technology training at the University and high school levels to build into our workforce readiness need on the horizon.
 Wells Fargo Economics Groups, April 19, 2010. Get the reports at: https://wachovia.mworld.com/Econ/alerts.asp
This is part of an occasional series looking for signposts of our energy future. It is not a forecast or a prediction, but a search for clues about the path we seem to be following to meet our energy needs. I also included a few bumps in the road.
Feel free to add your own signposts to this non-exhaustive list.
Signposts of our Energy Future
- Unconventional Gas is a 100 Year Winner! The steady growth of natural gas supply from unconventional sources like shale plays across North America is real and sustainable. That was the clear message from speakers at the IHS CERAweek conference in Houston. Jim Mulva, CEO of ConocoPhillips told the crowd on oil day that the proved reserves of natural gas from shales has grown from 30 years to more than 100 years supply with more to come. While this is not new news it does represent a significant recognition that unconventional gas is both substantial and sustainable. Even Energy Secretary Steve Chu acknowledged that natural gas was the key to America’s energy security and a major factor in achieving any reduction in greenhouse gas emissions from coal. He told the CERA crowd that he had asked the National Petroleum Council to begin a study in Spring 2010 of the Prudent Development of North American Natural Gas and Oil Resources. So What? Expanding development of America’s domestic oil and gas resources is essential to our energy security and a key factor in restoring America’s global economic competitiveness. The potential for oil & gas from unconventional sources depends upon American technology and America’s oil and gas expertise being demonstrated in play after play across North America. Will this open the door to offshore drilling? Too soon to say. Will this be good for the environment? Yes, since natural gas has one-half the emissions impact as coal. Will gas expansion hurt wind and solar development? No, since renewables require backup to offset their intermittency. Is domestic oil and gas development good for America’s economy? DUH!!!
- Economic Recovery is Slow but seems Durable. OK, the glass is half full, but after all we’ve been through we’ll take it. Key signs of green sprouts include the sharp growth in the ISM index with industrial production up 5.3% since it bottomed out in June according to Wells Fargo Economics which also said that manufacturing jobs grew in both January and February suggesting that we have now eaten up excess inventory and suppliers are beginning to restock the shelves to meet the strengthening of consumer spending which has also been stronger than expected. Well Fargo Economics predicts real GDP growth of 3.4% in Q1:2010 but still sees slower growth by midyear. So what? So the rough spots remain stubbornly high unemployment which is always a lagging indicator and the continued problems in the housing sector. Other than that, Mrs. Lincoln how did you like the play.
- Is the Stimulus working? And do we Need it? The Administration and Democrat majority in Congress claim the $862 billion in stimulus spending approved is saving jobs and doing its job of turning the economy around. But others who are tracking the progress and problems with stimulus spending tell a different story. ProPublica reports that only $195 billion of the stimulus money has been spent with another $151 billion somewhere in process. You can read their report here. But if the Government cannot spend this stimulus money when we need it, do we really need it? And if the economy is turning around on its own BEFORE we get all this stimulus money handed out could we just save the billions not yet spent and reduce the deficit?
- Renewable Energy Market Share is Growing but So are Rates. We continue to see major expansion of the market share of wind and solar power generation across America driven by the state renewable portfolio standards. But this massive growth has only raised the total installed capacity of renewables to something like 9% but not even this fast growth is sufficient to materially affect the market share of coal and certainly will not do so cost effectively. So what? Utility rates are programmed to rise dramatically as the above market cost of renewable energy is factored into rates on top of the costs for emissions reduction and smart meters. And guess what, it won’t be sufficient to meet our growth in energy demand in a recovering market. OUCH!
- Electric Demand is Returning to Historic Levels—will that mean shortages ahead? The US EIA short term forecast for U.S. Electricity Consumption assumes 5.5% growth in manufacturing output during 2010 which means an expected growth in electricity sales to the industrial sector of about 1%. EIA forecasts electricity sales to the residential sector to grow by 3.5% during 2010 assuming normal weather. Total consumption of electricity across all sectors is expected to grow by 2.0% during 2010 and by 1.5% in 2011.  So what? These are signs that we are in the build up stage of the next electric boom and bust cycle and one signpost of that stage is perceived and real constraints on power generation. States have favored renewable energy for most new power generation additions and many, many coal plants have been cancelled or deferred in the face of uncertain cap and trade regulation. The Obama team has supported one new nuclear power plant project. We have reduced our lead time for power plant construction and a return to historic demand levels for power means that the only practical choice to quickly catch up to demand will be to build natural gas combined cycle plants. Got gas?
- US is not Serious About Electric Transmission. The failure of US DOE to release the 2009 Electric Transmission Congestion Study due to Congress last September is a clear signpost that the US is not ready to face up to the need to take substantial actions to upgrade and expand the interstate transmission system essential to bring new renewable energy projects to market and enable smart grid investment to be practicable. Problems are likely political given the historic conflict between the States and Federal Government over control of transmission siting. So what? NIMBY wins! Smart grid requires broad market access to make the networks and efficiency and demand response programs scalable. Without transmission access new renewable solar in the Southwest and wind in Texas, Iowa and elsewhere cannot reach the load centers. Federal preemption of the states in building natural gas pipelines has created a common market across North America for gas that is serving us well. The fragmented state by state approach to electric transmission is holding us back and undermining our investment in smart grid and renewables.
- Ratepayer Tea Parties Ahead. There is a looming problem of rising utility rates brought on by the pancaking costs of state renewable portfolio standards, feed-in-tariffs and other procurement subsidies, the cost of emissions reduction especially AB 32 in California, and the rolled in costs of smart meter installation. So what? So expect ratepayers to start coming to the street with signs when their rates double or triple over the next five years as a consequence of the political aspirations of politicians and regulators who have approved all these programs. Polls show that ratepayers do not see this coming and it is likely to hit the fan BIG TIME before the economic recovery fully takes hold.
May You Live in Interesting Times
Peering into our energy future always reflects the volatility and surprises that characterize the energy business. Add that to the natural boom and bust cycles of the business and you find a frothy stew simmering and ready to boil over.
The good news is we have more choices today given the growth in unconventional natural gas that reduces our dependence on imported LNG and turns upside down the once forecast transformation of our domestic gas market into a global gas dependence on the same countries that send us oil.
The other good news is the growth in clean and renewable energy from wind and solar and the exploding global demand that is bringing China and its low cost manufacturing prowess to bear driving down the equipment costs for wind turbines and solar panels. If some of the stimulus money allocated to energy ends up in China because we bought their renewable equipment it is a good sign that the Chinese are our friends because they are committed to driving down the cost of renewable energy to grid parity prices in order to capture market share for exports.
When they do that we can end the subsidies of wind and solar and force them to compete on a level playing field with natural gas and clean coal—and let the competitive markets work!
Now that’s an energy future worth working to achieve!
There is a growing body of anecdotal evidence to suggest we may be at the crest of the smart grid wave and key players are beginning to map out an exit strategy. They are not yet running toward the exits but there is a sense that time may not necessarily be their ally so the pace is quickening.
Smart grid hype was born out of the global warming movement in the belief that improved efficiency in the use of electric power would result in easier access for clean and renewable energy from wind and solar, fewer line losses or wasted power, and better grid management. And there is some truth to these beliefs since the transmission segment of the electric power value chain has been the most neglected. It has always been tough to build transmission lines because of NIMBY problems so smart grid became a way of wrapping transmission expansion in a political correctness that might make it more acceptable. After all, getting that wind energy from West Texas, Wyoming and Iowa to the load centers that need it most requires transmission. Likewise, unleashing the solar potential of Arizona and the Mohave Desert to bring that clean energy to Los Angeles meant investing in wires as well as solar panels.
The excitement over smart grid was fed by the seduction of billions of Government, venture capital and utility investment in smart grid technology. And it has now produced deal flow sufficient to accelerate installation of smart meters, sensors, boxes and the networks needed to live into the cleantech potential it promises.
So why—-when smart grid potential is reaching its peak is this first wave of investors in smart grid looking for ways to cash in or cash out?
Signposts of the Smart Grid End Game Taking Shape?
- Cleantech Investors were in it for the flip. Many of these early Silicon Valley cleantech investors are not “true believers”. They saw cleantech as a profitable way of aligning the market and politicians to cash in on the global warming concerns. Just like Al Gore, these players looked for ways to make money on our fears and pain points. Seed money produced a wide range of start-ups all across the cleantech value chain leveraging the networks, software, gadgets and chips that made Silicon Valley famous. More importantly, it created a global market for the innovative technology America does best and united it with the low cost manufacturing efficiency of China and the social welfare tendencies of Europe “juiced” by the EU fear being dependent upon Russian gas. Obama became the darling of Silicon Valley because he proved willing to spend our money pursuing a policy regime that enlarged the Government’s industrial policy and social engineering—and paid off for Silicon Valley. But now it’s time to put lipstick on this pig and flip it. So Silver Spring Networks is talking about IPO? Consolidations from M&A is speeding up as smaller weaker players are acquired by stronger ones. This is happening sooner than expected but the return on investment is sufficient to do well by having “done good” before the risk erodes the value peak.
- Risks for Smart Grid Investor are Rising. The dirty little secret of smart grid is that all that investment in smart meters, networks, sensors and gadgets is meaningless unless state regulators and politicians do two things they are loathe to do—raise rates and build transmission lines. Since ratepayers are charged based upon average cost based rates they have little incentive and even less ability to influence demand on the system. Smart grid technology works by using real-time pricing so that customers, being exposed to the volatility and high costs of on-peak power change their behaviors and reduce demand. Smart grid technology taken together is well suited for this, but customers are not ready for it and politicians see it as something to consider—in the future. As a result we get all the embedding costs of adding smart meters and none of the benefits. Add to that the need to build new transmission to bring that clean wind and solar power to load centers and costs are going up—and so are rates. Not a good set of facts for investors seeking to monetize their start-up investments so it might just speed up the exit for many.
- Ratepayers are angry over rising utility rates. The cumulative cost of all this “do-gooding” is beginning to hit the utility bills just when ratepayers can least afford it. The result is pushback by ratepayers, complaints to politicians and pressure on utility regulators. But it is too late. The costs of years of procurement of cleaner, but more expensive renewable energy is coming due. The rate impacts of program after program of energy efficiency, demand response, subsidies and feed-in-tariffs paying above market costs to get cleaner energy resources built is going into rates. In California, PG&E gets pushback in Bakersfield over high utility bills and politicians run for cover. In Colorado, Xcel Energy does “good” by sponsoring Smart Grid City but when the cost go up—way up, the Colorado regulators slap it with a prudency review and threat of disallowance. In Florida, the Public Service Commission denies most of FPL and Progress Energy’s rate increases and both utilities respond by slashing capital investment and thousands of jobs. It’s getting ugly out there in ratepayer city—and the worse is still to come.
- We Told You It Would be Expensive! The age old process of CYA is setting in big time across the smart grid landscape. In Spain and Germany, the use of feed-in-tariffs to pay above market costs for solar energy imploded in the recession and the governments decided they could no longer afford the subsidies. The action in Spain pulling back on the FiT caused worldwide chaos in the solar PV panel supply chain as Spanish vendors dumped panels at less than cost to avoid being stuck with them sending PV prices around the world plummeting. The lesson: what lives on unsustainable subsidies cannot be sustained when they dry up. Now in the US there are growing concerns that utility investment in smart grid especially smart meters may turn out to be a poor one since the prospect of real-time pricing diminishing at the same pace as the rise of ratepayer squealing about rate increases. The same is true of other global warming “solutions” where in California the implementation of AB32 remedies to reduce emissions are likely not cost effective unless the market price of natural gas rises to $13.87 per mmbtu and a carbon tax of $100 per tonne is imposed according to the state agencies responsible for implementing this law. Even in California we have limits.
- Settled Science is, perhaps, Not So Settled after all. The meltdown of the Copenhagen COP15 climate change treaty process is only one of the problems plaguing the proponents of global warming solutions. The IPCC panel scandals over research manipulation has destroyed the credibility of the foundation for smart grid, AB32 like draconian measures to reduce emissions, real-time pricing and perhaps even renewable portfolio standards for clean energy by the time it runs its course. I am not cheering this on, just stating the reality that the implosion of the scientific basis underpinning all this hype on global warming and smart grid or clean energy solutions tarnishes these strategies in the face of their staggering cost. Perhaps, we do have time to find more balanced, affordable, cost-effective solutions that do not require the remaking of our global economy. And besides that, unless China, India and a few other fast growing economies agree to play by the same rules there is little reason to commit economic suicide to pursue a policy prescription that will not work to reduce emissions.
So the pendulum is swinging back and a sense of balance, proportionate response, and re-examination of the facts and science is likely to save us from our own political folly—this time. Cleantech investments will produce a rush of new products that the natural process of consolidation and flip will combine into better solutions. Subsidies and stimulus will give way to economic rationalism once again. The aftermath of the recession will have purged our economy of its unrealistic leverage and our next few rounds of elections in the US and EU body politic will purge incumbents and relieve the pressure of excessive spending—we hope.
Investors in cleantech and otherwise will do what they do best—harvest profits and move on to the next big thing. And their investment in smart grid may yet be realized—not thru stimulus or subsidies but by leveraging the convergence of information technology, communications, entertainment, security and, yes—energy management to create the next generation of ‘must have’ and oh so cool products we will gladly spend money to acquire and use. Look around you, it is already at work.
Check out the latest AT&T ad for its iPhone which touts—almost in passing—the iPhone App for “did we turn off the light at home before we left?” It’s here today. Or consider the new Comcast ad for Xfinity, the next generation of bundled services with 100 mbps bandwidth for streaming TV combined with VOIP, cable TV and a menu of thousands of movies and soon apps to meet your every need.
Smart grid investment will pay off in the long run but not because we bankrupted ourselves to install them—-but because —in the nick of time—we didn’t!
The ARRA stimulus bill targeted $36.7 billion in spending for energy investments, with solar, wind, and the smart grid as the major focus for spending while biofuels, energy storage and carbon capture and sequestration projects saw targeted financing. This Federal money certainly stimulated the venture capital sector that saw it as a once in a lifetime cleantech binge.
Analysts said there were 356 deals in 2009 including 110 Series A and seed round start up deals, compared to 350 deals in 2008 and 222 deals in 2007 with a 2009 total capital invested of $4.85 billion down from $7.6 billion in 2008—the record year. Venture capitalists continue to bet heavily on cleantech and renewable energy with solar power investment of $1.4 billion in 84 deals according to GTM Research continuing its four year lead in the category. Biofuels saw $976 million in investment perhaps responding to the big bet made in the sector by XOM. 
The sleeper in the race was water with 33 deals totaling $130 million. Water and energy have always been integrally linked but the best way to profit in the water business is to provide the technology, advanced process services and equipment to increase supply, reduce waste and improve the efficient and cost effective treatment of water.
The Great Cleantech Flip Ahead?
The market also saw an uptick in capital investment from outside the United States and that combined with the stimulus and VC spending binge suggests rising demand for cleantech opportunities might mean a rush of IPOs in 2010 to cash in big time before the inevitable consolidation process eats some of the best opportunities. Timing seems right for increased deal activity in 2010 because Federal stimulus money is drying up and prospects for more gravy out of Washington are greatly diminished over worries about the deficit.
The VC trade press says investors are looking for opportunities in smart grid infrastructure perhaps hoping to pick up products and capabilities that can “tuck under” to make more complete and thus valuable solutions. The bigger fish are also looking opportunistically to eat the smaller fish in the consolidation process. Any anyone who did NOT get ‘stimulated’ or got VC capital infusion and now is threatened by those that did turning them into ‘fish food’ in the consolidation process now underway.
Global Competition is Good
The other factor at work is that as the markets improve we need for more deal flow to put capital to work, consolidate market share, and position for the next boom. This is a global competition with the US, EU and China as healthy rivals for this investment.
Fish Stew with Sour Wine in EU
The EU today is the weakest of the three global rivals with problems in Euro zone in Greece, Spain and others. Germany and France are working to address the economic problem but it is a distraction, adds uncertainty, and will require bailouts to prevent more damage. UK investors seem more attracted to the US markets than Europe leaving the problem to Germany with France along for the ride. Renewable energy in EU took big hits with the failure of feed-in-tariffs in Spain and then Germany two of the largest markets causing equipment prices to tumble worldwide as vendors dumped excess solar panels and China slurped up FiT subsidies from existing contracts.
China Demand for Growth is High but Sustainable Growth Means Coming to America.
Strange as it seems from the political sparring between the Obama Administration and China over issues like arms sales to Taiwan and chicken parts, Iran nukes and North Korea sanctions issues, these two rivals seem linked at the hip even if the lips are bantering. Rivalry results in tiffs like this but the core relationship between the US and China is too interdependent for either to do something stupid.
China needs American markets to export its goods and sustain its growth. It buys US dollars and increasingly invests capital in US assets and businesses to further diversify its portfolio and reap the benefits from the most stable world economy returning to growth. Besides, China needs something only America can provide—technology and brainpower to deploy it.
The US needs China to finance our deficit and recovery by continuing to buy dollars and increasingly invest in American business to allow the US Government to dig out of its deficit hole. The US also needs China to drive down the cost of goods sold and especially to drive down the cost of renewable energy equipment such as solar panels and wind turbines to grid parity prices with natural gas. Unless this happens, renewable energy is not sustainable or affordable long term.
If the global rivalry is managed and healthy both China and the US can win big time. If they permit other issues to distract them from their strategic relationship both lose potentially big time.
The US is the World’s Best Hope for Recovery
Like it or not, the US is still the world’s most influential superpower even when its economy is weak. We likely will survive the Obama Administration stumbles with a big debt but that can be fixed over time with a robust recovery. That must be our single minded focus—putting Americans back to work and leveraging their ingenuity to drive markets, technology, innovation and growth around the world.
Grid lock in Washington DC is a wonderful thing.
It constrains the worst aspirations of both political parties. Recent elections in the US have humbled the Democrats, but the Republicans make a huge mistake if they see the Democrats stumble as their gain. Voters are surly and have a ‘pox on both your houses’ attitude that will require human political sacrifice to purge. And November 2010 is shaping up to be a time of wholesale political sacrifices threatening all incumbents. This sends our beltway bandits running for cover, but voters smell blood and will not be denied. There are risks in electing a new Congressional majority of people with little elected office experience, but the genius of America has always been our ability to reinvent ourselves when we needed it most. America is in the early stages of that process of renewal which will play out in 2012 in the next presidential election.
The Return of Prudence in Energy Costs Looms
Meanwhile we have market and economics work to do. On the energy front we have seen explosive growth of clean and renewable energy from wind and solar. We have been over stimulated in smart grid investment—ahead of its full potential—so we are likely to see a consolidation of players, firming of interoperability standards, and then a pause while the political issues that will determine the next wave are decided. The issues are mixed for the energy markets.
Renewable portfolio standards have created incentives for wind and solar growth but rising utility rates to pay higher than market costs for renewables are starting to hit the fan and ratepayers do not like it. In addition, we lack the electric transmission capacity to bring all this new renewable energy to market and we lack the political will to speed up the environmental review and transmission construction to make it work. NIMBY could crater the renewable energy market in the US over transmission line siting and construction.
COP15 meltdown and the collapse of credibility for climate science research have stalled emissions reductions advances. We do not know if this is temporary or fatal. The market for carbon credits is sinking like a rock in both EU and US with emissions allowances now selling for as little as $2 per tonne. At those prices there is no incentive to invest in more expensive solutions—just pay the penalty and let the government worry about it.
Smart meters are being installed as an accelerated pace but largely sit unused and un-useful without the changes in policy like real-time pricing or dynamic pricing as it is now being called to give customers the incentives to make smart energy decisions. Utilities face a tsunami of meter data heading their way with limited capability to do anything with it. Customers really don’t want all that information and as long as we continue to have rates based upon average prices and regulatory lag in rate cases—we just keep on living our lives.
So all of this geopolitics, venture capital investment, and policy hassle is going to converge in a giant pause as we await the next election and torment our politicians. Ratepayers will increasingly complain more loudly about rising utility bills and regulators will rediscover “prudence” looking for a way to slow down rate increases and save their skin.
Meanwhile, investors who want to cash out have two choices: sell out to now to strategic buyers looking for good deals and get your money out of cleantech, renewable energy and smart grid while the getting is good. Or, if you feel lucky, wait for a good window in an improving economy and try the IPO route to cash in big time.
The problem with the latter strategy is that window of opportunity may not arrive in time and the global competition is going to keep moving. Sit and wait to cash out and you may miss the next big wave after cleantech or the hassles over rates and policy may hurt your flip.
My prediction: Prepare for the big fish food feast ahead where flip, consolidation, and a new focus on riding the next wave will be on the menu. What is that next wave? Well, think about it, you really don’t need any of this cleantech, smart grid or renewable hassle if you control the communications networks to make all of that as well as streaming TV, home area networks and the more fun side of life work faster, better, cheaper do you. Now we’ll pay big money for entertainment and faster, wireless communications on new iPad toys. Energy—its a big hassle.
Can I get the sports package with that? To go, please.
This time of year in California the ocean currents and weather set up patterns of very big waves beloved by surfers from around the world. It is tricky to know when the Mavericks surfing competition will take place so airplane tickets and surf boards are ready as enthusiasts watch the California weather reports. Give them the signal and they descend on the Central California coast.
For California ratepayers 2010 brings a kind of Mavericks competition with energy bills as the era of rate freezes closes with a decision in December 2009 approving electricity rate increases for all classes of customers of PG&E including Tier 1 “baseline” customers which had been frozen since the early days of wholesale power competition in the 1990’s for PG&E and SCE customers.
The energy mavericks have been the upper tier ratepayers who have the misfortune of living on the hot side of the mountains or in the desert or the great Central Valley where gas heat isn’t a big problem but summer air conditioning is a must. These Mavericks have borne the brunt of frozen rates since the revenue requirement from the frozen Tier 1 baseline customers was pushed up the user curve and added to already higher rates.
How High Will Electricity Rates Go?
I wrote recently about the surprise electricity customers in the Central Valley got when they opened their electricity bills. The bills reflected the summer A/C period so they were high, but unfortunately smart meters had been installed about the same time and there was some good publicity sought by utility and politicians over the smart meters bringing the promise of a more efficient energy future.
Killing the Utility Messenger Won’t Solve the Problem
That protest of rates was BEFORE this latest rate increase kicked in for PG&E and a similar one for Southern California Edison (SCE). Temperatures outside have cooled down, but inside ratepayer are slowly steaming. Their immediate focus is the utilities that are sending them the bills. But PG&E, SCE and Sempra are regulated and they charge the rates that the CPUC tells them to charge—no more and no less.
PG&E’s 2010 rate structure looks like this:
|2009 Rates ¢/kwh||2010 Rates¢/kwh|
|Tier 1 Baseline||11.5||11.9|
|Tier 2 up to 130%||13.1||13.5|
|Tier 3 up to 200%||26.1||27.6|
|Tier 4 up to 300%||38.1||40.6|
|Tier 5 over 300%||44.3||47.4|
California has a tiered rate structure of inclining blocks meaning the more energy you use the higher the rate. With the rate increase approved by the CPUC average rates will go up 3%. But average is the politicians’ way of spinning the news about rates. For Tier 1 baseline customers this means their rates will rise from 11.5 cents per kilowatt hour to 11.9 cents—high by national averages but a good deal in California.
But for the Tier 5 customers rates go up from 44.3 cents per kilowatt hour to 47.4 cent. OUCH! This may be good energy efficiency inducing behavior and it certainly has worked, but it only portends the rate increases to come when the full costs of renewable energy and smart meters and other demand side programs are factored into rates over the next few years.
Calculating the impact on your electricity bill from a CPUC rate change is a little like doing your Federal Income Tax with its own Alternative Minimum Tax equivalent in the tiered rate structure for tiers 3, 4 or 5. You need a lot of time and a good calculator. If you want to see for yourself go to the link below for a detailed explanation that is guaranteed to put you to sleep before you get to the answer.
“Nothing concentrates the mind so well as the near term prospect of a hanging,” said Mark Twain.
The next wave of California Mavericks will not be surfers but waves of ratepayers heading to Sacramento looking for someone to hang over the looming cost of living into the political correctness that is driving energy policy in the Golden State. It sounds great! It makes great headlines! We love to be green and clean and at the cutting edge of technology. But being at the bleeding edge of policy as well as technology often costs more—much more. But add these looming rate increases to an economy with 10% unemployment, huge budget deficits, and surly voters and you have a volatile cocktail at the next election for any incumbent.
This wave of rate increases will be like the Mavericks surfing contest which brings out dare devils to ride the waves. But in this case it will take deeper pockets and a better economy to be able to afford our energy future.
“How do you turn the world’s 6th largest economy into the 15th largest?” as the old Sacramento joke goes. ” You make it subject to California regulation.”
Or in an economy deeply under water, Californians might decide move to Texas or Iowa where taxes are low, baseload generation moderates rates, wind energy is plentiful and the rates are not 11.9 cents per kilowatt hour let alone 47.4 cents. As an added bonus—in Texas there is no income tax!
While there is enormous promise in smart grid technology, it will take more than intelligent meters than can spin both ways to realize its true potential. The Administration is focused on pouring stimulus money into smart grid technology both to create jobs and to advance the pace of clean energy adoption.
But the electric transmission sector is the last unreformed part of the electric power value chain. There are several substantial policy, political and business problems that can undermine all the technology investment in smart grid equipment we are about to make. Yet little attention is being paid to these barriers to our smart grid future. They include:
There are three separate North American power grids. The Eastern Interconnect includes the US and Canada from the Atlantic Ocean to the Rockies. The WECC covers the Western States, a small part of Baja California in Mexico and the Western Canadian Provinces, and then there is ERCOT—the Republic of Texas is alive and separate with a distinct grid covering much of that state.
Moving electricity North and South within each grid is relatively easy, but East-West movement between the grids is impracticable. Doing so requires converting alternating current to direct current to move it to the adjacent grid and then converting it back to alternating current. There are a few places where this is done, but it represents a small fraction of the vast need to move energy for optimal use. This becomes even more important when we consider the desire for access to renewable energy resources such as geothermal and solar in the West or the wind resources of ERCOT or the Midwest.
Congress dabbles with policy solutions. In the Energy Policy Act of 2005 it first authorized US DOE to designate National Interest Electric Transmission Corridors (NIETC) where future high voltage DC power lines could be built. Two were designated including one in the Southwest US for solar energy and one in the Northeast. But scores of politicians objected to US DOE “intrusion” into the regional or local role of states.
We are now awaiting release of US DOE’s 2009 Congestion study to learn whether the Department plans to designate additional NIETC corridors. If it does not or fails to address assertively the integration of these three un-synchronized power grids then the investment in Smart Grid will be restricted to use in each of the respective grids based upon the progress in retrofit.
Grid fragmentation prevents the North American wide scaling of markets that gives renewable energy developers bigger markets for their projects. SmartGrid is primarily an IT play and scale is necessary for these start-ups and investors to realize the potential for their products. Defragging the transmission system improves the ROI in smart grid investment and drives down the costs of conversion faster for all of us. Grid fragmentation prevents the optimization of grid resources so that each market can take advantage of the resources and capabilities of all the markets.
There are two ways to end grid fragmentation. The first, is to build the transmission interstate highway system equivalent often discussed straddling the interconnects with high voltage DC backbone transmission sufficient to satisfy the smart grid objectives. This will require large financial investments by the industry and the preemption by the Federal Government of the morass of state, regional, local planning, permitting, environmental and other land use reviews which has, to date, been the NIMBY death to most transmission construction projects.
The second alternative, (I suggest facetiously) is maybe we can just turn the power off in two of the three grids and on the count of three flip the switches at the same time to get them to function the same. Just kidding!
Creating a truly North American scale electric power grid opens the full potential of SmartGrid to create continental markets and competition for both renewable energy and clean technology, transmission congestion services, demand response, energy efficiency and customer aggregation. Unleashing the forces of wholesale and retail competition is the sure way to the SmartGrid promise.
The second problem is like the first except it is policy driven not technology driven. Grid fragmentation resulted in balkanizing the authority to manage power grids.
In the beginning this was done by state public utility regulators and their jurisdictional vertically integrated utilities. FERC and Congress sought to prevent utilities from using their monopoly ownership of transmission to prevent competition so utilities were forced to turn over control of transmission to independent system operators in order to take advantage of the benefits of wholesale power competition.
The result was amending the Federal Power Act adding new laws creating USDOE and FERC, adopting the Energy Policy Act of 1992 and a series of FERC Orders implementing these laws clarifying Federal jurisdiction over interstate transmission. One result was creation of regional transmission organizations in many parts of the country with the notable exceptions of the Southeast and Pacific Northwest. By forcing utilities to turn over operational control of transmission to these RTOs or independent system operators, FERC thought it was doing the industry a favor. While we got less utility control, we substituted an even more complex bureaucracy and drove up the cost of transmission operation substantially.
Today the promise of SmartGrid requires renewable energy developers and other technology players to navigate a complex web of stakeholder committees, business process reviews, transmission planning requirements and the like.
Even if we get interoperability standards in place among SmartGrid equipment and appliance builders, we still have the problem of this balkanized policy setting process across the country driving up the cost, slowing down progress, and forcing a mind-number process of planning consultation in the absence of clear strategic direction.
Left to the fate of RTO/ISO process as usual SmartGrid will suffer the death of a thousand meetings, cost vastly more to implement, and take longer—much longer.
Who’s on First? The Politics of Federal-State Relations
The third problem is pure politics. SmartGrid forces the Federal government and States to talk to each other. It requires active collaboration on action plans around share objectives. State regulators are loath to give up jurisdiction and control over utilities and the transmission siting and permitting process. This creates a system where an interstate transmission line is subject to being held hostage to regulatory proceedings in each state, country, municipality or special district is passes through. Good luck with that.
Watch what happens when USDOE issues its 2009 Congestion Report. That study is complete and due to Congress by the end of September, but DOE officials says release is being held up by Administrative clearances. This is code for a fear that certain members of Congress are going to have reactions ranging from irritation to apoplexy over the DOE’s recommendations.
The more you hear about political conflict this 2009 Congestion study in the press, the better job US DOE is likely to have done on the report.
Spending a king’s ransom on SmartGrid technology offers the promise of transforming the way we use energy, but it may not deliver on that promise because of these problems. It offers the potential for cleaner power generation technology, more efficient use of energy, the ability to turn appliances on and off to optimize our energy use. But none of this will matter if the transmission grids remain fragmented, control balkanized and bureaucratic, and politics takes precedence over economics of energy efficiency, optimization and security.
Which will we get?