Future investment In smart grid will dwarf current expenditure: Where will it come from?

By Alan McHale
Happy New Year and welcome to the first 2012 message of the memoori smart grid blog.

Later we will publish our annual report “The Smart Grid Business 2011-2016” and, during the next two months we shall produce a series of blogs taken from this study on the major issues and challenges that face the industry over the next five years.

Vast sums of money will need to be invested: Will it be available?
We estimate that to achieve full penetration of the world’s existing grid together with future extensions to 2030 will require an investment of some $2,000 billion on pure smart grid equipment at installed prices.

There is no question about demand for smart grid in the long term; it is inevitable. But we believe that investment funds are the weakest link in the chain and could cause a slowing down in growth. This can be overcome if the utilities are allowed to recoup the investment over time by increasing their charges for electricity. This will be the solution in Europe but is unlikely to be politically acceptable in North America, despite the fact that prices there are less than half that in most European countries.

In the U.S., according to figures published by the Edison Electric Institute, electric utilities in 2010 had revenues of $371 billion producing a net income of $68 billion and a net after tax profit of $27 billion, whilst retained profit after dividend payments was $10 billion and of this transmission and distribution is unlikely to have contributed more than 30%. Pure smart grid average annual expenditure in the U.S. will need to run at $22 billion and will peak in around $35 billion in 2021 and this simply cannot be achieved without a significant hike in the tariff rate which the regulators will be reluctant to authorize.

Utility companies are not the most profitable operations and they are going to need significant help with financing the development of the smart grid. In most countries the electricity grid needs refurbishing in any case, so additional expenditure will have to be found, or the basic requirement of electricity supply and reliability will not be satisfied; let alone the pressing need to reduce CO2 levels.

Government funding will be required
Smart grid is part of the “clean tech” business and, so far, it has only received a relatively small sum of investment from private and public sources compared with the largess heaped on other parts of the business. However, so far under government programs in the USA alone, some $4.5 billion has been awarded for investment in Smart Grid projects in the electrical utilities business. In addition at least 27 American Recovery and Reinvestment Act (ARRA) projects are being funded from the almost $5 billion allocated to the U.S. Department of Energy (DOE) for grid modernization projects.

Our market sizing figures show that the United States is currently the global leader in investment in smart grid. In view of the size of its generating capacity and electrical transmission system this should not be a surprise, but the smart grid stimulus programs have pump primed investment and played a major part in taking the U.S. to the front.

In Europe, finance has been made available through EU programs and some demonstration projects are being financed within member state initiatives, but nothing on the scale of that provided in the U.S. In the Peoples Republic of China, the state has orchestrated the program for the nationalized utilities to carry out a major program of investment and directly and indirectly they will finance it.

This industry will still need stimulus funds for some years if it is to continue developing at a fast pace and play its proper role in assisting with the delivery a comprehensive green energy solution. But with so many countries around the world now looking to reduce public expenditure, government funding for smart grid is unlikely to go unscathed. However, IT & communications companies would almost certainly be interested in joint collaboration with the utility industry on all aspects of the Internet of Things (IoT), and they have the funds to invest.

Much improved ROI will stimulate investment
Smart grid will deliver a better return on investment than is currently realised in the utility industry but this has yet to be proven in most sectors of the business because full scale tests and demonstrations have not yet been completed. The exception to this is smart meters. In the UK, a typical smart sub metering installation in the commercial/ industrial market will provide a return on investment in 10-14 months subject to enhanced capital allowances allowing offset of the total cost of installation against corporation tax in year one. In most countries smart meter installations in the residential market are being financed directly and indirectly by the buiding owners / occupiers without so far placing too much burden on the utility companies. In the US smart meters save consumers $60 to $180 per year, according to the Energy Information Administration for an outlay of $500 and a recent DOE study showed that when consumers can track their energy usage through smart meters, their usage declines as much as 15%. For the utilities smart meters provide value through automatic billing reducing costs and better management of cash flow. Full AMI will provide real time data to help balance out supply and demand and reduce wastage for every unit of electricity saved at the point of usage will save three units at the generator set. As the volume of equipment rises prices will fall and ROI will increase, conversely energy prices are almost certain to rise.