Solid progress has been made in the last 3 years to take the smart grid out of its embryonic stage into its infancy, but other findings show that not all is well. The regulators and policymakers in the developed markets of the world are struggling to find the framework on which the smart grid can be effectively built and in some cases are losing sight of the most important reason for developing a smart grid and that is to build a system that will accept as much variable renewable energy that is practical to meet the needs of the low carbon economy in the 21st century.
A new model is needed — and quick. It's been clear for some time that the fundamental central architecture of today's electricity grid, based on the concept of a top-down, radical transmission system with unidirectional energy that flows from large, centralized power plants, is not appropriate to meet either the needs of the low carbon economy.
Micro-generation and micro-grids need to be incorporated into the electrical supply system because they can generate them from renewable energy, help balance out supply and demand, deliver locally and make the system more flexible and efficient.
We have no choice but to work around the present central system and gradually move to a hybrid decentralized model, but that will require the regulators to oblige the electric utilities to work within such a system that benefits all the stakeholders and not just themselves. Through inbuilt software technology, you can also operate a market-based system that not only manages electricity supply and demand but also allows for economic value through markets, rates, contracts or other value-based mechanisms.
Even if this could be organized through the electrical utilities and they could acquire the skills and manage the new technology in most countries they could not raise the $2 trillion needed to build the world smart grid.
Our report suggests that a new business model for the development of smart grid in many countries, particularly the U.K., could be based around capital investment coming from sovereign/state-owned investment and pension funds possibly from the Middle East and Asia. The day-to-day operation of balancing and operating smart grid would still be the responsibility of the utility companies while the IT and communications companies would supply and operate IT infrastructure and the billing and pricing mechanism.
One of the most important issues now being strongly debated is how much renewable energy can be accommodated by a smart grid. The old thinking is based on the premise that even a smart grid has a limit to how much can be accommodated and some authoritative bodies have published reports saying that in the U.S. the tipping point for benefiting carbon dioxide emissions from wind power could not exceed 20 percent of the total central power generated. Over this limit, spinning reserves will create more carbon emissions and nullify any benefits that are the sole reasons for installing wind power in the first place.
Germany is now pressing ahead with the new model, which claims that renewable energy can deliver almost all the power they need and will not require conventional baseload generation provided you have a smart grid that can balance supply and demand. Also called for in this model is a mix of renewable generation with some energy storage capacity for its photovoltaic solar content.
The proof of this is going to played out over the rest of this decade when they plan to have renewable sources providing 35 percent of its electricity by 2020 and 80 percent by 2050. If this model is proven then it opens up much wider options on which countries can base their energy policy, trading cost with long term availability, security and safety of energy supply.
Germany's grid, which is not yet smart, is currently accepting 15 percent with wind power providing more than 9 percent of the country's grid power while solar photovoltaic has more than a 5 percent share. But penetration rates can be much higher in real time solar production went from zero to 15.6 GW on September 30, at which point it was meeting 30 percent of total demand and renewables supplied about 40 percent of Denmark's power in 2011. Both countries have robust grids and the lowest rates of outage in the world.
Regardless of which strategy is adopted, the need for a smart grid goes without question with the prime requirement being to concentrate on automating demand response on the transmission and distribution lines, building on an existing but robust system, while taking in distributed power from independent public and private sites. This as we have already noted is also a game changer because it requires the structure of the electrical utility industry to morph from a central to a decentralized hybrid model and that will require smart grid ownership and operation to be shared amongst some new stakeholders.
The supply side is changing to meet the language. With billions of dollars being invested in smart grid supplier companies through mergers and venture capital funding for new starts and their continuing development. The structure is changing with a perceptible move away from the dominance of the international majors to the medium and small companies who are increasing their share of the business.
A significant number of new entrants from outside the industry from the IT and communications business are increasing competition and strengthening the industry. The industry is still too fragmented with hundreds of companies below minimum economic size. We are confident that the supply side will not hold back smart grid's development.
The supply structure is taking on a new shape as the traditional electrical transmission and distribution suppliers are competing with or forming alliances with the new boys from the digital world of IT, communications and controls. The traditional players certainly have a major role to play, although not a dominant one across all fields of pure smart grid.
The technology is in place and there are no known bottlenecks that will restrict smart grid's development although in some areas a full working prototype at a utility scale has yet to be proven in the smart grid environment. However, it is already being used in other industries and at the utility scale.