State of the smart grid, 2013

By Alan McHale
Smart grid sales across the world in the last 3 years at installed prices have grown by a compound annual growth rate (CAGR) of about 35 percent and climbed to $36.5 billion in 2012. Given the general global economic demise during this period these figures are remarkable.

However they include a steady flow of refurbishment business that has for more than 10 years incrementally improved and smartened up the control and reliability of the electrical network.

If we strip out these numbers then growth in pure smart grid is significantly lower. The main task in delivering a smart grid has to be installing and bringing together smart grid systems such as AMI, automated distribution response and interfacing at the customer end with distributed energy and smart buildings. This is to boost energy efficiency and achieve the main aim of the smart grid, which is to accommodate the maximum amount of renewable power on the grid and reduce carbon dioxide emissions.

With the exception of smart meters, smart grid is only in its infancy in these business areas. There is still much serious work to be done and roadblocks to be cleared. Fortunately, however, the technology is already in place and the supply industry is poised to deliver.

In 2012, about $19.5 billion was spent on acquiring and consolidating the smart grid supply business almost doubled its spending in 2011. Investment by venture capitalists amounted to $779 million after adjusting for senior debt finance transactions. Although this was a decline on 2011, it fell short of the general decline in the cleantech industry.

The structure is changing with a perceptible but slow move away from the dominance of the international "majors" to the medium and smaller specialist companies who are increasing their share of the business. In addition, a significant number of new entrants from outside the industry are increasing competition. The industry is still too fragmented with hundreds of companies below minimum economic size and consolidation will continue at the current pace for many years to come.

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 guys" 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. They have the financial muscle to take on major contracts that will become larger with time. The smart grid supply industry is in good shape and will not hold back the enormous potential of the new smart grid.

The technology is in place to meet the challenge of smart grid anf there are no known roadblocks here that will restrict its development. The new technology surrounding communications and "Big Data" has yet to be proven in the smart grid environment. However, it is already being used in other industries.

Asia still has yet to install much of its electrical grid, and this creates a double-edged sword with the benefit of starting with a pure smart grid system not hampered by the problems of a hybrid development, but the disadvantage of requiring much larger sums of investment.

On balance, it has a stronger potential to rapidly reach large-scale implementation than the other two major regions (Europe and North America) because it is one part of a major infrastructure plan to provide energy, transport and communications services for the majority of countries in the region. It has strong economic growth that at the moment are less likely to be blown off course. Vast differences exist between the capacity and capability of telecommunications networks in rural and metropolitan areas to play their part and smart grid deployment varies enormously across the region.

The countries that lead on smart grid development in Asia include Australia, Japan, Thailand, Singapore, South Korea and China. China's State Grid Corporation has started what will be the largest smart grid rollout with roughly 350 million smart meters to be installed by 2020.

In 2012, China spent more on smart grid than any other country overtaking the U.S. for the first time. They are installing for the most part locally manufactured equipment from indigenous suppliers, but gradually Western technology is making its way through thanks to alliances and partnering agreements.

Up until 2011, North America was the No. 1 regional investor in smart grid systems, but has since been overtaken by China. This is disappointing given that the 2009 American Recovery and Reinvestment Act provided a major incentive for the industry with more than $4 billion in grants for smart grid pilot projects. It does have the strongest supply industry and has spawned a number of impressive start-up companies.

It is likely to produce the strongest suppliers for the smart grid Big Data sector that will capture much of the business in the rest of the world. However, implementing the demand model could become more of a challenge in the U.S. than most other developed markets. If so, this would drastically hold back smart grid growth.

Europe has some of the world's most favorable policies for driving smart grid deployment. The E.U. has implemented policies on increasing energy efficiency, installing more renewable energy sources and reducing greenhouse gas emissions all by at least 20 percent by 2020.

Currently the region has some major economic restructuring ahead of it to solve debt problems, which is likely to delay these targets and in turn smart grid development.

The electrical transmission and distribution industry consists of both public and private ownership and is large scale and relatively strong financially. The supply side is strong as European manufacturers are leaders in electric grid technology and deployment of smart grid. On the negative side, regulatory policy on standards and interoperability is weak and the decentralized nature of utility markets leads to difficulties in sharing of technology demonstration programs.

Two fundamental changes need to be made here if smart grid is to deliver. The first is to change the model from its present centralized structure to a hybrid decentralized one that will allow all stakeholders to benefit. Micro-generation and microgrids need to be incorporated into the electrical supply system because they can integrate renewable energy, help balance out supply and demand, deliver locally and make the system more flexible, reliable and efficient.

The second is that it can't be left to the present owners of the electrical network. Even if this could be organized through the utilities and they could acquire the skills and manage the new technology, the 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 communication companies would supply and operate IT infrastructures and the billing and pricing mechanisms.