July/August 2010

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Smart grid: Is it time for industry to get involved?

Each company must evaluate their particular situation and make value judgments that optimize their business situation

FAST FORWARD

  • Electrical energy is a common denominator. Energy from all types of sources can be converted into electrical energy.
  • The existing power grid is critical for our way of life and cannot be shut down, overhauled, and started-back up. It needs to be modified "in-flight."
  • Industrial customers need to re-evaluate their cost-benefit models to include new costs and benefits arising from smart grid opportunities and risks.
By Dave Hardin

smart1Smart grid and energy sustainability have received a lot of attention in recent months, and some industrial companies are quite proactive. They are integrating energy management and renewable energy sources into their operations. They are working with their local utilities to export excess power to the grid, and they are participating in demand management programs. Many other industrial companies however are sitting on the sideline taking a "wait and see' stance. Is this the prudent course of action, or is it time to get off the bench and onto the field? Let's explore this question in more detail.

The electrical power system

The electrical power system has been and will continue to be a key component of the world's energy system. In fact, its role will increase. This does not change the fact that hydrocarbon energy runs the world and will be a major component well into the future. In fact, natural gas will be a very important fuel for powering turbine generators to balance electrical supply and demand as more variable wind and solar energy is added to the grid. Over time, new storage and advanced automation technology will help decrease this dependency.

Electrical energy has several important characteristics that make it attractive for building the next generation energy infrastructure. Electrical energy is a common denominator. Energy from all types of sources can be converted into electrical energy. Electrical energy can then be economically transferred over short and long distances, and then converted back into other forms of energy to power electric cars and heat homes. Electrical systems can be small or very large. They can be interconnected or isolated. This broad flexibility permits electrical systems to adapt to a variety of energy "use-cases" or usage scenarios. Relatively small self-contained, but interconnected systems, called micro-grids, can serve local energy needs and increase reliability by separating, or "islanding," from the distribution network. Variable, renewable energy resources can be sited at locations where wind, solar, or geothermal energy is in abundance and transmitted to locations that require the power.

Headwinds

With all the benefits associated with smart grid such as renewable energy and electric vehicles, why hasn't the grid already been modernized? The short answer is: Change is hard and takes time. The existing power grid is critical for our way of life and cannot be shut down, overhauled, and started-back up. It needs to be modified "in-flight" with new systems and technology. In addition, many forces exist that impede progress toward a smarter grid. Some of these include:

  • Business models and regulations: Most utilities still operate under a regulated monopoly business model with guaranteed return on investment through the regulation of consumer rates. Smarter grids will require new regulations from national policy to state regulations which incent the growth of competitive electricity markets while maintaining grid reliability and security. Wholesale and retail markets need to expand, and business models need to be developed that enable the participation of new customers, organizations, and devices.
  • Low cost of fossil energy: The low cost of carbon energy relative to renewable energy. Typical fossil energy costs include production, transportation, and processing but do not include costs associated with long-term environmental or societal impact. Garrett Hardin (no known relation) referred to this as "the tragedy of the commons" in the 1968 Science article of the same name.
  • High cost of renewable energy: Wind, solar, and storage technologies are still in the process of being developed and refined. Costs are still high but will decrease over time. In addition, the variability of renewable energy sources increases the costs associated with providing reliable power. 
  • Efficiency of energy conversion: Energy conversion efficiency refers to the energy lost when converting from one form of energy to another form of energy. The greater the energy conversion efficiency, the less energy is lost. As an example, it is more efficient to burn natural gas to produce heat than it is to burn natural gas to produce heat, heat to produce electricity, and then dissipate electricity to produce heat. This is a major concern when considering fixed or limited energy sources but alleviated when the energy source is essentially unlimited and must be used or lost.
  • System interoperability and standards: Interoperability is needed for the smart grid infrastructure to grow and expand. Developing interoperable systems through standards and conformance testing is a high priority nationally and internationally. National Institute of Science and Technology (NIST) has primary responsibility for coordinating smart grid standards in the U.S. through the work of the Smart Grid Interoperability Panel.
  • Chicken or egg: Two systems wait on each other, and neither can move forward. This is commonly referred to as "deadly embrace." Users wait for vendors to produce products, while vendors wait for users to tell them what they need. I just saw on the web that the "chicken or egg" problem has been solved. It's the chicken. Unfortunately, this only applies to the literal chicken and egg, not the figurative chicken and egg. Governmental stimulus funding is designed to overcome this stalemate by providing initial funding for bootstrapping the development of products and services.

Cost and benefit

Businesses run on cost-benefit. At the end of the day, businesses must maintain a profit or cease to function. Investment, expense and capital, is based on the perceived benefits of an investment.

Smart grid is emerging and represents a fundamental change in the way that customers interact with the electrical energy system. This may be more pronounced for some customers than others, but most will ultimately be affected. Industrial customers need to re-evaluate their cost-benefit models to include new costs and benefits arising from smart grid opportunities and risks. Understanding what these changes will be, when they will affect the business, and how the business should adapt to them is core to successfully managing an industrial enterprise.

Managing business priorities

Managing an industrial business is difficult. The recession and slow recovery has taken a major toll on manufacturing and the potential for a "double-dip" recession is gaining increased awareness. Keeping the lights on while satisfying customer needs is not getting any easier. Many industries are facing increased global competition and are struggling to make payroll. And did I mention the investors would like a reasonable return on their investment? In this business environment, activities that do not directly affect the bottom-line are scrutinized. Unnecessary expenses and investments are ferreted out.

Proactively addressing potential problems that may or may not exist in the future gets tossed in the bucket called "let's wait and see." Reacting to every perceived issue can be less than fruitful. This is not new. Growing up you probably heard phrases like: "This too shall pass." or "Pick your battles."

To help managers cope, the common practice is to prioritize needs from high priority to low priority. The highest priority work is funded, and the low priority work is shifted to the back burner with the split based on available funding. Many factors weigh into this process, but one that is very important relates to time.

The importance of time

The near term trumps the future. Corporate time horizons vary, but a common strategic window is three to five years. If an investment makes business sense within this time period, then its priority increases. If it does not, then its priority decreases. Anything that might have financial value beyond this window is put on hold.

Even within a three-year window, much uncertainty exists in our tightly connected, fine-grained, non-linear digital world. Financial market instability is an example where a news event, good or bad, will perturbate the market in real time. Public opinion and international events were once filtered and had little impact but are now propagated and affect the markets instantly. This unfiltered system coupled with complex non-linear processes, create "bubbles" and "black holes" through positive feedback loops. It reminds me of a "quantum soup." But I digress ...

Another factor that needs to be considered is our affinity to overestimate the short term and underestimate the long term. We tend to expect change to occur fast and are often disappointed when it does not. As time goes on and we look back, we are often surprised so much has happened. Why? The reason is exponential growth.

When a process grows exponentially, it builds on itself. Examples include compound interest, the power increases of computer microprocessors and the expansion of ecommerce. Back in the late 1990s, the Internet was going to enable a vision of global ecommerce that would be full of opportunity and very profitable. The gold rush was on, and technology companies sprang up everywhere. When the vision was not achieved in a few years, the tech bubble melted down. Looking back now, it is clear the ecommerce vision was indeed correct. It just did not happen within the investment time horizon. On the other hand, companies that understood the strategic changes and made good business decisions have prospered. The old saying, "Timing is everything," rings true.

Innovation, change, and life cycles

Another important aspect of time is that systems exhibit a life cycle. They are born, live, and then decay. The length of time for this process to occur varies greatly from system to system, but the basic process is hard to deny.

Clayton Christiansen describes the innovation life cycle is his book: The Innovator's Dilemma. This life cycle forms a diffusion curve (i.e. s-curve) and can be broken down into regions: Innovators, Early Adopters, Early Majority, Late Majority, and Laggards. This is reflected in product life cycles: Introduction, Growth, Maturity, and then Decline.

So what does this have to do with the electrical power grid? Systems must adapt to change in order to survive. The grid is over 100 years old and showing its age, but can another energy system replace it? If not, then it is a good bet that grid modernization will occur.

Risk and reward

The right decisions at the right time can net large rewards. The wrong decisions can cost large sums of money. Fuzziness or uncertainty concerning the future leads directly to the concept of risk management and a risk culture.

Risky business is more than a movie starring Tom Cruise. It is a way of life for industrial organizations. The approach that a company takes in understanding and dealing with risk is part of its organizational culture. Risk-averse organizations are conservative and satisfied with limited growth. They invest where risk can be minimized, mitigated, and managed. Risk oriented organizations see the value to be gained and are willing to accept higher risk knowing that the good investments can cover the losses and still yield significant growth. 

Investing in emerging growth markets such as smart grid requires a high degree of subjective analysis. This differs from mature markets where companies compete over market share in a zero-sum game using readily-available current and historical data.

Organizations that work to understand the facts and fiction that surround an opportunity can better evaluate the risks and rewards. This allows them to invest appropriately and at the right time.

Charting a prudent course

It would be nice if a single set of guidelines could apply to all industrial companies, but the reality is the diversity of products and needs vary greatly. Each company must evaluate their particular situation and make value judgments that optimize their business situation. The following broad guidelines are offered as a suggested baseline for developing tactical and strategic business plans:

  1. Quantitatively analyze the impact of energy on operations. This includes the average energy costs and the sensitivity or impact of energy cost variations on operational costs. The higher the impact, the greater the business priority to engage in smart grid.
  2. Get involved to better understand smart grid and the issues surrounding concepts such as demand response, dynamic pricing, variable renewable energy, energy storage, distributed energy resources, and electric vehicles. Many resources are available on the web.
  3. Determine what resources, such as assets, technology, or location, could form the foundation upon which to expand and build new businesses and business models that leverage smart grid.
  4. Engage in the NIST Smart Grid Interoperability Panel. This is a national organization with an open consensus process for collaboration and coordination among all stakeholders of the electrical energy system.

The decision to passively sit on the sidelines or proactively get involved is a decision that each industrial organization needs to consider. This can be an explicit decision or an implicit decision. The choice is yours.

ABOUT THE AUTHOR

Dave Hardin (David.hardin@invensys.com), Invensys Operations Management, serves as a member of the U.S. Department of Energy-supported GridWise Architecture Council and co-chair of the NIST Industrial-to-Grid Domain Expert Working Group. Hardin serves as a member on the NERC Smart Grid Task Force and OPC Foundation's Technical Advisory Council. He is a registered P.E., IEEE Certified Software Development Professional, and Project Management Professional.