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What smart grids need most is a level playing field

2 Mar 2011

Among the blizzard of information that crossed my desk last month, two items made me think that while smart grid technology has still got some obstacles to overcome, it’s the regulatory and policy demands that are in place to protect electrical utility users that are most likely to hold it back, according to Allan McHale, author of smart grid blog Memoori.

The first was the latest information on the on-going saga concerning consolidation and merger through two deals in the US, namely Duke Energy and Progress Energy, and Allegheny Energy with First Energy.

However, the regulatory authorities are not against the merger but in this case they are making sure they get their pound of flesh and extracting rate credits or reductions of varying amounts to Allegheny’s customers in Maryland, Pennsylvania and West Virginia. The original merger proposal called for a $2.5m rate credit for Allegheny’s Maryland customers. That amount was increased, with Maryland PSC approval, to $6.5m.

Assuming that these deals go ahead it will be good news to all stakeholders because the US electrical industry is badly weakened through fragmentation and incapable of financing the thousands of billions of dollars that will be required to invest in smart grids.

These two mergers, which are thought to herald many more, are a start to improving their capacity and capability to provide their customers with a more reliable and better service. However, the regulatory bodies have extracted badly needed funds that would have been better spent on installing a smart grid.

Although the main driver for merger would appear to be improving credit quality of the merged entity so that they can get cheaper finance for modernising their generation and transmission plant, it will be insufficient to have a major impact. In the short term electricity prices will have to rise to finance this, or government programmes will have to be both increased and extended well into the future if progress is not to stall.

Lest we forget the US is currently a global leader in investment in smart grid applications and capabilities, according to The Smart Grid Utility Data Market by market research publisher SBI Energy.

But it is a variety of smart grid stimulus programmes that have pump primed the investment. At least 27 American Recovery and Reinvestment Act (ARRA) projects are being funded from the almost $5bn allocated to the US Department of Energy (DOE) for grid modernisation projects that have some portion of the award going toward data management or backend smart grid applications.

For fiscal year 2010 the US DOE’s Office of Electricity Delivery and Energy Reliability (OE) Smart Grid research & development budget was $125m, up from just $83m in fiscal 2009. The funding request for fiscal 2011 is up almost 16 per cent to $144m.

Additionally, $30m in funding in fiscal 2011 is set aside for cyber security for energy delivery systems. Some of the cyber security projects being funded originally come from the visualizations and controls R&D programme, but the DOE has now recognised the need for specific cyber security funding.

The stimulus programme is just that, and it’s not to finance the implementation of a fully capable working smart grid. The investment needed to achieve this is staggering with cost estimates ranging from a few hundred billion dollars to over one trillion dollars to fully upgrade the US electrical grid.

Will the utilities be able to justify these costs to regulators and show the investors that they will get a satisfactory return on their money? Not unless there is a cultural change by the regulators. They see their role as keeping down prices and if smart grid can’t do this then few will sanction it. Of course, in the long term it can be justified, but their role is not to judge its contribution to reducing carbon dioxide levels. But be assured one way or another the consumer will pay.

The second piece that caught my eye was entitled Smarter regulation needed for smart grids in Europe”- which said that a smarter approach to regulation is needed to incentivize the development of smart grids in Europe, according to a new study from the European industry association, EURELECTRIC.

Based on a survey of the current regulatory frameworks across Europe the organisation found that there were several shortcomings, including sub-optimal rates of return and regulatory instability that are hampering investment in smarter distribution grids, and regulators taking a narrow view when evaluating cost efficiency, penalising extra expenditure on R&D or smart grid pilot projects and encouraging business-as-usual expenditure instead. Where have we heard that before?

Further, the rollout of smart meters is being delayed by a lack of clarity regarding the roles and responsibilities of individual market players. The study was aimed to assess the current regulatory challenges which the European energy distributors face when investing in smart grids, and to establish principles towards smarter regulation.

Based on the findings, EURELECTRIC considers efficient regulation at national level to be the key tool for driving the European development of a highly modernised grid. To ensure investments in smart grids, national regulators should focus more strongly on long term requirements and provide a fair rate of return. This will imply revising the regulatory models of certain EU member states.

It is a generally accepted opinion that the state of the electrical grid is in far better shape in most European countries than the US and few would argue that European electricity cost are on average double that of the US. Could there be a correlation here? The proposed joined up thinking applied to Europe badly needs to be adopted in the US if smart grid is to take root there but it will not come without major cultural changes and a lot of pain.

This abstract has been taken from memoori’s Executive Brief – Business Opportunities in the Smart Grid Industry. It is a monthly world review of the issues that will determine and identify business opportunities in the smart grid industry, particularly focusing on merger, acquisition, investment and alliance.

Copyright © 2011 NewNet

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One Response to “What smart grids need most is a level playing field”

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