Knowledge Problem

Lynne Kiesling

As you energy gurus know, CERA is one of the leading consulting firms in the energy space, and hosts an increasingly popular event called CERA Week — rather like the Davos of the energy world! In support of the event this past week, CERA has splashed out for two large advertising sections in the Wall Street Journal. Wednesday’s special advertising section (pdf) includes an article from Larry Makovich entitled “What Really to Expect from a Smarter Power Grid.” I recommend reading his high-level analysis, although I find his logic and his thinking limited in some important respects.

He starts by identifying the promise of smart grid, but cautions against being too optimistic:

Many see the smart grid as a disruptive technology ready to transform the power sector. According to this view, the smart grid will unleash pent up efficiency, integrate distributed renewable generation, enable electric vehicles, reduce greenhouse gas emissions and, in the process, lower consumer power bills. But this vision in its entirety is too good to be true.

Both Mike and I fit into that “many” who see smart grid as a disruptive technology that can enable private individuals to create value, but I think we each have our doubts about how many regulatory and cultural barriers will limit that value creation and will make it more incremental. Let’s see if Makovich concurs …

He then goes on to point out that the grid isn’t as “dumb” as it might appear, and as evidence for this claim he offers the fact that “integrated control centers … employ real time data and sophisticated software”. While this claim, and his subsequent claim of the use of virtualization to simulate the grid, do indicate evolution and the use of digital technology, much of what he’s describing there is quite limited to transmission and high-level distribution. Once you get below that in the network, his argument fails. Control centers may be technologically up-to-date, but they see mostly aggregates. Some of the most crucial elements in the network for reliability and for end-user value creation are below the control centers — substations, transformers, and end users are technological black holes. Those are precisely the areas where smart grid technologies can be beneficially disruptive, but Makovich’s glossing over of where in the network the intelligence already exists allows him to dismiss the potential benefits of distribution automation and intelligent end-use technologies.

And that’s where Makovich goes next:

At the heart of the current narrative about the smart grid is a conviction that power customers want to be able to manage their consumption in response to different power prices at different times of the day. The idea is that consumers could adjust their usage to take advantage of lower prices during periods of slack power demand. But it is not very likely that varying pricing over the day—what is called “dynamic power pricing”—will be the hoped for killer app of the smart grid.

Makovich is creating and taking down a shaky straw man here, and omitting some of the most important reasons why smart grid technology could be beneficially disruptive but is not. Not even the most breathy enthusiasts for dynamic pricing (self included) would categorize it as having “killer app” potential — but what does have such potential is the set of possible end-use technologies for home energy management and digital home integration that reduce the transaction costs to consumers of choosing dynamic pricing while still enabling them to save money at an ambient comfort level they choose. Makovich spends almost half of his article on why dynamic pricing isn’t the be-all-end-all and why consumers don’t want it … without even mentioning one single word about such potentially game-changing customer-facing technologies! As we have seen repeatedly in several pilot demonstrations, customers are more enthusiastic about dynamic pricing when

1. They get to choose it rather than having it foisted upon them by bureaucratic fiat
2. It accompanies digital end-use technologies that consumers can use to respond to prices for them

Makovich addresses neither of these topics in his article, which is a substantial omission that undermines his argument considerably.

Finally, he also fails to discuss one of the primary drivers of the slow, incremental adoption of smart grid technologies: regulation and regulatory incentives. He comes close when he notes that “… smart grid technologies will likely reinforce the traditional industry structure …” because of focusing investments in the power supply portion of the network. But he leaves the elephant in the room, and doesn’t discuss how regulation makes regulators and firms risk-averse in the face of new technologies, even when said new technologies would improve our ability to provide desired reliability along with a host of other value propositions that their top-down control culture and mindset cannot imagine. He doesn’t discuss how regulation defines market boundaries and stifles the discovery of other value propositions beyond plain-vanilla electricity service. In fact, he’s missing the role that regulation plays in deliberately preventing smart grid technologies from being beneficially disruptive.