What’s Happening With The Smart Grid: A Q&A With Industry Expert David Leeds

Last week, Obama announced more than $3 billion in stimulus grants to improve and “smarten” the national grid. To get some insight into what to make of this major development, we chatted with David Leeds, an analyst specializing in grid technology at Greentech Media. He recently authored a free 145-page report called The Smart Grid in 2010, has lectured on the subject at MIT, Stanford, and The Wharton School of Business.

Q: What do most Americans not understand about smart grids?

A: Well, frankly, the term “smart grid” has yet to enter the pop lexicon–so, generally speaking, Americans are still unaware of the concept and its enormous potential to dramatically increase energy efficiency, system reliability, and the amount of renewable energy plugged into the grid.

Electricity generation is the number-one contributor to greenhouse gases, and smart grid may represent the largest single IT investment that can be made to reduce CO2 (and other GHG) emissions. That is something that Americans have yet to be clued in to, although the message is quickly spreading, and having President Obama mention the term “smart grid” on the Letterman show certainly helps.

There have actually been many such moments in the past six months, another one being when John Chambers, chairman and CEO of Cisco, stated that the smart grid market “may be bigger than the whole Internet.” The word is getting out…

Q: Following Obama’s announcement last Tuesday, what do you think of the government’s plan in relation to the smart grid?

A: Well, anyone connected to this industry likely has a strong opinion of how the initial $3.4 billion in stimulus funds could have best been invested. On one end of the spectrum, the DOE could have chosen to fund a focused number of projects with the aim of seeing how advanced we could make a dedicated number of our nation’s grids. On the other end of the spectrum, the DOE could have chosen the shotgun investment approach and fund a project in every state in the union. The DOE opted for the latter, giving money to 49 of the 50 states. In many ways, this approach is lame, but I suppose a first-term president has to spread it around, keep the swing-states blue and all that.

Having said that, these matching grants will lead to a direct investment of $8.1 billion in the near term, an amount that slightly exceeds all of the venture capital that flowed into greentech last year—a major shot in the arm for the electric power sector in a recessionary period. On the other hand, while $8 billion does represent a substantial down payment on the upgrade of our nation’s grid, groups like the Electric Power Research Institute have estimated the cost of building out the smart grid at $165 billion over the next two decades—which comes to approximately $8 billion per year. So perhaps we are just doing the bare minimum, and “the silicon valley of smart grid” may well end up in countries like China or India. A lot remains to be seen here.

On Tuesday, after his utility received a grant award worth $200 million, Lewis Hay, the CEO of Florida Power and Light, introduced President Obama as “the man who’s done more to advance the cause of renewable energy than anyone in the nation’s history.” The same could be said of the president in respect to smart grid.

The government’s plan is basically to provide some seed money in a bad economy and then get out of the way. And while we can argue about the best way to do disperse the funds, this general approach is absolutely the approach we should be taking. The electric power industry has severely underinvested in infrastructure and IT in the last few decades. While we as a country have come to take this fundamental mission-critical infrastructure for granted, events such as the Northeast Blackout of 2003 serve as a powerful reminder of what’s at stake (it’s estimated the U.S. currently loses $150 billion per year due to outages). smart grid investments will be positive NPV (net present value) projects, and ultimately the private sector will drive these investments, but in a bad economy where banks aren’t loaning, the government made the right decision stepping in.

Q: How long before smart grid technology becomes as ubiquitous as cell phone technology?

A: I think that’s a great question. Apart from the speed of penetration, many see strong parallels between the revolution that transformed the telecom business and what is now happening in the electric power business. One part of this is that the future of this business will—mark my words—not be in selling a commodity to the end customer, but rather in providing and marketing a bundle of services. Just as we no longer consider cents per minute with our calling plans, but instead pay a monthly rate that gives us a certain amount of total minutes, text messages, and data, it looks like the future of electricity will be in bundling energy services together. In five to ten years, we will no longer buy electricity based on kilowatt hours, but rather purchase a capped amount (with penalties for going over) combined with new services and applications, such as demand response (where you receive financial rewards for reducing consumption on demand during peak hours, which, by the way, your smart appliances will automatically do for you), plug-in hybrid electric vehicle smart charging (automatically charging your electric vehicle at night when the power is cheaper), PV solar and macro wind turbine integration services, and a variety of other energy apps that will likely be controllable via the web or a smart phone.

To answer your question more directly: We now have approximately 60 million smart meters either contracted or proposed to be deployed in the next five to seven years—that’s nearly half the households in the U.S. What’s interesting about smart meters is actually not the meter itself, but the end-to-end communication platform you need to build out to have these meters connected. So in about five-years time, we have a whole new country, in that we will then have this new communications platforms in half of the homes in the U.S.—providing a pathway for not only a smarter grid, but smarter homes. This platform will provide countless win-wins to both utilities and consumers. So I expect in five years time to have a majority of the U.S. population familiar with both the concept of smart grid, and using applications that sit on top of it. The same can be said of Europe, and many other population centers around the globe.