Haris A. Raja Industry Analysis BA 01

Smart Grid Industry

Introduction
Current electrical grid was conceived more than a hundred years ago. With rising and ever changing energy demands of the 21st century, existing grids are under pressure to deliver efficient, reliable and sustainable supply of electricity. 21st century demand for electricity is driving the evolution of smart grid technologies. The smart grid is a “developing network of new technologies, equipment, and controls working together” to deliver electricity efficiently and reliably. (www.smartgird.gov) Its been called “electricity with a brain,” or “the energy Internet.” (www.nist.gov) Some key benefits associated with smart grids are as follows: • Efficient power transmission • Faster recovery from power disruptions or failures • Better integration with other power generation systems (e:g. renewable energy)

Driving Forces and Trends
Capacity- growing demand According to International Energy Agency, $6 trillion investments will be needed to satisfy the global demand between now and 20301. Boston Consulting Group predicts that by 2020 there will be 40 million electric cars in the US. This mean that a robust infrastructure is needed to charge potentially millions of batteries. This will clearly put higher demand on the electrical systems. (www.abb.com) Reliability- Reliable operation According to the US Department of Energy power outages and interruptions in the US electrical supply cost $150 billion every year. (www.nist.gov) A reliable system is needed that can detect and isolate the outages, containing them before they become large blackouts. Also a system that ensures electricity resumes quickly in case of any disruptions. Efficiency- Energy Saving There are various steps involved between energy production and its transportation and distribution to the end user. 5-10% of energy is lost during this process. An efficient system is the one that avoids unnecessary waste of energy at all steps. A new electrical system is needed that has inbuilt controls and intelligence to improve power consumption and avoid wastage. (www.nist.gov) Sustainability- integration with other technologies

1 Energy Technology perspectives 2012 published by IEA

Exploration for newer technologies such as solar and wind energy productions and other renewable forms of energy are underway. A big challenge is to transport the energy from these sustainable sources to the consumer. A new system that can integrate with these alternate energy options is required to fully realize the benefits. (www.smartgridnew.com)

Smart Grid Industry
Smart Grids are changing the industry landscape by introducing a two-way communication system. For example, with the introduction of smart meters2 and smart devices3, homes and businesses can now communicate back to the grid and manage their electricity usage (www.smartgirdnews.com). This means that Smart Grid industry is not only limited to utilities (power generating companies) and equipment providers, but also includes manufactures of smart devices and advanced software and application vendors. Market Outlook The global smart grid market is expected to reach $80.6 billion in 2016 from $22.8 billion in 2011. Smart Grid market in the US is expected to grow to $9.7 billion by 20154. (www.smartgridnews.com) Submarket segments • • • • Advanced Metering Infrastructure (AMI)- communication and control between the utility and grid’s components Distribution Automation (DA)- Intelligent transmission of energy Home Area Network (HAN)- smart devices, meters and appliances Smart Utility Enterprise- Infrastructure companies investing in Smart Grid

Major players in the industry are as follows: ABB Presence: Global (around 100 countries) Revenues: $38 billion (2011) Net Income: $3 billion (2011) ABB is a market leader in power transmission and distribution solutions and among top 3 in energy efficient solutions and automation products. The most advanced smart grid

2

Smart meter is an electrical meter that records consumption of electricity and communicates that information for monitoring and billing purposes. These meters communicate continuously so that monitoring can be done in real time.

3 Intelligent 4 See

electronic devices Exhibit 1 for forecast with respect to sub-segments of the industry

technologies are in electrical transmission and “ABB is well poisoned in this space.” (www.smartgridnews.com) Schneider Electric Presence: Global (over 100 countries) Revenues: 22.4 billion Euros (2011) Net Income: 1.8 billion Euros (2011). The company provides energy efficiency solutions to residential market, buildings, Industry and Infrastructure. “We are in an exceptional position to keep exploring the new frontiers of energy management technologies; seize new business opportunities offered by energy efficiency, smart grid and smart cities.” (Jean-Pascal Tricoire, President & CEO) (www.schneider-electric.com) General Electric (GE) Presence: Global Revenues: $43 billion (Energy Infrastructure- 2011) Net Income: $14 billion (2011) GE is strong across most of the Green Sectors today “particularly in the area of Smart Grid and Energy Efficiency.” (www.gedigitalenergy.com)

Attractiveness of Smart Grid Industry
Porter’s Five Forces and Value Net In the following section I will discuss barriers to entry, regulations and collaborator. Supply and substitutes are discussed under ‘uncertainties’ section. In my analysis there is very little to none buyer power in this industry due to financial benefits to the consumers. Rivalry among players is not discussed in detail, since the industry is in its early stages, however competitive differentiation is discussed in the ‘strategy’ section. Barriers To Entry Cost of Entry According to the Electrical Power Research Institute, the 2011 projections for Smart Grid technology investments stand at $338 to $476 billion. (www.epri.com) Although it is recognized that these investments will significantly lower the energy cost for consumers the risk of such hefty investment plays a significant role in the Smart Grid Industry. As Dr. Massoud Amin of University of Minnesota described, "many in the industry are waiting to see what happens to those who jump in the fire first. This explains why so many utilities are engaged in Smart Grid pilot projects." (www.smartgrid.ieee.org) Lack of Open Standards Smart Grid needs consistent standards worldwide. Many of these standards are in development phase in various places around the world. Completing and normalizing them

worldwide will play a key role in fully realizing the potential of Smart Grids. (www.mckinsey.com) Regulations Regulations will play a very important role in the adoption of Smart Grids. Utilities whose territories go across jurisdictional boundaries often have to gain rate approvals from multiple utility commissions and regulatory bodies. This can slow projects by months or even years. (www.mckinsey.com) Government Energy Independence and Security Act of 2007 has mandated efficient energy policy for US. As a result National Institute of Standers and Technology (NIST) has been given the task to develop a framework for Smart Grid standards. To date there has been significant progress made in the development of these standards. To further accelerate the progress Congress also passed the American Recourse and Recovery Act in 2009 that allocated $4.5 billion to the Office of Electricity Delivery and Energy Reliability to be used to modernize the electric grid. (www.nist.gov) Collaborators Utilities alone are not enough to fully realize the benefits of Smart Grids. Smart appliances, smart meters and intelligent network infrastructure is needed in homes and buildings to optimize energy consumption. Therefore, collaboration between utilities, appliance vendors and IT vendors plays an important role in defining attractiveness of this industry. Some key collaborators/complementors in the industry are as follows: • Itron- Smart Meters and Grid Routers5 • Silver Spring Networks - Enables utilities to achieve operational efficiencies. Smart Appliances GE, LG, Whirlpool and other appliance manufacturers are building smart appliances (refrigerators, oven, dishwashers etc). These products communicate with the smart meters and trim back their power usage during peak periods. (www.consumerreports.org) Based on the analysis presented above, I argue that Smart Grid industry is attractive and has a large potential to grow. However, players in the industry will need to understand the uncertainties and adopt the winning strategy discussed in the sections below.

Uncertainties
Regulations "The only certainty we have... is that our industry will be confronting large amounts of uncertainty for the foreseeable future,” said George W. Sharp, president of EUCG6. Most

5 IT devices to communicate back to the grid

of this uncertainty can be attributed to regulatory rulemaking. Major concerns include the Clean Air Act7 and its impact on coal plants as well as the Fukushima (Japan) nuclear incident and its impact on nuclear regulation. (www.eucg.org) Gap between knowing and doing There is a greater dependency on emerging gateway technologies, smart sensors and massive computer systems giving instantaneous control to power grids. This creates great uncertainty about how, and how much benefit can actually be realized through smart grids. Consumers may suddenly have access to real time data on home energy use, but it is unclear how they – or utilities – will put that data to use to instant power system adjustments. Finally, can these solutions be commercialized such that the cost structure works for consumers and utilities can still stay profitable? (www.techpulse360.com) Other considerations Other uncertainties relate to economic conditions both in the US and worldwide. Population, dependence on foreign energy sources, climatic changes and impact of electric vehicles, all these factors will play a role in the adoption of smart grids.

Industry Scenarios
In developing industry scenarios for Smart Grids, following driving forces are taken into account. • • Supply side (fossil, nuclear, renewable generation) Demand side (manufacturing industry, residential, electric vehicle)

Scenario 1- Impressive technological improvements and high economic growth In this scenario the fossil fuel dependence will be reduced and alternative forms or energy will be used8. The overall carbon emission will be reduced. Good economic conditions will generate energy demand, which will require more supply. Technology advancement will meet consumers’ affordability. Prospects of successful smart grid are promising in this scenario. Scenario 2- less ambitious technological improvements and moderate economic growth In this scenario the fossil fuel will remain the dominant source of energy. Carbon emission levels will stay at their average levels. Energy demand will not increase much due to expensive cost structures. All these factors will affect the smart grid adoption.

6 A global association of utility professionals 7 Comprehensive federal law that regulates air emissions from stationary and mobile sources 8 Exhibit 2 presents the % shares of world energy use from 1990- 2030. (www.solartribune.com)

Smart Grid Strategies
Embrace diversity and collaboration Some analysts believe that renewable energy will be as cheap as fossil fuels by 20209. Utilities need to take full advantage of variable power generation sources like wind and solar. Natural strategy for the three big utility players mentioned above would be to continue to invest in R&D to explore these alternate energy resources. It is also important to develop sophisticated transmission and distribution infrastructure to promote system reliability and scalability. This can be achieved by developing integrated systems that can seamlessly communicate with one another. Complimentors need to develop the next generation AMI (HAN etc.) to optimize energy consumption in homes and buildings. (www.bloomberg.com)

Conclusion

Smart Grid is an emerging technology and there are various well-positioned players in the industry- both in utilities and AMI space. Due to the changing trends in the energy industry only those utilities and complementors will survive who will respond to these market transition and reinvent themselves every 3 to 5 years. Open standard will be needed for various entities to seamless communicate with each other.

9 See Exhibit 3

References:
1. http://www.smartgrid.gov/the_smart_grid#smart_grid 2. http://www.nist.gov/smartgrid/beginnersguide.cfm 3. http://www.abb.com/smartgrids 4. http://www.smartgridnews.com/artman/publish/Business_Strategy 5. http://www.smartgridnews.com/artman/publish/Business_Smart_Grid_101 6. Energy Technology perspectives 2012 published by IEA 7. Energy: The next 50 Years published by the organization for economic cooperation and development 2006 8. Smart Grid Leadership Report published by Energy Power Research Institute (EPRI) in 2010. 9. www.bloomberg.com/news/2010-11-24/solar-power-cost-to-equal-fossil-fuelexpense-in-decade-bp-says.html 10. http://www.power-technology.com/features/feature90922/feature90922-8.html 11. http://www.abb.com/cawp/abbzh251/76465d8d53273699c12571920030dbef.aspx 12. http://www2.schneider-electric.com/corporate/en/finance/finance.page 13. http://www.ge.com/investors/financial_reporting/index.html 14. http://www.mckinseyquarterly.com/The_global_grid_2626 15. http://www.eucg.org/committees/transmission.cfm 16. http://techpulse360.com/?s=Smart+Grid 17. http://www.bloomberg.com/news/2012-05-08/smart-meter-defiance-slowsadoption-of-29-billion-grid.html

Exhibit 110

10 Source GTM research

Exhibit 2

Exhibit 311

11 Energy Outlook published by IEA 2012