The Smart Grid overlays, automates, and controls the entire electric power system including production, transmission, distribution, and end-use of electricity
In the U.S., it consists of: 3,000+ utilities (using 41% of the nation's primary energy), 9,200 generating stations, >1,000,000 MW of capacity, >170,000 miles of transmission lines above 200kV, >6 million miles of distribution lines.
Transmission and distribution line losses are about 7%.
On average, there are 1.5 to 2 power interruptions per year, lasting between 2 hours and 8 hours
The power system's service reliability is about 99.7%
10% of all generation assets and 25% of all distribution infrastructure are required less than 400 hours per year, roughly 5% of the time
End-use of electricity is approximately: residential: 37%; commercial: 36%; industrial: 27%
Capital Intensity of Infrastructure Industries
SGIX is focused on three critical, very capital intensive, infrastructure sectors: electricity, natural gas, and water, with the initial emphasis on the electric power sector. All of these sectors are implementing "Smart Grids" with the electricity sector well in the lead.
The electric power industry is one of the most capital intensive sectors in the economy, behind railroads and water utilities:
- Investor-owned electric utilities' capital intensity (measured as the normalized ratio of capital investment to revenues) is 1.7X the mining industry's, and 3.3X the manufacturing sector's
- Some estimates of the ratio of plant capital assets to revenue: investor-owned utilities - 1.51; natural gas utilities - 1.24; local telecom exchange carriers - 1.46; water utilities - 3.52
Infrastructure Markets Have Unique Characteristics that Impact Business Cases
The electric, natural gas, and water sectors produce commodities that are critical for the nation’s economic well-being and security, as well as being essential to the everyday needs of individual citizens. Because of this, the sectors are regulated to a greater or lesser extent. For example, the electric power industry consists of competitive wholesale markets, regulated transmission and distribution operators, and a preponderance of regulated, tariff-based retail markets.
These unique characteristics of infrastructure markets, in addition to their capital-intense nature, strongly impact Smart Grid business cases and sometimes contribute predominant factors, as follows:
- Risk-adverse decision-making by utilities
- Extended sales cycles
- Request for Proposal bidding processes are the norm
- Deceptively “easy wins” for new or even non-commercial technology, followed by long-drawn out technology re-testing and demonstration projects
- Once “won”, utilities are loyal customers, and highly credit-worthy
- Protectiveness by utilities of existing revenue streams
- Capital investment preference by regulated utilities, due to the “Averse-Johnson” affect which incentivizes regulated utilities to accumulate capital in their rate-bases
- Long-lived assets with depreciation periods of 15+ years
- A mixture of different vintages of technology (the “legacy systems” effect), leading to interoperability challenges for new Smart Grid systems
- A political environment related to rate cases, existing regulatory policies and subsidies, and new policies
- Slow pace of regulatory change
- An adversarial, docket-based (legal), environment where intervenors represent many different stakeholders, especially consumers
All of the above factors represent rational behavior by the various parties in a regulated environment. This environment will not change quickly, and even when it does, it will likely be only in small incremental ways.
It is absolutely essential that the business cases that we develop collaboratively at SGIX take the above market factors into account. They are part and parcel of the infrastructure business. We cannot ignore them, wish them away, or make over-optimistic assumptions about how they will change. They imply that we will often be looking at longer time-horizons, business growths attuned to regulatory cycles, and longer waiting-times for liquidity events. But we are not concluding that there isn’t room in our business cases for strategies for targeted mitigation of the impacts of regulation or changes in regulatory policies. And it certainly does not say that there are not attractive and sustainable returns to be realized by Smart Grid businesses.
Finally, not all business opportunities in the Smart Grid are directly connected to major infrastructure or regulatory changes, e.g., software applications, customer-based energy management -- these often have much shorter sales cycles and can provide higher growth rates and more near-term liquidity events.
3,000+ U.S. utilities, independent power producers, energy trading companies, equipment vendors and service companies, government, regulatory commissions, independent System Operators (ISOs), Regional Transmission Operators (RTOs), environmental protection entities, banks, insurance companies, legal firms, all electricity customers, consumer advocacy bodies, various special-purpose communities such as professional societies, users' groups, trade associations, and industry consortia, R&D organizations and academia, testing, certification and standards organizations, investment funds.
Eric von Hippel, “Horizontal innovation networks - by and for users”, MIT Sloan School of Management Working Paper No. 4366-02 June, 2002.
John Dahlgren, and Curtis Evans, “A Revised Calculation on the Value of Networking as Applied to Airborne Platform”, 16 Jan 06, Copyright, Mitre Corporation 2004.
Michael Mauboussin, "Exploring Network Economics", October 11, 2004, Legg Mason Capital Management,
Friedrich. A. Hayek -- Forefather of SGIX's Approach to Collective Knowledge: Presaging the ability of the Internet and Web 2.0 applications to access the collective wisdom of highly dispersed decision-makers, Friedrich A. Hayek, Nobel Laureate, explained in 1964 how "an overall order of economic activity was achieved which utilized a large amount of knowledge which was not concentrated in any one mind but existed only as the separate knowledge of thousands or millions of different individuals". The internet and Web 2.0 applications (and "big data analytics"), unanticipated in Hayek's time, provide efficient mechanisms for accessing and collecting dispersed knowledge both archived and in "thousands or millions of minds". Of course, the minds still have to be willing to divulge the information, but the connectivity is available. In an analogous fashion, SGIX's approach (and others using collaborative Web 2.0 tools) attempts to gather up and bring together as much as we can of the dispersed intelligence related to the Smart Grid and apply it to the improvement of Smart Grid business cases.
A useful summary of Hayek's views can be found in "Hayek’s Transformation", Bruce J. Caldwell, History of Political Economy 20:4 0 1988 by Duke University Press CCC 00 18-2702/88
"Web 2.0 is the business evolution caused by the move to the Internet as a platform: harnessing network effects and the collective intelligence of users to build applications that literally get better as more people use them", Tim O'Reilly, 2006
Web 2.0 applications are widely used and usage is growing -- examples of companies using Web 2.0 applications include Proctor & Gamble, Eli Lilly, Lego, Hewlett-Packard, British Petroleum, General Electric, Dell, CISCO, salesforce.com, Goldcorp, Starbucks, LinkedIn, Pinterest, Instagram, Zygna, Yelp, Angie's List, GitHub, Opower, Simple Energy (for more, Google any of these names along with the phrase ":Web 2.0")
A McKinsey survey of the drivers of Web 2.0 initiatives launched by corporations asked users to rank their reasons for using Web 2.0 with results as follows:
- Business productivity - 74%
- Competitive pressure - 64%
- Specific problem solution - 53%
- Partner recommendation - 45%
- Bundled service - 25%
A McAfee white paper on Web 2.0 addresses how to manage the security and confidential challenges -- "Web 2.0 A Complex Balancing Act: The First Global Study on Web 2.0 Usage, Risks, and Best Practices", September 22, 2010.
According to a Pike Research's consumer survey of "Social Media in the Utility Industry" in 2012:
- 57 million customers world-wide use social media to engage with their utility
- This engagement is forecast to increase to 624 million by 2017
- Most of those actively engaged are under 30 years old
- Interactions are primarily related to billing issues
- Utilities have discovered that customers who do engage using social media tend to be more satisfied with the utility's service
In 2011, E-Source conducted a survey of utility social media and their use of social customer relationship management applications (CRM 2.0), identifying the leaders as Avista, Duke, Potomac Electric, Salt River Project, Memphis L,G & W, Public Service New Hampshire (PSNH). While you have to be a member of E-Source to receive the full report, various publicly-available sources provided some interesting snippets from the findings as follows:
- 40% of utilities are using Twitter to communicate with customers
- 43% of Home Pages reviewed indicated links to social media
- Outage and crisis management via social media have proven themselves
- Utilities are starting to apply social media to the customer care function, e.g.., Xcel's integration of social media into their call center operations
In 2009, Exelon Corporation conducted a Social Media Benchmark Survey of 30 Utilities -- the following findings are available publicly:
- 83% of the utilities were interested in using social media
- ConEd had 1,400 Twitter fans
- Nine of the utilities had social media guidelines
- Eight of them used social media for crisis communications
- WE Energies used social media for customer services (i.e., CRM 2.0)
- Colorado Springs Utilities uses social media for hiring
Southern California Edison provides its employees with a Twitter account and a free micro-blogging account at Yammer.
During a major ice-storm in 2007, PSNH's Twitter followers increased overnight from 100 to 1,900, and by 2009, the number was 2,098.
SWEPCO used Facebook to promote their new John W. Turk coal power plant - the COO of SWEPCO posted to the Facebook account regularly.