Unplugged: What Happened to the Smart Grid?

Replacing the antiquated electrical system in the United States with a super-efficient smart grid always seemed a surefire opportunity for entrepreneurs. So what went wrong? asks Professor Rebecca M. Henderson.
by Dina Gerdeman

Replacing the antiquated electrical system in the United States with a super-efficient smart grid always seemed a surefire way to strengthen the economy, improve society, and provide endless opportunities for entrepreneurs. Big opportunities.

But modernization of the country's power infrastructure has encountered several hiccups in recent years that have put the timing of its implementation in question, leading Rebecca M. Henderson, the John and Natty McArthur University Professor, to get students thinking during a class last week: Who exactly stands to profit from the smart grid in the long run?

“It's a question of who will make money and which business models are effective”

"There's a huge opportunity to make money here," Henderson, codirector of the Business & Environment Initiative at HBS, told students who attended a recent field study seminar in the course Innovation in Business, Energy and Environment, held in Harvard's Innovation Lab. "It's a question of who will make money and which business models are effective."

Although the definitive answer to that question remains to be seen, Henderson helped students develop strategies for analyzing the positions of the various players in the smart grid market—infrastructure builders, software suppliers, network providers, utilities, system operators—in an effort to figure out who might benefit.

"It's interesting to get some type of understanding about a complicated market where there are so many different players and so many uncertainties," one student remarked after class. "It was an opportunity to step back, look at the issues, and get some clarity."

Cracks In The Infrastructure

The arrival of the smart grid—essentially computerizing the electric utility network for more efficiency, remote troubleshooting, and customer personalization—has been delayed despite wide acceptance by many experts that the existing power system is falling far short of America's energy needs.

In 2009, energy demand in the United States was rising nearly twice as fast as it had in the previous two decades, according to the 2010 case The Smart Grid, prepared by Henderson, Associate Professor Noel Maurer, and former research associate Catherine Ross. When demand peaks beyond the capacity of the base system, utility companies use additional plants, called peaker plants, to help meet the increased demand, but these plants are expensive to maintain.

Besides, much of the key power equipment is aging rapidly. After government moved to weaken monopolies that utilities enjoyed, those companies had little incentive to invest in replacing transmission infrastructure because of uncertainty over who would keep control of those assets in the future, according to the case. So the same transmission lines, power transformers, and circuit breakers that were installed in the 1960s and '70s are still in operation, in many cases barely chugging along beyond their expected life span.

When power demands strain the overwhelmed electrical system, the results are not pretty. The United States had three major blackouts in recent years, including one in New York City in 2003 that lasted several days and created an estimated $6 billion economic loss. All told, power outages have resulted in an estimated $80 billion a year in total economic losses, according to the case.

The smart grid was touted as the best solution to the problem, allowing for on-demand energy use resulting in greater energy conservation and reduced greenhouse gas emissions. It was expected to allow for the transmission of anywhere from 30 percent to 300 percent more electricity and allow for greater energy storage than the current overburdened system.

"We're trying to reduce the peak demand because it's very expensive. We need to find a way to handle the swings," Henderson said. "A smart grid with efficient storage would get us a long way forward."

Another potential plus: Consumers would have more control over their energy usage. Homeowners would be given in-home meters to monitor their energy use and even control how much they spent on electricity, perhaps by setting their lights and appliances to turn on when rates were at their lowest. Plus smart meters, monitors, and sensors capable of two-way communication would allow for a more efficient reaction time if an outage was detected, rather than relying on field workers to truck to sites and report back to power plants by phone.

Even better, the system would work well with alternative energy sources such as wind and solar power, unlike the existing energy system, which has a tough time with renewables. Potentially, customers would be able to sell unneeded renewable energy produced at their homes back to the utility companies to be used in other places.

The system could even be a cash cow. One report suggested that transforming from current energy transmission to a smart grid would generate $227 billion over four decades in the United States alone.

The US government threw its support behind the concept, announcing that $3.4 billion in stimulus money would be directed toward smart grid technologies. This created excitement in the industry, and many utilities and technology companies made the smart grid a top priority.

By 2009 venture capitalists had invested over $1 billion in new smart grid technologies, the case said. Utilities began working with software, networking, and technology companies. John Chambers, CEO of leading networking and communications technology provider Cisco, said his company would develop smart grid technologies with an "almost unlimited budget."

Stalled Out

But the smart grid has stalled as a result of several challenges, including federal regulatory issues and the need to bring the various partners together to negotiate technology standards.

Also, an overarching question looms: Will consumers get on board? Even if the smart grid offers customers the ability to reduce energy usage and costs, the system could require programming and other actions by consumers. "Life is busy," Henderson said, adding that consumers might say, "I don't want to do this whole thing. I might think it's an intrusion."

As Henderson guided students through analyzing the different players in the smart grid market, she told them there are basically two ways companies can make money: by offering a product or service that is unique or by having tightly held complementary assets, capabilities that support the successful commercialization and marketing of an innovation.

"You can be unique, the only company that has this product or service. You have a patent for Lipitor, and you get to make a lot of money," she explained. "Or you have tightly held complementary assets. Look at Coca-Cola. It's not unique, but it has really strong customer relationships and a deep knowledge of customers' needs."

Henderson noted that it is much easier to make money in an industry if there are high barriers to entry and if there are no substitutes for your products. "We love industries in which it's difficult to get in," she said. "The example I use is Kodak. If you were Kodak [several years ago], you were selling to consumers, your suppliers were chemical companies, and there was no substitute for high-quality film. Kodak was among the most profitable firms."

Many companies decide a product will be successful based largely on whether a market exists for that product, but they fail to look at whether the product is unique or has complementary assets, Henderson said.

"Just because a market is big doesn't mean there's some money to be made there," said Henderson, who has worked with both Fortune 100 companies as well as small technology-oriented start-ups. "You need to look at the conditions [that might contribute to success or failure]. A robust strategy pays off."

As for the smart grid, years ago many thought it might be in place by now throughout the United States.

Other countries, including Sweden, Italy, and China, have made major headway with developing their smart grids, but progress in the United States has been slow.

"It's rolling out much more slowly than people expected. Consumers seem less interested in its capabilities. The regulation regime is difficult," Henderson said. "People have been talking about the market for 10 years, but it's not yet where it's supposed to be."

Henderson's best guess is that the utility and power integrators, like Siemens AG and GE, may have the best shot at making money off of the smart grid. But with so many uncertainties, it's hard to tell.

"This question of who will make the money is a very difficult one. We don't know exactly how it will look," Henderson said after class. "It will be a tough place to make returns. The worst case is no one will make money."

About the Author

Dina Gerdeman is a senior writer for Harvard Business School Working Knowledge
    • Larry Gottlieb
    • Sr Rate Analyst, Ecova, Inc.
    The Smart Grid has been delayed, in part, because of a loss of trust in Smart Metering in the initial stages. Some people in California noticed higher electric bills after Smart Meters were installed. Smart Meters had recorded higher usage. The average consumer did not believe that their usage was higher because the new meters were more accurate.
    • Thomas Dolembo
    • Founder, NewNorth Institute
    Larry has a good point. My clients who have invented smart sockets, etc. have run into two issues: no standardized specs from power companies and few incentives to install. Unless a critical number of smart devices are installed, there is no benefit. Early adopters were green advocates, and this did not expand. If the devices were offered free, general adoption was much higher. I believe Minnesota also had the same results. In the end, the way rates are billed (a very high basic rate with declines with volume) proved a barrier. Small initial benefits did not result in lower bills. I would contend that if you can measure by the microminute you can bill (and incent) the same way to show how a change in use can show immediate cost savings. Just me. It's not all technology.
    • Bruce H
    Here in Boston NStar has a pilot program which a) reads my meter periodically and b) allows them to bump up my AC setting. While this latter function may help with peak load, the other "benefits" of this system are illusory.

    My meter reading occurs only after 1 KWH of use...but only after 15 minutes have passed from the last reading. So trying to see what impact any appliance has on your usage is almost impossible. And, these readings are only available on the web...and then only for the most recent 24 hours. After 24 hours you only see the hourly usage.

    There is a home display - really useless since all it shows is the hourly usage for the past half day.

    Finally, since there's no time of day pricing there is little incentive to time shift usage
    • Anonymous
    One of the problems is that some of the utilities are on a fixed return cost structure and and thus have no incentive to become more effecient
    • Anonymous
    Would be interested in a value chain evaluation of Hydrogen Fuel Cells
    • Anonymous
    With a regulated Utility on a fixed return cost structure, it is very clear that the culture of such a monopoly is to dominate, maintain its monopoly status quo, and keep Wall Street happy.

    There is publicity aimed at influencing the consumers mind paid by rate payers about energy conservation, smart grid initiatives, and rebates (all such costs added to the electric bill of every consumer). This all bogus marketing and sleight of hand. The Utility does not make money when electrons are nor flowing, and they high five internally when consumption is up. Such monopolies have weak net-metering rules, which do not promote the proliferation of distributed Solar PV generation.

    They would rather get rate payers to fund the development of Utility scale projects rather than create an open market for distributed generation. Systemic issues, hard core cultures of such Utilities, and government policy all play a role in the advancement of the smart grid. Things must change and strong leadership with knowledge of what need to change is sorely needed.
    • Clifford Francis Baker
    • Chair, Neffel Corporation
    A partial beginning solution for this problem could simply be the mutual participation of the appropriate government agencies and varied business interests in the creation of a program centered on the selling of the need and benefits of a Smart Grid to the public. The resultant formation of an interested customer base would, hopefully, provide an incentive for the government and business sectors involved to move forward in the grid development at a velocity greater than that of a snail.
    • Guy Higgins
    • Principal, Performance Squared
    I don't see the iPod/iPhone/iTunes business model thinking in this assessment. The music and personal music players businesses were a huge market with no way for a new entrant to make money -- so the illustrious St Steve changed the game. He completely turned the music business on its head and and entered the red ocean of MP3 players by making design so cool that people couldn't resist it. It was a technology and design and business model and marketing coup. I don't know what that combination is for the Smart Grid (if I did, I would not be posting this comment), but it is out there.
    • Jamie Clark
    • OASIS
    It's good to ask about business models. But the announced goals of the federal standards program were not to create exclusive opportunities or IPOs. Rather, the point was to create more stable distribution networks, based on better information ... and better pricing models & product opportunities, based on more open information. In other words, break up some tied and closed markets, not nurture them. Sort of the antithesis of the Kodak model you cited. From the inside, it looks to me like success should be measured by whether network effects do eventually create more / better services.
    • Jean Femia
    • Technical Publications, Opto 22
    Comments have hit upon several important points. First, we don't have a unified grid in the U.S.: electricity is generated and distributed in widely differing ways depending on where you're located. Second, the only way to get consumers (individuals or businesses) to care is to change the pricing structure from flat rates to time-of-use or real-time pricing. Third, if you can't see your energy use in near real time--for example, see the effect of turning on your A/C--you can't intelligently respond by changing your behavior.
    The Smart Grid may be coming more slowly than expected, but it is coming. One reason is new rules from the Federal Energy Regulatory Commission (FERC) that make demand response (DR) programs much more appealing (source: an unpublished paper by Dr. Lawrence Plumb). In this context, HBS readers may be interested in a white paper on DR I recently wrote for industrial/commercial businesses: Energy Monitoring for Profit: Introducing Demand Response (http://www.opto22.com/site/documents/doc_drilldown.aspx?aid=4200).
    • Leo
    • Senior Engineer, Kestrel Power Engineering
    I don't understand the statement that ..."[smart grids] would allow for on-demand energy use ... and allow for greater energy storage than the current overburden system".

    Since there is no large-scale efficient way of storing electrical energy, our electrical power system is absolutely on-demand: you turn on a switch and your device (TV, lights, motors, whatever) works! And that is done without any "storage" of electricity. The generation and the demand are automatically balanced all the time and power systems have been operated like that forever, nothing new in that.

    So, what exactly is the smart grids going to do, that is different than what we do nowadays? It cannot create "on-demand" use, because it already exists. It cannot allow electricity storage because that technology does not exist in the necessary scale.

    As far as I know, from what I've read, smart grids will bring us two things:
    a) time-of-use tariffs, that will charge more for electricity during the peak of use. That is hoping for market forces to push people to use electricity some other time. But that will actually make electricity more expensive for consumers. The peak of use of electricity in most US regions is during the summer, due to air-conditioning. So, are we going to use air-conditioning, instead, during winter? Ah, perhaps we will not use air-conditioning during the afternoon, just during the night.
    b) demand-side management, which means giving someone else control over your electricity consumption. Big brother will be able to adjust your thermostat, perhaps your fridge and freezer settings, water heating, etc. In extreme cases, big brother will be able to shut off your equipment. This is called, by engineers, as rolling black-outs. But sure, demand-side management sounds a lot better, right?
    • Alex Rodriguez
    • CEO, Diversegy
    There are lot of moving parts and the supply chain is disparate with sometimes competing interest... The End-Result-Promise is a great one, however each state has it's own unique challenges towards making it happen... and I don't mean simply installing a smart meter, its actually enabling the technology to do what it is intended to do.
    • Tom Simchak
    Folks shouldn't get too hung up on smart meters as representing the smart grid as a whole. They're the visible end for consumers, but in the big picture they're only the pointy end of a vast range of infrastructure. You could have a smart grid with no advanced metering and you could have advanced metering with no smart grid.

    I think the author may also be looking for a somewhat monolithic 'smart grid' when there have been constant infrastructure improvements across the world's electricity grids that have been slowly but surely smartening transmission & distribution systems for years. It's not a sudden 'here's the smart grid' with a nice ribbon cutting ceremony; it's a baby step process that moves sometimes faster, sometimes slower and has been since long before we'd heard the term 'smart grid.' I doubt that smartening process will ever stop - there's no finish line for smart grids.
    • Dan Seiden
    From my experience working on some pilots in New England, value to the consumer is the biggest hurdle. The efficiency gains are realized more by the utility than the rate payer. Any cost savings to the consumer through use of an in-home display or other smart devices are contingent on behavioral changes; which consumers have not shown a willingness to make. Thus, as other posters have touched upon, the key to success in smart grid lies in more effective and creative marketing strategy. It's not that people don't want to save energy, it's that these companies are not doing a good enough job communicating how these devices will save them energy. A major thing many start-ups in the web portal / smart device space have failed to address is lack of consumer education about energy.

    IBM did a study last year across 15 countries which revealed that 1) more than 60% of consumers polled did not know the meaning of the term smart grid or smart meters 2) More than 30 percent had never heard of the term "dollar per kilowatt hour;" 3) More than half didn't know if their utilities has a green energy program; 4) Almost a quarter of those who participate in green energy programs have no idea if they pay a premium for that power or how much more they pay.

    The answer to getting the smart grid gears going is addressing these issues - not by sending all of these people to classes on energy, but innovative behavioral approaches like Opower and Efficiency 2.0.