The US needs a smart rethink before a smart grid



The US electricity market is highly fragmented and has long suffered from a lack of investment. The inefficient, disparate development of the US grid has led to significantly more capacity constraints and outages than occur in most other developed nations. Hurricane Sandy recently exposed north-eastern utilities’ failings in outage restoration, with some customers going more than two weeks without power. Thousands of residents have bought small, diesel-powered generators to provide power when utilities are unable, making the US grid look more like that of a developing nation instead of the world’s largest economy. Most commentators will suggest that smart grid is the answer to all of US electricity’s current woes. However, we believe that a radical restructure of the US electricity market is more critical. In fact, inefficient, disparate deployment of smart technology now would create an expensive barrier to future market restructuring.

US electricity infrastructure has long suffered from a lack of investment and restructuring

The US electricity market, in comparison to most European markets, is highly fragmented, vertically integrated, and uncompetitive, and it lacks significant investment. Most important, it lacks coherent federal policies to improve power delivery. According to the US Energy Information Agency, there are 3,200 electricity utilities in the US, some of which serve only handfuls of customers and have revenues counted in thousands rather than millions or billions of dollars.

Some utilities are investor-owned (IOUs), but most are municipal utilities or utility co-operatives. With few exceptions, utilities are vertically integrated, owning generation, transmission, and distribution assets, and are responsible for collecting revenues from customers. Customer switching is rare except in Texas, where customers of IOUs (but not municipals) can change suppliers.

Each utility submits a rate case periodically to increase prices to fund investments, which are subject to the vagaries of different state regulators. In short, US electricity infrastructure has been cobbled together over the past century, creating a patchwork of different assets and technologies that has led to bottlenecks, capacity constraints, and regular blackouts and brownouts.

Hurricane Sandy leaves US energy infrastructure looking more like the third world

Despite the East Coast’s annual battering by hurricanes and storms, most of the region’s electricity infrastructure is above ground. So when a severe storm hits, outages are unavoidable. Despite many US citizens’ inclination to deny climate change, most data suggest that storms will become more frequent and destructive over the coming years, resulting in more frequent and prolonged outages.

Hurricane Sandy exposed many flaws in US electricity infrastructure. For example, Long Island is served by municipal utility Long Island Power Authority (LIPA), which is often criticized for its overly bureaucratic organization and lack of investment in infrastructure. LIPA customers suffered some of the longest outages after Hurricane Sandy: some were without power for two weeks.

Instead of the utility funding investment in long-term protection of the electricity infrastructure, which we believe should start with burying power networks underground, droves of customers (at least those that can afford them) have bought emergency generators.

We are used to seeing this phenomenon in India, where electricity utilities are perennially unable to guarantee power to their customers, who must rely instead on backup generators. This should not happen in the world’s leading economy.

Is smart grid the smartest move to improve US energy infrastructure?

Smart grid technologies are often seen as a way for US utilities to avoid huge investments in electricity networks. However, the effect of Hurricane Sandy highlights deeper problems that potentially could be exacerbated by smart grid deployments. Specifically, the fragmentation of the US infrastructure has led to huge regional imbalances in infrastructure investment: infrastructure assets and the technology used to monitor and control them vary greatly from state to state and city to city.

We believe that infrastructure investments would be better coordinated if US transmission and distribution companies underwent radical restructuring by merging the myriad companies into regional network companies. Best practices could be shared, investment dollars could be more effectively targeted, customer satisfaction would improve. However, merging these companies will be a difficult (or even impossible) task, given the deep roots of this imbalanced and uncoordinated approach to asset and technology acquisition.

Neither candidate in the 2012 presidential election offered strong policies to improve US electricity infrastructure. Politicians simply cannot muster the will to take on the painful, long-overdue restructuring that is needed. Smart grid technologies will likely be the preferred option because they are simpler, cheaper, and more politically acceptable. However, it can be argued that smart grid is a short-term, expedient solution, which may make future industry restructuring even harder than it would be today. As with investments in existing infrastructure, each of the 3,200 utilities will be left to make its own smart grid investment choices. Instead of converging networks to single, manageable platforms, uncoordinated smart grid investments would add another layer of complexity, and create an expensive barrier to future industry reform.



Stuart Ravens, Principal Analyst, Energy & Utilities Technology


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