"The investment we’re making today will create a newer, smarter electric grid that will allow for broader use of alternative energy. … This investment will place Smart Meters in homes to make our energy bills lower, make outages less likely, and make it easier to use clean energy. … And it’s an investment that takes the important first step towards a national transmission superhighway that will connect our cities to the windy plains of the Dakotas and the sunny deserts of the Southwest.”

Remarks by President Barack Obama at the signing of the American Recovery and Reinvestment Act, February 17, 2009

Electric systems in the continental United States are part of three major regional interconnections that, collectively, are often referred to as “the grid.” Virtually every home and workplace establishment in the U.S. has access to the grid. Although our grid is among the most reliable and affordable in the world, it is based on aging infrastructure and legacy technologies. It is now widely understood that the deployment of advanced information technologies can make the grid “smarter” — more efficient, reliable, flexible and supportive of renewable energy resources while reducing the rate at which new transmission and distribution infrastructure must be built.24 Congress and President Obama have put a priority on the development of a “Smart Grid.”  

There is no universally accepted definition of a “Smart Grid.” Most would agree, however, that it can be described as an electric transmission and distribution network that relies upon robust two-way communications, advanced sensors and other technologies to enable more reliable, efficient and environmentally benign electric service. The Energy Independence and Security Act of 2007 (the “EISA”) indicates that a Smart Grid would have ten characteristics (see table).  

Smart Grid technologies can aid the dispatch of energy from distributed renewable energy sources, such as small residential solar panels and wind turbines, feed that power back to the grid; and help account for compensation to power generators. Smart meters can provide customers detailed electricity information that, in turn, can enable them to tailor their electric use to meet their price and supply goals. Smart Grid technologies may also be able to reduce peak demand and enable better use of transmission facilities due to increased efficiency and better asset utilization, thus reducing the need for additional power plants. Broadly, the Smart Grid promises to enable new opportunities and support innovations, including:  

  • Nationwide use of plug-in hybrid electric vehicles, including the ability to return stored energy to the grid  
  • Seamless integration of renewable energy sources like wind and solar  
  • A new era of consumer choice  
  • Integration of green building practices with the grid  
  • Large-scale energy storage25  

Barriers to Implementation of the Smart Grid  

The Smart Grid faces a number of barriers to its implementation, including cost and regulatory and legal hurdles.  

Cost

Although estimates of the total cost vary, it is clear that building a Smart Grid will be an enormous undertaking. FERC Chairman Jon Wellinghoff recently said that full investment to meet President Obama’s renewable energy goals, which include the Smart Grid, could require more than $200 billion.26 According to the Brattle Group’s estimates, $880 billion of investment in transmission and distribution systems, including Smart Grid projects, will be needed by 2030 to maintain current levels of reliable energy service for customers throughout the country. Smart Grid spending, while only accounting for a portion of these investments, will be considerable by any measure.27  

Regulatory Hurdles  

Investment on the necessary scale will require the participation of private investors, customers, equipment suppliers, utilities and, in today’s economic climate, federal and state governments. Numerous state and federal regulatory issues must be resolved if Smart Grid technologies are to become reliable, efficient and widely deployed. The disposition of regulators toward Smart Grid and their willingness to allow returns that properly recognize the magnitude and risk of Smart Grid investments will be key. In keeping with their responsibilities to oversee regulated utilities in providing safe and reliable service, state public utility commissions will be on the regulatory front line reviewing investments in the Smart Grid, and they have a major stake in enabling these investments to be made. Hard economic times may make state utility regulators wary of approving large capital expenditures for Smart Grid investment. Regulators are naturally concerned for customer bills and aware of the uncertainties surrounding the broad deployment of new technology.  

FERC will also have a role, likely an increasing one notwithstanding the limits of its current jurisdiction, as issues of standardization, regionalization and national interest come into sharper focus. Federal agencies, such as FERC, will be responsible for coordinating the development of standards and protocols for the use of Smart Grid technologies to eliminate technology “seams” between Smart Grid regions. There will be difficult cost allocation issues to resolve when determining how to assign costs of new technologies that may benefit large regions rather than one utility’s service area. Finally, success of Smart Grid technologies will depend on the existence of user-friendly market rules and coordination with existing mandatory reliability standards and business protocols.

Utilities must keep a keen eye on returns on prudent investments and have historically been deliberate in the adoption of new technologies. The current difficulty of raising capital from external sources is also causing utilities to rely as much as possible on internally generated funds. Thus, investments in Smart Grid technologies face intense competition for scarce capital. Greater regulatory certainty and a clearer commitment on the part of regulators to approve reasonable returns on these investments would give a significant boost to Smart Grid deployment.  

Legal Hurdles  

Early adopters are creatively overcoming a number of legal barriers to implementation of the Smart Grid, including intellectual property, contracting and privacy concerns.  

As with many new technologies, navigating pre-existing patent rights and negotiating licenses with technology owners can slow development and increase costs. Certain vendors hold patents that they claim apply to a number of wireless network and other technologies and have sued or reached licensing agreements with many of the major smart metering vendors. Southern California Edison Company (“SCE”) is addressing these complex issues creatively by offering to anyone worldwide an open-source license to use its copyrighted 2006 advanced metering infrastructure (“AMI”) use cases and, if a U.S. patent is granted, for the royalty-free use of the processes covered by the patent.28 According to the SCE, “[t]he non-exclusive royalty-free license is written so that the SCE 2006 AMI Use Cases can be used by others in developing either proprietary or open source derivative works, since there is no requirement that the derivative works be made available on an open source basis.” SCE’s website states that it “is interested in encouraging the open development of smart meter/smart grid uses and related technology, so that we can better meet the needs of our customers and improve our operational efficiency and safety. It is in this spirit of open innovation that SCE is providing the AMI use cases to other utilities, for their potential use.”

Not surprisingly, the most difficult contracting issues revolve around technology and allocating the risks — and costs — inherent in a rapidly developing area. In addition to addressing intellectual property risks, carefully drafted agreements also cover technology obsolescence, compatibility and interoperability, and warranties at all phases of development and installation, among other issues raised by any transaction involving large-scale purchases of hardware, software and services in a regulated industry.  

Privacy issues also are top-of-mind. Much of the promise of the Smart Grid derives from the ability to collect and analyze highly detailed usage data identifiable to individual customers. Obtaining legislative, regulatory and — perhaps most important — customer cooperation in handling that data requires unusual sensitivity to responsible information management practices, appropriate data security and careful observance of the promises made about customer data.  

Federal Incentives for Smart Grid Investment  

To spur deployment of Smart Grid technologies, Congress passed several laws intended to provide incentives for utility investment. In the Energy Policy Act of 2005, Congress required states to consider implementing smart meter technologies for residential and commercial consumers.30 In the EISA, Congress authorized the Regional Demonstration Initiative (the “RDI”) and a matching grant program for qualifying Smart Grid investments (the “Grant Program”). The RDI is “a smart grid regional demonstration initiative composed of demonstration projects specifically focused on advanced technologies for use in power grid sensing, communications, analysis, and power flow control.”31 The demonstration projects are limited to five electricity areas and projects conducted under RDI are not eligible for reimbursement under the Grant Program. The Grant Program provides for the reimbursement of 20% of qualifying Smart Grid investments. 32 Electric utilities are eligible for reimbursement for costs associated with installing or modifying equipment to engage in Smart Grid functions.

Although Congress authorized up to $100 million for each of fiscal years 2008 through 2012 for the RDI, it did not appropriate any funds. The American Recovery and Reinvestment Act (the “Stimulus”), by contrast, appropriated $11 billion for grid-related activities, including $4.5 billion directed towards the modernization of the electric grid under programs previously authorized by the EISA, and $100 million for Smart Grid-related worker training. The Bonneville Power Administration and the Western Area Power Administration, two federal power marketing administrations that operate transmission systems in the West, each received $3.25 billion in additional “general provision” funding. Other components of the Stimulus that could contribute to the Smart Grid include $6 billion in new loan guarantees by the Department of Energy (“DOE”) and $2.5 billion in energy efficiency and renewable energy research.33  

NIST and FERC Smart Grid Efforts  

In the EISA, Congress called on the National Institute of Standards and Technology (“NIST”) to identify existing and developing standards related to Smart Grid technologies, assess their current functional and technical interoperability and prioritize actions to achieve a higher level of interoperability that would benefit utilities, businesses and consumers. NIST has been seeking input from many public and private groups, including the DOE, the GridWise® Architecture Council, the Edison Electric Institute and others, to build a Smart Grid interoperability framework. The EISA called for NIST to publish by December 2008 a progress report on recommended or consensus standards and protocols in the interoperability framework but this report has not yet been released to the public.  

NIST, however, is chartered to coordinate and propel the industry’s standards development efforts, not to create standards. It seeks to synchronize the standards development work of such groups as the National Rural Electric Cooperative Association’s MultiSpeak® Initiative, the UCA International Users Group and the Utility Standards Board. Peter Shaw, a director with Navigant Consulting and adviser to the Utility Standards Board, underscores the role of the industry in fomenting interoperability standards: “It is paramount that utilities embrace an active role in shaping business process requirements and associated Smart Grid standards, in concert with equipment and solution vendors, other service providers, and global standards bodies.”  

A visible example of industry’s leadership in forging Smart Grid interoperability is the collaborative work under way on plug-in hybrid electric vehicle integration standards. The utility-funded Electric Power Research Institute is collaborating with automotive companies like General Motors and Ford, with the Society for Automotive Engineering and with numerous utilities to establish interface standards for vehicle-to-grid battery charging and discharging. Meanwhile, the Utility Standards Board has begun work on defining utility information requirements for managing the customer-facing business processes that will enable a seamless customer experience regardless of where a car is “plugged in.”  

The EISA also directs FERC to adopt the NIST Smart Grid standards for use in the interstate transmission of electric power after a sufficient consensus has approved the standards. FERC and the National Association of Regulatory Utility Commissioners (“NARUC”) have formed the FERCNARUC Smart Grid Collaborative committee to facilitate technology discussions in a transition to a Smart Grid so that regulators understand what Smart Grid technologies are being developed and how such technologies will impact consumers.  

Recent Investments in the Smart Grid  

Investors are also seeing opportunity in Smart Grid’s potential. Google™ recently announced that it is developing a tool called “PowerMeter” that allows users to monitor home energy consumption online using smart meters.34 PowerMeter software would tell consumers exactly how they are using energy, including appliance energy use. Google™ is currently testing PowerMeter software with its employees, but it is looking to partner with utilities and smart energy device makers and will eventually roll out the tool to consumers. General Electric (“GE”) plans to introduce a suite of “smart” appliances that can reduce energy demand in response to signals from a utility. GE also recently won several large utilities deals for smart meter deployments. Northern California utility PG&E is installing 3.3 million GE smart meters in California and American Electric Power plans to install an initial 200,000 smart meters, with a goal of five million users by 2015.35 GE has also partnered with Google™ to promote renewable energy and spur better investment and swifter government action on Smart Grid technologies.  

Conclusions  

Due in part to Smart Grid provisions in the Stimulus, utilities, investors and suppliers have increased economic incentives to develop and deploy Smart Grid technologies. As recently demonstrated by the entry of giants Google™ and GE into the Smart Grid investment space, even with the global financial crisis, investors see the enormous economic potential of the Smart Grid. However, with the global financial crisis, investors will need to see continued government interest in the Smart Grid, including a complementary, if not coordinated, approach to the Smart Grid by federal and state regulators, especially on permitting reasonable and prompt returns on Smart Grid investments.  

In a recent report, the Electricity Advisory Committee (the “EAC”) outlined recommendations to the DOE designed to accelerate the deployment of cost-effective Smart Grid technologies. The EAC recommended that DOE establish a Smart Grid program office. This program office would act as a clearinghouse of Smart Grid information, provide coordination of Smart Grid activities and drive standards-based work once NIST completes its development of a standards operability framework. The EAC also recommended that a roadmap be developed by December 2009 for the achievement of a coordinated, nationwide, cost-effective deployment of Smart Grid technologies.36  

Building the Smart Grid, like all great endeavors, will be a challenge, and there is much to be done. Nevertheless, opportunities such as those President Obama has described should spur completion of the task.