Lux's Peter Hebert on Smart Grid

This week my Lux Capital partner Peter Hébert who leads many of our energy VC investments weighs in with great insights from a recent interview on the “Smart Grid” which he says is getting smarter by the hour.

PLI: Lately, we've been hearing a lot about smart grid technology? What exactly is it?
PETER HÉBERT: "Smart grid" has definitely become the topic du jour in both Silicon Valley and Washington, DC. One of our portfolio companies Lux Research—which analyzes energy technologies on behalf of large corporations and hedge funds—defines the smart grid as a “two-way real-time network connecting distributed generation, distributed storage, and distributed intelligence to increase grid reliability and enable green technologies such as wind turbines and plug-in hybrid vehicles." Smart grid technologies will help modernize the electrical power grid to support increasing demand, more intermittent renewable energy as well as increase overall energy efficiency. This is a big deal—Lux Research expects the smart grid to grow from a $2.7 billion market today to $4.8 billion in 2013—that represents an 11.8% compound annual growth rate (CAGR).

PLI: Can you give an example of smart grid technology?
PETER HÉBERT: Sure. First it's valuable to take a step back and understand our current electrical power infrastructure. Today's power grid is a one-way transmission and distribution network that allows utilities and other generation companies to deliver power to residential, commercial and industrial customers. Much of our grid dates back to the days of Edison—more than 50% of the transformer assets are over 40 years old! The aging grid can't keep up with ever-increasing electricity demands. If the infrastructure fails during periods of peak demand, we see blackouts—like those that swept the Northeast in the summer of 2003 and knocked out New York City's electricity. Replacing or adding additional power lines is prohibitively expensive, so utilities are looking for alternative ways to deal with peak demand—particularly in the summer.

Smart grid technologies fall into three broad categories: advanced metering infrastructure (AMI), networking systems, and software. A smarter grid infrastructure can help integrate renewable generation sources (like wind and solar) and in the long run, smart grid technologies will help utilities expand to more customers (such as plug-in electric vehicle drivers). At Lux Capital, we've made investments in several technologies that power a smarter and more efficient grid. The smart grid will also enable both utilities and energy users to better understand and control power usage. Demand response systems can help mitigate blackouts despite old power lines, and connects distributed storage and generation to the grid. Real-time energy information and time-of-use pricing can help consumers make better decisions—for example running a load of laundry when electricity prices might be cheapest late at night.

PLI: Can you give us a brief history of the technology?
PETER HÉBERT: As I said earlier, smart-grid is not one technology, but rather the combination of a number of products and technologies in hardware, software and networking. Over the past few years, utilities and local governments have been aggressively building out smart-meter infrastructure. The first step to enabling a smarter grid is upgrading meters for enhanced data capabilities, including two-way meters that read electricity flow in both directions — from the utilities to the customers, and vice versa. Around 20 million smart meters are already installed worldwide and many more are on the way. Based on announced and likely installation programs (and assumption of meter costs), Lux Research forecasts that the smart meter hardware segment alone will be a $2 billion/year business in the next five years.

PLI: How committed is the federal government to deployment of the technology and what steps is it taking to promote it?
PETER HÉBERT: In short—very committed. There has been huge government support and financing driving the deployment of the smart grid. Power outages and power quality disruptions cost U.S. businesses roughly $100+ billion per year. The Energy Independence and Security Act of 2007 mandates the deployment of smart-grid technologies. The recent $787 billion economic stimulus package included $4.5 billion for R&D, pilot projects and federal matching funds for the Smart Grid Investment Program to modernize the electricity grid. It's not just in the U.S.—the European Union has also formally promoted smart-grid technologies.

PLI: Are there any states, local governments or other communities that are already successfully using a smart grid?
PETER HÉBERT: Many utilities, as well as local and regional governments, have designed programs to roll out smart meters to enable the shift. Lux Research identified 147 such programs planned in the next 10 years worldwide, which would outfit global power grids with over 90 million smart meters in 2013 — and reach roughly 150 million 10 years from now. As an example, last month Florida's state utility Florida Power & Light and several corporate partners announced a state-wide smart grid-initiative, anticipated to cost upwards of $700 million.

Other utilities that have already announced major smart grid initiatives include PG&E, Nevada Power, San Diego Gas & Electric, Southern Maryland Electric Cooperative, Southern California Edison, Tampa Electric, Tennessee Valley Authority, Ontario Power Authority, ISO New England, PJM Interconnection, Toronto Hydro and ENEL. As part of these announced installation programs, about $28 billion of investments (government and private) have already been committed.

PLI: What companies are considered the “key players" in smart grid technology?
PETER HÉBERT: Some of the major smart grid pure-plays include public companies like Comverge (COMV), Echelon (ELON), EnerNOC (ENOC) and Itron (ITRI), as well as venture-backed start-ups like Silver Spring Networks, GridPoint, Trilliant and eMeter. Technology giants like IBM (IBM), Honeywell (HON), GE (GE) and Cisco (CSCO) also have major initiatives underway.

The biggest differentiator among smart-grid companies today is not rooted in technology, as much as in their business strategies. Companies like EnerNOC are focused on grid reliability for utilities, while firms like Comverge are targeting commercial and industrial customers that are trying to reduce their energy consumption.

PLI: What are some of the obstacles to a successful deployment of smart grid technology?
PETER HÉBERT: There are a plethora of different technology approaches to upgrading the grid, but the principal obstacles to successful deployment are not technical. Some major obstacles include future decisions on tax incentives, decoupling, and time-of-use pricing. While one driver for this increase on the utility side is a desire to decrease the number of blackouts, the conservation aspect serves a headwind to adoption. Many generators are paid by the megawatt-hour produced, and thus don't have a direct incentive to conserve. In fact, Lux Research has heard from many sources (including the CEO of a major U.S. utility) that utilities are getting paid less due to demand response and smart metering.

The bottom line: Whether or not utilities ever believe energy conservation is in their best interest, in the near term their focus will be on reliability. In the long run, smart grid technologies will likely help utilities expand to more customers, such as drivers of electric cars. At a recent conference I attended, one large energy company CEO said that he predicted the electric car would be the air conditioner of the 21st century for utilities.