David Leeds on the Smart Grid

December 5, 2009

Amelia Bryne: I took a look at your report and your diagram on the smart grid.

David Leeds: A number of smart grid CEOs have appeared before congress in the last 6 months, and they’ve all made the same claim. That is: that smart grid investments are the #1 IT investment that you can make to reduce the carbon gas problem. There are fields that are tangential to smart grid that are really important, one of them being energy storage, the other possibly being electric vehicles. Those things essentially need the infrastructure of the smart grid to plug into.  So, from a high level perspective smart grid is a real influx point, or, as Buckminster Fuller used to say a “trim tab” which is when you have a big boat at sea there is so much pressure on the rudder to turn the wheel that there is actually a rudder on the rudder. You turn that and that give you the momentum to turn the rudder, which turns the ship. So, when you are trying to fix a problem go for the trim tab. I see smart grid as trim tab in terms of solving a larger problem.

How would you define a ‘smart grid’ or what is the best way to conceptualize everything that a smart grid could include?

David: I’m not going to try to define a smart grid in one sentence – many have tried, and many have done a poor job.  The way I boil it down is that the smart grid is a convergence of three industries or sectors, power, telecommunications or wireless communications, and IT and the applications that can sit on top of a communications platform. From an architectural perspective that’s how I see smart grid. Essentially it’s about upgrading the grid to be more responsive, like a human central nervous system where there is distributed intelligence throughout the grid like there is distributed intelligence throughout the human body – it’s not just the brain that is sensing and feeling, it’s the entire network.

The transmission system in the U.S. has had a great deal of intelligence for more than a decade or two. So smart grid is really about a distribution network from the substation to the end-user. Historically there has been zero intelligence after the substation. So, the utility has had control up until the substation, but once they push the power from there they don’t know what’s happening, which is why end users have to call and say, “there’s an outage,” because there’s no monitoring or feedback loops. So smart grid is really 95% about upgrading the distribution network. The first part of smart grid is building out the communication network, connections between wide area networks, backhaul networks, and networks that connect to the end user.

Who or what will be impacted by smart grid?

David: There are two sides to this. There’s both the consumers who ultimately- I mean the vision of smart grid is a very participatory energy network.  There is still the question of what the interface will be that the end user interacts with and how often he will need to do that. Vendors including Microsoft, Oracle, and Google are all interested in this home area network portal space now but there is still uncertainty as to what technologies will win out and how the end user will interact. It’s argued that the benefits will include cheaper electricity. I don’t see that happening in the long run because I think in a limited resource world if you look at the demand charts for energy in the next 20 years I think if we can keep electricity prices stable that would be a victory.  The infrastructure itself is aging. More than half of the grid infrastructure in North America is over 40 years old and the average life of a transformer, etc. is 40 years.  So, we’re really in a dire situation with the grid infrastructure.

Today utilities are trying to respond to outages, but increasingly they are going to have to keep an eye on power quality as well. Different devices, like a computer, can only operate within a certain range and if you spike it that can actually cause a device to malfunction. And, as you talk about having increased data centers and assets on the grid, healthcare systems, etc. you really have to insure the power quality. That’s part of smart grid as well. It’s really about the utility getting better control of their system for performance, reliability, safety, etc.  I think the internet runs at 6 times reliability and is 99.999% reliable, which means you will only experience an outage or a failure for a couple seconds a year or minutes. The grid runs at 3 or 4 times reliability, so 99.997% which equates to several hours of outages per person per year. This doesn’t sound like a lot, especially if you’ve been to other parts of the world, but when you think about the associated costs of not having electricity for different industries like credit cards and banking and stock markets there are some serious costs.

So, the smart grid could help greatly improve reliability?

David: Yes. What’s really cool is that I was at GE’s global headquarters two days ago – they are announcing some smart grid products – and they were showing how they can monitor every aspect of the grid. They were talking about the blackout in New York in 2003, which was started by a very minor thing like a tree branch falling down in Ohio that rippled through the system because it wasn’t contained or detected in time. But, using even simple smart grid technologies that blackout would never have occurred. I don’t know what the numbers are but that blackout was certainly in the billions of dollars in terms of damages.

Amelia: From the consumer or business perspective how would everyday life or everyday business be impacted by smart grid?

David: The true answer is that from the perspective of 95% of the employees in those buildings is that they wouldn’t feel any impact. But, that’s the thing. Like in sports you don’t see a good referee because they are not interfering with the game. That’s sort of the thing with smart grid. Most people in their daily lives won’t directly see the benefits of smart grid when they are in the office. But, when they are in the home it will be more visible. There are different applications associated with smart grid. One is advanced metering which will let home users see how much energy they are using, where that energy is coming from. You will have insight as to whether the energy is coming from coal sources, renewable sources, etc.  There are detailed portals that will show you really detailed aspects about your energy use.  In order for this to happen we are going to need to have time of use utility prices.
Most utility rates in North America are flat rate prices, so the utility could indicate right now that they are experience peaking power, which makes life very expensive for them and they have to bring on peaking natural gas plants which are carbon intensive. There’s really no incentive right now for consumers at 4PM in August when there’s a heat wave not to crank their AC or run the dishwasher and washing machine at the same time.  There’s no financial incentive telling them that’s not good for the whole system because they are going to pay the same rate in any case. So, we are going to need to have time of use prices implemented in order to get smart grid off the ground on the consumer end. There are all kinds of studies that have been done that once you give consumers energy management systems that are tied to time of use pricing the consumers typically save between 10 and 20% on energy per month and even higher in terms of the peak energy.

What is the timeline for smart grid as an infrastructure? When might we start seeing those kinds of things in the home?

David: In this sense I think it’s helpful to talk not about smart grid as “smart grid” but to talk about different market sectors.  So, for example, Advanced Metering Infrastructure (AMI) projects have two parts: the deployment of the smart meters themselves and then the corresponding network to go along with that to support them. That’s happening right now. Obama has called for the deployment of 40 million smart meters in the U.S.   That’s happening now, and that has to go first because that puts the communications infrastructure in place. So, at the moment the leading application of smart grid is AMI, but it’s probably not the killer application of smart grid.  In 201 we will all take it for granted that we have a smart meter and that you can find out in live time how much energy costs.

Then really it’s the other applications that become interesting. Demand-response with utilities getting customers to turn off or turn down power for certain periods of time when they experience peak load – that’s existed for two or three decades but in really rudimentary ways where the utility would actually call the client and say, “Hey listen we’re having a peaking power moment here and we have to ask you to turn off one of the plants that’s not essential.” But, how that’s going to happen in the future is that your appliances in your home like your air conditioner, your cool pump will have chips installed in them and they will talk over your home area network through your smart meter back to your utility. So, you’ll have contracts agreed to in advance, you’ll sign up for a rate program and say, “I don’t mind  having my air conditioner either shut off or cycle on and off if the grid is experiencing peak power.” The utility will actually will pay money to get those appliances turned off. The reason that they would pay the end user is because it’s cheaper for them than if they had to turn on natural gas peak power plants.

Demand-response is going to become much more commonplace.  Almost like cell phone plans; you’ll pick the plan that is most suitable for you.  Depending on the region, utilities really only experience 10 to 40 hours per year of peak energy, but they have to keep all these assets online to make sure that they can protect the grid from a blackout.  It’s really an inefficient model.  So, using more demand-response is just a win-win for everyone: the consumer makes money, the utility operator spends less money. Demand-response is also a clean alternative because it means you are not burning coal or natural gas.

Amelia: How will utilities make money if smart grid enables consumers to use less energy?

David: That’s a great question, and it’s one that hasn’t been sufficiently answered.  That’s one of the leading challenges of smart grid:  redesigning the way in which utilities are compensated. A lot of utilities are investor-backed companies. Why would any investor-backed company or publicly owned company want to sell less of its product?  I mean you can’t very well ask Starbucks to sell fewer cups of coffee without the government giving them a big stick, or finding some business case that supports that. Duke Energy has really been at the forefront of advocating new regulatory business models. They want to get compensated for the power that they save using demand-response and energy efficiency methods. To me that seems absolutely obvious. But, it’s going to take a lot to change these utility business models.

Are utilities looking to get compensated by the government?

David: I’m not an expert on this, but take a look at the report.

Amelia: Who is involved in building smart grid?

The leading vendor now in terms of the networks in North America is called Silver Spring Networks. The other people that are getting the big dollars right now are the smart meter manufacturers [names the top 6] and companies building out the communications infrastructure.

Amelia: How do these companies relate to the utilities?  Do they sell their product or service to the utilities?

David: Yes. They are all competing for these contracts and these are huge contracts. The contract for Pacific Gas & Electric was 2.2 billion dollars for their full smart grid initiative.

Amelia: Related to this I noticed in the report that there was something very interesting happening regarding the people who are behind these new companies. For example, you talk about how Trilliant’s founder and CEO changed positions in March 2009 to make room for a new CEO who had formerly been the head of GE Hitachi Nuclear Energy, so this larger trend of smart grid companies as they switch from a startup phase to the operations phase they bring in senior management with utility ties.

David: Yes. Most of the companies that appear in the report have gotten their funding, so they’ve been given millions of dollars. These companies have their money, but what they don’t have in some cases are the utility-scale contracts and they haven’t really successfully deployed their technologies.  As they move from the startup phase, everyone is in operations mode now and what can they do to get utilities to trust them?
I was talking to one of the directors of Florida Power & Light at this GE conference and he said, “You know, in the past if we had the choice between IBM and Dell to buy the new computers of course we would just take IBM.” But, what happened was that there was a loss of innovation in the utility world. Now there’s a mixed feeling because they want the most leading edge technology, but the concern is whether the startups can scale to the level they need. So, if they hire a company that has 50 employees to do their metered data management services can that company, if it also wins another contract with another huge utility, can they sufficiently bring that product to market and deliver the solutions that the utility needs? So, that’s really the trend right now. There have been 5 or 6 of these smart grid companies that have announced just in the past 6 months that the founder or CEO has stepped aside and assumed the role of either VP of Marketing or Senior Strategist or whatever the sexy title they want to give that individual is and get some guy with 25 years of utility experience and, probably more importantly, connections to assume the top position.

Have you seen anything similar in terms of bringing in telecommunications expertise?

David: If you look at the stimulus package there are 4 big telecoms that are left essentially: AT&T, Verizon, Sprint, and T-Mobile. Ten years ago there were a couple hundred telecom companies. Each of these companies has in some way applied for smart grid stimulus funding. These telecoms increasingly see smart grid as a market that they want to play in.  Smart grid is a kind of small community. If you’re on LinkedIn and you’re hooked into 200 individuals you pretty much know everybody in smart grid and there’s a sense of fraternity.  Cisco entered into smart grid about 3 months ago and they essentially built-out the internet. They see this as a huge market for them.  How do you charge your electric car? How do you properly integrate renewable energy sources?  These are the questions that need to be answered. There are a lot of software solutions.

Amelia: There are many industries and many players involved in smart grid. In the report you talk about the danger of silos and of some utilities seeing the smart grid as a one-off project. How can the industry ensure that the necessary planning happens so that we don’t end up with silos or so that things are compatible?

David: It’s a really important thing. We have a golden opportunity right now to reinvent the way we generate, transmit, and consume electricity. But, in order for that to happen, the utility control systems have to talk to each other. For example, if there is going to be severe weather you need to have the weather systems talk to the grid optimization application layer, and also to the metering layer.  What happened in the past is that you have all of these systems that aren’t communicating with each other. If you look at the application layer, the AMI – the meter, if the power in your house was going to go out one of the neat things about a smart meter is it can send a “last gasp” signal. So, that data is speeding along the communications network before the power cuts to let the utility know, “Hey, my power is going down.” That way that creates a feedback loop that the utility can just cut off the power in a certain area so that the outage doesn’t spread, or do whatever they need to do get the power back on. But, when that signal is sent back to the utility on the AMI level, it also needs to talk to the grid optimization level, which is where all of the self-healing and monitoring takes place. The underlying architecture is allowing all of these systems to communicate so that all problems that could potentially emerge can be immediately dealt with.

Amelia: That’s interesting.

David: The smart grid will grow in evolutionary steps, much like the internet did. For example, last year Youtube used as much bandwidth as the entire internet in 2000 – there are now all these applications that you could have never imagined. So, we don’t know all the exciting stuff that we are going to be doing ten years from now. But, we do know that we’re going to need to have robust communications. One of the challenges of AMI networks is that they are deploying radio frequency mesh networks which are great for sending meter reads because that’s not a lot of data. But, if you start to talk about the real vision of smart grid, which is charging electric vehicles and integrating distributed generation sources we will probably have to have not just more bandwidth, but also lower latency. So there is some concern that communications networks are not robust enough to support future applications. That’s something that can hopefully be upgraded over time, but, on the systems level a lot of people that I spoke with at IBM (who know a lot about this) talked about AMI as a transformative application and to not miss this moment right now to set the IT systems infrastructure for integrated solutions and future applications.

Amelia: So, you are saying that developing smart grid is similar to developing the internet where it is important not to make a decision now that closes off some possible important future applications?

David: That’s right. Nobody knew Twitter was coming in 1998. We don’t know exactly what the applications are going to do. We have some sense, but we just need to be sure that the communications network is either strong enough or can scale or evolve. A big part of that is the integration of the utilities own control systems.

Amelia: What roles do policy and regulation have in shaping the smart grid?

David: In order for any of these large-scale investments to be made it has to be approved by the state public utility commission. So, they have a huge role. Smart grid vendors are in the days of really educating the utility commissions to understand these challenges and how these solutions will ultimately be beneficial to their citizens.

Amelia: What countries are leading in terms of developing smart grid infrastructures?

David: The largest deployment in the world was done about 3 years ago by a utility called NLSPA in Italy. Smart grid projects are happening all over the globe, all over Europe, the UK announced last month that they intend to have smart meters in all of their 25 million houses by 2020. Right now in the North America we are at 6-7% penetration for smart meters. We’re not going to get to 100% in the next 5 to 10 years, but we might get 30, 40, or 50%.  I would expect the same levels of penetration across Western Europe. I’ve spoken to people that have been working on projects in St. Petersburg in Russia.  China’s got a massive stake in smart grid.  A lot of the products being developed will be made there. Also, their energy utility is a nationalized system.   So unlike the U.S. where you have something like 3,000 different utilities,  other countries like Spain have 1 or 2 utilities. There is a global market for these technologies, and that’s part of why in the last 6 months you’ve seen the entrance of Google, Oracle, Cisco, Microsoft.

You said that there is something like 3,000 utilities in the U.S.  Are there any concerns about compatibly, interconnection, or standards clashes?

Interoperability standards are the #1 challenge of smart grid. There are a lot of companies that are waiting on the sidelines right now that can’t get funding until everyone knows that the standards are. Right now it’s the trend to be an end-to-end smart grid company, which means your company can provide solutions all the way from generation, through transmission, to the home.  But, this will likely change, and companies will begin to focus on a particular area, what they do best.  So, having interoperability standards is really critical to the success of all these companies.

Amelia: How will the smart grid impact the environment?

David: From a high level perspective, electricity generation is the number one cause of carbon emissions and greenhouse gases. So, any reduction you can make in terms of how much coal and gas and whatever else is burned will have a huge impact. I think that’s something that’s been recognized by leading scientists across the world. Conservation is really the number one thing we need to do to counteract the carbon problem. So, smart grid is about making the grid more efficient. But just simply using less power is going to be critical. Particularly on the consumer end where you have appliances and next generation cars.   We’re going to have to find ways to continue to have the same quality of life because I just don’t think American consumers are going to want to sacrifice one iota of their quality of life or their consumption patterns.   We’re going to have to find ways to deliver the same services and products, but using less energy.  In my view, that’s number one.

Smart grid is a lot about: How do you reduce customer’s demand without affecting their lives? There are a lot of smart solutions that have been discussed. Things like hot water heaters – it’s really expensive to heat water and if we could find better ways to time when those heaters are heated or use those heaters for energy storage by turning electricity into hot water – so, figuring out more precisely how to do all these things has tremendous environmental impacts.

Look at electric vehicles for example. Americans have historically gotten their electricity for dirt-cheap. Look at the rate that Americans pay as a percentage of their overall income versus other countries it’s laughable. But, the system is so antiquated. I mean what other system can you consume something and not get the bill until a month later? It’s like going to a gas station, filling up your car, having no idea how much gas you put in, or what the price was. You wouldn’t stand for that!  The reason we do stand for it – not knowing how much we’re using or on what – is because our energy costs are so cheap.

But, energy costs are going to escalate. They have to. The global population has doubled in the last 50 years and we’re going to be at something like 9 billion by 2030. We’re going to be adding another 2 or 3 billion people to the planet, and the planet has limited resources. What’s that going to do to your energy costs? There’s an interesting conversation going on about how the world is transitioning from an age of oil to an age of electricity.

Amelia: In the U.S. what raw material is electricity typically generated from?

Fifty percent of our energy comes from coal, 3% is renewables, which includes hydro, and that leaves the rest to natural gas and nuclear … you can find these numbers.

Yes, as you were talking about the possible transition from oil to electricity, I was just wondering what underlies the electrical system – where does our electricity come from?

David: Oil is really not used to make electricity today. But, oil is used to drive, for transportation. One interesting thing is that if you charge electric vehicles using coal, which is the dirtiest fuel source of electricity you have 40% less emissions than if you use petrol, oil. That’s one of the reasons to be excited about electric vehicles. That politically speaks to the left in most countries – usually the left is concerned about climate change, and the right is concerned about energy independence – but, the electric vehicle wins arguments on both sides of the aisle. So, politically there’s going to be a lot of momentum for them. Pretty much every major auto manufacturer in the world is now committed to delivering an electric vehicle in the next 2 to 5 years.

In the public consciousness I think there’s been a lot of exposure to climate change and things like organic farming and trying to live a cleaner and natural life, and concerns about population growth and limited resources. But, I think on an individual level it’s actually quite challenging to know what the best decisions are to support your interests. Even if you care about helping the planet I think modern life is so stressful that you do end up buying that bottle of Fiji bottled water. On the one hand you’re going to yoga class, and you’re doing what you can. But, on the other end, you could be stuck at an airport, you’re laid over and you eat at McDonald’s. We’re all kind of in that – we care, but the extreme measures that we would need to take individually don’t seem to fit in with the demands of modern life.  We’ve all tried to recycle every piece of paper in the house, but that’s not the answer. We can probably give ourselves a little bit of a break there, and focus our energy someplace else. That gets back to why I believe in smart grid, because it’s about infrastructure change.

Amelia: You mention in the report the relationship between smart grid and other green energy technologies, like solar and wind.

So important! One of the things that I wrote is that renewable energies will remain niche until there’s smarter infrastructure to support their introduction. Essentially it’s a scale management problem. These technologies are battle ready. Solar energy is approaching grid parity now in many markets in North America. In Italy the cost of electricity is about 30 cents per kilowatt hour; it’s 5 cents in South Carolina, but it’s also close to 25 cents in many parts of California and New York. At that price solar is cost competitive, and you are starting to see a much greater adoption and penetration of solar photovoltaics especially.
There’s still a scale management problem that has to be addressed and that’s really what smart grid aims to address. It needs to be as simple as when you buy a new computer and you go into your office the computer just automatically recognizes a network. That’s what needs to happen with distributed generation. Right now the cost of installing a solar panel is half the cost of the overall project, so the installation costs have got to go down.

In terms of renewable energy it’s important to understand that there are two kinds – bulk, like a wind farm, and distributed, like installed in different homes and properties. The bulk energy connects at the transmission level, so that’s easy to do, that doesn’t really create any problems for the grid other than the fact that renewable energy is variable, intermittent.  At the distribution level there’s going to be a lot of intelligence requirement to understand how these distributed energy sources – like home solar panels – can be integrated.

Separately from smart grid, there is also “micro grid” which is a completely self-sufficient grid. It gets all the power that it needs from the sun, the wind, and whatever else to generate power at the source and then whatever it doesn’t use it stores. It’s completely independent of having any wires or connection to the grid. Those are really cool. There’s probably going to be amazing demand for those technologies in countries in Africa, parts of India, and other parts of the developing world. But, they are also great in North America. You can still be connected to the grid, but you could also have a micro grid where the Smiths, the Johnsons, the Millers, the Patelsdo a deal between 10 families to share generation sources and storage and if the grid ever experiences a blackout.

It’s expected that there will be more blackouts in the next 5 to 10 years, the infrastructure is getting old, a lot of people in the industry are retiring. There are not many people in North America with expertise in both communications and power. There’s a lot of big problems right now in terms of the state of the grid and who’s going to operate it, but this is what smart grid is really hoping to fix.

Amelia: Is there anything else I should ask?

David: No, I think that’s good for now. I’d love to hear how your project is going as you work on it. Let me know how it all unfolds – keep me in the loop.

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Infrastructure, Systems