The 2012 Smart Market
David Ferris and Andy James, Smart Grid Group, Osborne Clarke
Sheeraz Haji, Cleantech Group
The vision of a top down, coordinated and integrated Smart Grid revolution driven by government regulation, incentives and targets has so far failed to materialise. In its place, a gradual evolution of products and services is emerging, more akin to the consumer-driven evolution of the internet than one grand state-led design with common standards.
The emergence of one pre-eminent ‘smart’ technology focus also, for the moment at least, looks unlikely. Instead we’re seeing all market participants, whether large multinational or entrepreneur, rolling out innovative products and technologies that work for their target market, provide first mover advantage, respond to consumer demand and, importantly, actually deliver the true beginnings of a Smart Grid.
In the last six months, Osborne Clarke & GP Bullhound hosted Smart Grid round table events on both sides of the Atlantic, bringing together market leaders to look at activity in Europe and the US. In each case Sheeraz Haji, CEO of Cleantech Group, provided introductory market insight.
Cleantech Group, creator of the i3 market intelligence platform, has been tracking Smart Grid investment during that period and back to its inception. They record that since 2007, a total of $1.4 billion of venture capital has been invested in Smart Grid across 125 financing rounds. More recently;
- 2010 and 2011 both saw over 30 venture rounds in Smart Grid, 34 and 32, respectively. (Previous yearly high was 23).
- Smart Grid has been a hot sector for mergers and acquisitions lately. In 2011, 17 acquisitions were targeting Smart Grid companies. Some notable deals:
- Toshiba acquired Landis+Gyr for 2.3 billion
- Schneider acquired Telvent for $2 billion
- Siemens acquired eMeter for $220 million
- Power and engineering corporations like GE, Schneider, Siemens and ABB have been very active in this field, competing to vertically integrate within the smart grid and energy efficiency sectors. In 2011, ABB made eight of such acquisitions, while Schneider and GE both had seven.
Disruptive Solution: Demand Response or Demand Behaviour?
The creation of a true smart energy grid is substantially more than the roll out of smart meters to consumers. Although an important part, what smart metering does is facilitate the collection of data on which demand response and demand behaviour technologies operate the other critical elements to the Smart Grid jigsaw.
Demand response is the technology that matches energy supplied to that actually demanded, rather than constantly supplying for peak levels as is traditionally the case. Demand behaviour is the technology that influences consumer demand from the ‘gadget’ that enables energy users to vary their demand to take advantage of variable energy supply and tariffs to automated demand response products that achieve this result.
Six months ago in Silicon Valley much of the debate on the future for Smart Grid centred on whether demand response or demand behaviour technology would prove to be the area of disruptive solution. One market commentator’s controversial view suggested that because demand behaviour is all about gadgets, it would be unlikely to drive real energy savings.
This doesn’t appear to be the case in terms of investment or deployment. People are investing in and deploying demand behaviour technology, and it’s having an impact. Take OPower’s impact in the US, where their demand behaviour services produced more than 300 gigawatt hours in energy savings, saving US consumers more than $30millon on their energy bills. Similarly, Trilliant’s activity in Ontario with partner Hydro One Networks, where they achieved time of use billing for 1.05million customers, which allows for different electricity rates at different times of day.
Indeed, in the last six months the debate has moved on from response vs. behaviour. It’s unlikely that either of these courses will, on its own, be the solution. Instead, a combination of the two will engage the largest number of participants through a range of options designed to achieve the ultimate goal of a more efficient energy system. Recent developments suggest that demand from domestic and commercial customers keen to manage their energy bills in the face of an upward trend in energy prices will ultimately call for a range of technologies and services that deliver a Smart Grid.
One of the defining features of that Smart Grid is that it will more likely be an aggregation of multiple micro Smart Grids than a uniform, top down solution. These micro grids will be focused on localised generation, linked to the energy requirements of a particular community or building, or similarly that community or building implementing power management technology to improve energy efficiency and power management.
PowerOasis’ launch of a Smart Grid platform for telecoms operators is a good example of a micro Smart Grid in action. Their product allows either a single base-station site (a truly micro grid) or an entire telecoms network, to optimise energy consumption from the grid, avoiding peak-hour tariffs and therefore reducing overall operating costs.
The system takes advantage of the cost /performance advances in lithium-ion battery technology to power the network during peak-hour and re-charge at low tariff grid rates. The system enables the operator to further reduce energy operating costs by combining solar power at the sites. John O’Donohue, CEO at PowerOasis commented: The PowerOasis Smart Grid controller enables a network operator to reduce the network CO2 by 50% and with Smart Grid energy arbitrage get a payback within two years.
Honeywell’s Thames Valley Smart Grid demand response project with Scottish and Southern Energy (SSE) plc is another example of micro grids in action. The project will connect up to 30 commercial and industrial buildings in the Thames Valley area, and temporarily reduce their electricity consumption when overall use spikes. This will help balance supply and reduce the strain on local networks and substations, helping SSE plc shave approximately 10 megawatts of energy use when necessary. It will also help building operators to decrease their energy use, utility bills and carbon dioxide emissions.
What is driving the creation of a Smart Grid is a clear business focus on engaging with the customer or end user, identifying their requirements and designing solutions.
Industry and regulatory barriers
One of the key hurdles to a centrally-led revolution in the delivery of a Smart Grid is the structural disincentives built into the market. With a European market still subscribing to a regulated asset base model for Utilities’ expenditure in most jurisdictions, there is currently no built-in incentive to recognise moves to reduce energy use and drive efficiencies in infrastructure.
Arguably, only with an energy efficiency-based incentive structure for utilities will the interests of the different elements of our energy ecosystem be properly aligned so that Smart Grid technology is genuinely adopted to drive such efficiency. At the moment, Smart Grid activity by utilities like British Gas, who have already rolled out 400,000 smart meters, is generally in spite of the regulatory environment and not because of it, and driven largely by a culture of customer service.
Perhaps we will see increasing speed of developments in Smart Grid and storage technologies, but are we doing all we could to create an environment that maximises reward for such development and the adoption of those solutions? As Alex Betts, a partner at Climate Change Capital commented: We can see the need for a Smart Grid to get the best out of renewables, to enhance energy efficiency and to deliver greater energy security. However, there are significant issues to overcome, such as standards and economics.
The long answer could be in the creation of some form of pan-industry perspective which can then look beyond all the individual demands to create the optimal macro Smart Grid solution. This is on the agenda of governments that are looking at Smart Grids and energy management solutions. But in the absence of that (and the absence of any realistic short term prospect of it), companies are pressing on regardless.
Looking forward, we expect the Smart Grid and storage technology markets to continue to grow and flourish in line with retailer and consumer engagement (jointly and separately). This will drive our energy grids towards increasingly sophisticated operating systems which, in their aggregated form, will be Smart Grids long before a solution for the macro vision of the Smart Grid is defined.
This market insight report was drawn from discussions held at two Osborne Clarke/GP Bullhound Smart Grid dinners, involving leading Smart Grid executives from sector participants including Amadeus, Battery Ventures, British Gas, Cisco, Climate Change Capital, ESB NovusModus, Exalt, GE Energy, Hewlett Packard, Honeywell, IPL, Oracle Utilities, OPower, Ovo Energy, PowerOasis, Tendril, Trilliant, UK Power Networks,