The Smart Grid Opportunity

smart_electric_grid_pylonsElectrification was named the "Greatest Engineering Achievement of the 20th Century" by the U.S. National Academy of Engineering. The smart grid may soon prove to be the greatest engineering achievement of the 21st. Smart grids use information technology (sensors, communication networks, and user interfaces) to produce a wealth of data about the way electricity is consumed--in unprecedented high resolution. By applying this data and technology, we can revolutionize the way we consume electricity.

New data also means a new balance of power between utilities, regulators, and ratepayers. Each group will have its own motivations for wanting the smart grid, but they'll all likely want a piece of the action. I explain why below--and how entrepreneurs and investors in each of the three groups might deploy new technology on massive scale for a positive purpose.

getting funded badgeWhy Utilities Want the Smart Grid When it comes to matching demand, utilities are reaching the limits of their supply--like spinning up gas-fired peaker plants during mid-summer afternoons when everyone jacks up the air conditioning. Getting approval to build more peakers like this is tough, and there may not be sufficient transmission lines to move their power anyway. The smart grid will enable utilities to exert control over demand to match existing supply. The sophisticated revenue models they will employ to shape customers' behavior, such as time-of-use electricity pricing and demand response (where ratepayers are paid to pare back their consumption during peak periods), will require customers to become better educated about their usage and will encourage cooperation with utilities. The payoff: Avoiding stiff capital expenditures for additional peaking plants as well as the trading risks associated with paying spot prices for electricity on the open market. In other words, they'll make more money. Finally, the smart grid will enable utilities to offer better customer service, such as less intrusive meter reading and faster response to outages, which may become a competitive necessity in deregulated service territories.

Why Regulators Want the Smart Grid Regulators trying to meet policy goals want better tools to measure compliance. For example, some regulators have "decoupled" utilities' profits from being solely based on the sale of electricity; they have enabled utilities to also earn profits by promoting energy efficiency. Today, utilities report these efficiency programs in indirect ways, like the money they spent to run ads for efficient appliances or the subsidies they paid out for compact fluorescent bulbs. Instead, regulators would prefer to measure utilities' actual performance on reducing consumption and pay out accordingly on that basis. The smart grid will make it easier to measure energy savings--and also to monitor progress on other programs, such as renewable portfolio standards.

Why Ratepayers Want the Smart Grid Ratepayers want the smart grid in order to better manage their energy expenditures--in absolute dollars and relative to their peer group. Different classes of ratepayers have different motivations. For commercial and industrial electricity users, the argument is economic: Companies that spend a lot on electricity, like silicon ingot producers, grocery stores, and datacenters, are often already required to participate in time-of-use billing programs from their utilities, and they're adopting smart grid technology early in search of greater efficiency--and lower costs. For brand marketers, it's all about image: These firms are advertising their energy-efficiency initiatives to make data-driven claims about social responsibility and regulatory compliance, and see the smart grid as a route to proof of their efforts. For residential ratepayers, it's a mix of the two. The smart grid may be a way to save money--for example, by upgrading an old appliance to an energy-efficient model once its energy costs are known. But it also may be part of living an eco-conscious lifestyle, hand-in-hand with choosing to be served by renewable energy or installing one's own net-metered solar generating capacity.

There are also some specific technology segments have the potential for significant smart grid impact:

  • Easy-to-install, low-cost sensors to measure energy use with high resolution
  • Networked power electronics for everything from solid state lighting to solar micro-inverters
  • Grid-scale electricity storage to buffer transients in supply and demand
  • Electrified-vehicle infrastructure including batteries and charging stations
  • User interface and product design to make energy efficiency compelling to the mass market

Leading smart grid entrepreneurs will deliver value to utilities, regulators, and ratepayers. A detailed understanding of who really wants the smart grid and why they want it is essential to success in this market.

Matt Trevithick joined Venrock in 2004 after a 4-year investigation of energy-related applications of nanotechnology. Matt previously co-founded and sold two software companies--LiquidMarket, a product search and comparison shopping service, acquired by NBC Internet in 1999 and Flash Communications, a developer of instant messaging technology, acquired by Microsoft in 1998. In addition to his entrepreneurial efforts, Matt worked in project finance and currency trading in Tokyo, London, Singapore, and New York. As a co-founder of two acquired companies, combined with his energy and finance background, Matt has an in-depth understanding of the entrepreneur and what it takes to get across the finish line.

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