Smart grids need smart rules and smart markets

With its ability to manage two-way flows of electricity and integrate renewable and distributed supplies into power systems, smart grid technology offers tremendous potential to improve energy management and accelerate carbon reduction. However, the complex nature of energy markets means that successful implementation demands more than technology alone.

Different elements of the smart grid will enable a range of stakeholders, from electricity generators and supplier companies to end-users – the customers – to use power more efficiently.

For customers, installing smart meters not only offers more convenience in the ability to operate heating and other domestic systems remotely, but also the possibility of making energy, and therefore cost, savings by being able to view and control the amount of energy they use.

Households or businesses that have installed individual solar panels or wind turbines will be able to use smart meters that permit two-way energy flows to sell excess power back to the grid. And as smart-meter technology becomes more widely used and power utilities introduce variable pricing, consumers will be able to cut their bills by avoiding power use at peak times.

Smart-grid technology allows you to actively and intelligently manage the network

In Italy, an hourly-based tariff system allows people to alter power use to take advantage of off-peak prices, says Roland Vetter, head of research at CF Partners, which invests in carbon reduction and clean-energy projects. “This change in tariff structure is an essential pre-requisite to incentivise people to alter their behaviour,” he says.

Meanwhile, utilities can use smart grid technology to help balance demand and supply, reducing their reliance on more expensive and polluting “peaker plants”, and enabling integration of intermittent renewable sources of power into the supply.

In response to real-time shifts in demand and supply, companies could, for example, change the output of a wind farm, charge a storage device or export more power to the network.

“Smart-grid technology allows you to actively and intelligently manage the network,” says Philip Taylor, professor of electrical power systems at Newcastle University and director of the Newcastle Institute for Research on Sustainability. “You can pull more levers in real time to make the network accommodate more energy.”

In addition to these benefits, Michael Valocchi, energy and utilities industry leader for IBM’s Global Business Services, sees a new trend emerging in smart-grid technology – the use of analytics. “These software technologies are harder to touch and feel,” he says. “But advanced analytics applications are coming into play because we’ve started to get the data points out there from information from meters and devices that have been put out on to the grid.”

Using analytics, companies can improve reliability and customer service by gaining a real-time picture of events, such as outages, so they can send crews to the right place at the right time. And for consumers, analytics helps interpret consumption patterns and show how using power at different times can reduce energy bills.

However, technology is only one part of how to reap the benefits of the smart grid. Because of the complex market structures and policy frameworks of the power sector, transforming energy systems will require more than hardware and software.

First, the regulatory environment influences the speed at which the infrastructure can develop. “For the business case, the regulatory framework is important and we have a fair amount of uncertainty, which holds back investors,” says Mr Valocchi.

The structure of the market also influences how difficult or easy it is to attract investment in smart-grid technology. “In markets that are vertically integrated, such as in North America, it can be easier to generate a business case for investment in smart grid,” says Albert Cheung, practice head for energy smart technologies at Bloomberg New Energy Finance.

In the UK and Europe, however, the picture is much more fragmented. The unbundling of the electricity system has split stakeholders into different functions, from companies that own the wires to supply companies that buy and sell electricity, and power generators.

“What that means is we have a broken value chain,” says Professor Taylor. “You have this potentially large [smart-grid] investment that delivers value across the chain, but the question is who’s going to step forward and pay for it?”

One solution is to use alternative business models. Professor Taylor cites the possibility of consortium ownership of assets or financial arrangements that allow for cross payments between stakeholders. “But it’s an added layer of complexity, so you need the business models as well as the technology,” he says.

Adding to the structural complexity of energy markets are cultural differences in approaches to energy efficiency. This varies from country to country, says Mr Vetter.

In Germany, for example, consumers have a high awareness of the need for energy efficiency, while in the UK, use of even basic infrastructure, such as insulation and boiler upgrades, is not yet widespread.

“The impact [of the smart grid] will depend on users’ willingness to adopt new technologies and take an active role in managing their energy demand,” says Mr Vetter. “I therefore expect different outcomes for different countries.”



For some people, references to “the smart grid” conjure up images of a single, powerful high-tech energy network. The reality, however, is that the smart grid consists of a range of technologies and systems, from smart meters to storage capabilities, hardware, such as sensors, data architecture and analytics software.

Even within power metering, different forms of technology are available, ranging from AMR – automated meter reading, which provides simple one-way communication and saves utilities money on meter reading costs – to AMI, or advanced metering infrastructure, which provides for two-way communication.

AMI allows for better analysis of demand and creates opportunities for consumers to use power at cheaper times, says Roland Vetter, head of research at CF Partners. “This is where the high value-added data management can come in and links in with the ‘smart-grid’ idea,” he says.

Investments in the various smart-grid technologies also vary. Of the $13.9 billion that utilities worldwide spent on smart-grid technologies in 2012, about half went on smart metering, and related infrastructure and services, according to Bloomberg New Energy Finance.

The next largest category was distribution automation, followed by integrated demonstration projects in areas such as demand response, home energy management and smart electric vehicle charging.

Different technologies are also needed to cope with energy challenges that vary widely in scale, particularly when it comes to integrating renewable energy into the grid.

“It’s one thing to add huge wind farms in Spain,” says Michael Valocchi, of IBM’s Global Business Services. “That’s a different challenge from putting rooftop solar panels on houses in southern Europe.”

In fact, the term “smart grid” describes not just a wide range of technologies, but also the way those technologies are integrated into a system, says Philip Taylor, professor of electrical power systems at Newcastle University and director of the Newcastle Institute for Research on Sustainability.

“It’s a networked, dynamically interacting suite of technologies that is spread out over a large geographic area and integrated through the network, which is distributing the power, or through the communications networks,” he explains.