TODAY’S STUDY: WHAT’S NEW ON THE SMART GRID

Smart Grid: 10 Trends to Watch in 2013 and Beyond

Bob Lockhart, Neil Strother, Marianne Hedin, Kristoffer Torvik and Thayer Hirsh, 1Q 2013 (Navigant Research)

Smart Grid Market View

Smart grid markets are taking their own sweet time to mature. While technologies such as smart metering have been around for more than a decade, it is tough to claim that any aspect of the smart grid is a mature market. Home energy management (HEM), which appeared set in concrete 2 years ago, may now be the most chaotic corner of market. Currently, there is no consensus approach for communications, devices, or cyber security.

Smart metering has received much of the media coverage for smart grids but, as this white paper describes, it appears headed for a trough before revitalizing in 2014 or 2015. Meanwhile, utilities demonstrate considerable interest in demand response (DR) programs, even if those utilities have not understood how to effectively engage customers to opt-in to DR.

Navigant Research sees much revenue potential for smart grid vendors throughout this decade, but it is not always clear – even to industry insiders – where the lion’s share of that revenue will go. However, some success themes recur in researching these markets, including the following:

» Sell into utilities’ business problems, not technical solutions. In plain talk, go after the budget of the chief operating officer (COO), not the operations manager.

» Demonstrate understanding of business issues. Do not rely upon clever market messaging for success in an industry that is more than a century old.

» Recognize that utilities have limited funds for their smart grid programs and understand that when a utility acquires one technology, it has consciously decided to put some other investment program on the shelf. The smart grid market remains wide open, with much investment still planned.

Although Navigant Research forecasts that utilities will invest nearly half a trillion dollars on smart grid technologies throughout this decade, that grand sum is not nearly as much as utilities would like to spend – or vendors would like to sell. Technical excellence and innovation remain important to push the smart grid forward, but the blocking and tackling of solid business cases and sales execution are most likely to bring rewards to vendors in this market.

The following section presents 10 key smart grid trends to watch during 2013 and beyond.

Navigant Research selected these particular topics because they stood out during 2012 research projects as most likely to have an ongoing business impact for smart grid vendors.

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10 SMART GRID TRENDS TO WATCH

Smart Grid Technology Spending Remains Robust

Smart grid technologies overall represent a large market, and one that is likely to continue growing throughout the decade. Chart 2.1 shows the cumulative revenue forecast from Navigant Research’s 1Q 2013 report, Smart Grid Technologies. Global smart grid technology revenue is forecast to reach a cumulative total of $494 billion during the period from 2012 to 2020. The compound annual growth rate (CAGR) during that period is expected to be 10% – a healthy CAGR for a market approaching half a trillion dollars.

Note that the growth of smart grid technologies is unlikely to be uniformly distributed across either regions or technologies. The most obvious conclusion from Chart 2.1 is that transmission upgrades are likely to contribute a disproportionately large portion of smart grid technology revenue. Within transmission upgrades, a cumulative $256 billion – or 51% of all smart grid investment – is forecast to be spent on high-voltage direct current (HVDC) transmission upgrades.

Drilling further into that number, $114 billion is forecast for HVDC investment in Asia Pacific between 2012 and 2020. The two typical HVDC use cases described below demonstrate that HVDC investment has diverse drivers:

» Transmission of power to load centers over long distances from remote generation sources, such as China’s Three Gorges Dam project.

» Integration of renewable energy into grids, where solar or wind generation may be distant from load centers. Underwater transmission from offshore wind farms also requires DC transmission – even for short distances – because of capacitance issues that arise when alternating current is used for submarine transmission.

Meanwhile, distribution automation is expected to contribute $78 billion in revenue through the forecast period. Key drivers include increased grid efficiency from energizing lines through a narrower voltage range; integrating the variable inputs from renewable energy sources; and integrating distributed generation (DG) inputs such as residential solar generation. If not carefully managed, these inputs can destabilize a grid.

Smart metering, for all its hype, is anticipated to contribute approximately 10% of all smart grid revenue from 2012 to 2020. While total revenue of $47 billion is nothing to sneeze at, Navigant Research sees the smart metering market as fiercely competitive and not the most promising for new market entrants. The number of well-established smart meter vendors competing for the same business is likely to apply significant downward pressure on smart meter pricing.

Geographically, smart grid technology investment correlates strongly to the developmental state of a region’s – or nation’s – economy. Emerging Asian economies such as China and India contribute a disproportionately large percentage of Asia Pacific revenue. In fact, some Asia Pacific nations with populations well in excess of 100 million barely figure in smart grid revenue forecasts. In the meantime, Africa, with nearly 1 billion inhabitants, contributes only 9% of global smart grid revenue, with much of that revenue forecast to occur during the second half of this decade.

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Smart Meter Shipments Continue to Decline

Smart meter shipments will continue to decline in North America during 2013 as the end of American Recovery and Reinvestment Act of 2009 (ARRA) stimulus funding takes hold. The ARRA Smart Grid Investment Grant (SGIG) programs required most deployments to be completed by the end of 2012, and Navigant Research’s tracking of deployments indicates most recipients hit those targets or came close. The year-to-year drop from 2012 to the end of 2013 is expected to be almost 35%. Navigant Research is forecasting another difficult year in 2014, when shipments are expected to decline another 3.3% year-to-year. For smart meter vendors, the short-term dismal picture will improve by 2015, when shipments are forecast to rise by 3.3% year-to-year. This increase will be followed by basically flat shipments for several years, with some recovery of growth at the end of the period.

In the Asia Pacific region, massive smart meter rollouts in China will continue in the near term as the country endeavors to fulfill its goal of deploying some 300 million smart meters by middecade. This huge undertaking will drive the forecast in the first half of the decade before it starts to diminish toward the end of the decade.

Smart meter deployments in Europe will start their growth phase in the middle part of the forecast period, but will not quite offset the steep decline in North America and the moderation in Asia Pacific as Chinese deployments wane. Worldwide growth will resume in the second half of the forecast period as European deployments continue and smart meters make inroads in Latin America and the rest of Asia Pacific. Overall, the global smart meter market is expected to grow at a CAGR of just under 5% between 2010 and 2020.

Home Energy Management Gains Momentum

The market for home energy management (HEM) products and services will gain momentum in 2013 before long anticipated growth kicks in mid-decade. Several key forces will help drive this growth: time-of-use (TOU) pricing, DR programs, an eventual rebound in new home construction, and consumers looking for new ways that new technology can help hold down energy costs. In addition, non-energy service providers, like cable and telephone service providers, have entered the market and will help drive awareness and demand for HEM products and services.

Nevertheless, growth potential will be tempered by consumers willing to spend only so much on HEM products, as well as those unsure of the return on investment (ROI) in the face of unsubsidized systems that can cost $200 or more in some cases. Navigant Research expects many utilities to enter the HEM market cautiously.

Two regions where the bulk of HEM growth will occur are North America and Western Europe, where regulatory mandates for greater efficiency and conservation are strongest. HEM revenue will grow from a relatively low base of $93 million in 2011 to more than $2 billion in 2020 at a CAGR of 41%. In the rest of the world’s regions, revenue volumes will be lighter. HEM product purchases will mostly be for small trials or will be spurred by limited deployments based on regulatory mandates.

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Demand Response Shifts to a Flexibility Market

The DR market is evolving from primarily serving a capacity market with a focus on curtailing electrical demand during peak periods (typically only a handful of hours per year) to continuously balancing supply and demand of power on the grid to participate in a flexibility market. Some observers are referring to this new development as “DR 2.0,” while others are calling it “fast DR” or “grid balance.” One of the major drivers is the need for ongoing adjustments to correct small, frequent changes in the power system on a second-by-second basis. These adjustments become imperative as more and more utilities incorporate intermittent renewable resources like wind and solar power, which have variable and very uncertain outputs, into the grid.

Flexibility Market

The flexibility market involves all types of services that a system operator must procure in order to manage ongoing, real-time system requirements. It is served by operating reserves, reactive support, sync reserves, and ancillary services. Traditionally, these services have been provided by generators; however, with the right technology, demand-side resources are capable of offering such services, especially ancillary services. Among the different ancillary services, minute-to-minute regulation (must already be online to respond immediately when called upon to increase or decrease load and is certified to do so at a specific capacity/minute rate) and spinning reserve (addresses a supply and demand imbalance within the first few minutes of an emergency event or unforeseen load swings) are considered to provide the highest value.

Ancillary services have primarily been provided by third-party aggregators, (e.g., EnerNOC), but some progressive grid operators, including PJM Interconnection, Electric Reliability Council of Texas (ERCOT), New York Independent System Operator (NYISO), Midwest Independent System Operator (MISO), and Ontario’s Independent Electricity System Operator (IESO), have already begun to provide load from these types of services. Likewise, vendors such as ENBALA Power Networks and Calico Energy Services are offering technology to enable grid operators and utilities to offer ancillary services. These approaches can take advantage of the inherent flexibility that exists with many electrical loads (e.g., aerators, pumps, and chillers) by continuously making small automated adjustments in the electricity use of this equipment at commercial, institutional, and industrial sites. The company is able to do so without adversely affecting operating processes or changing the overall energy consumption.

Several large U.S. industrial facilities contribute load by providing spinning reserves or regulation. For example, Alcoa in Evansville, Indiana has invested in advanced metering, data visualization tools, and integrated control systems to allow its plant operators to take advantage of ancillary service opportunities. Alcoa contributes 70 MW of industrial process load (e.g. smelting) to MISO.

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Benefits of Ancillary Services

Although many technical and regulatory barriers exist, there is significant potential for ancillary services to contribute flexibility to the power system while offering a high degree of reliability.

As intermittent renewable resources increase their contribution to energy supplies, the need for flexibility on the grid will grow in order to maintain electric grid reliability and security. Moreover, because of improved and widely available communications systems, including open standards such as OpenADR, and the availability of measurement and verification tools for realtime telemetry and settlement, this type of DR can provide fast response – both to system operator commands and to price signals. In short, ancillary services with fast response are increasingly being seen as the next frontier of DR.

Adoption of Automated Demand Response Picks Up

Automated DR (ADR) is not a new concept in the DR market. In the United States, it has been used by utilities for many decades, especially for their commercial and industrial customers to address the need to stabilize the supply and demand of electric power on the grid. In fact, in many instances, automation has been the preferred approach in order to improve the reliability, predictability, and speed of load curtailment during peak periods. It has benefitted both utilities and consumers since utilities can balance the grid effectively and electricity consumers can earn a lucrative bonus every year by allowing their utilities to automatically reduce their load during peak periods.

Prospects for ADR in the Residential and Small-to-Medium Size Business Sectors

Although ADR has been considered an attractive and viable alternative to conventional and manual DR, its growth has been somewhat stymied by the significant expense of retrofitting buildings with the necessary technology to support ADR programs. To enable a site for ADR can sometimes cost as much as $100,000 or even more, depending on the type of facility, type of operation, and type of hardware and software that need to be installed. However, with the introduction of new advanced technologies, including advanced smart meters, two-way smart thermostats, smart home appliances, new control switch technology, and open standards like OpenADR, costs have been dropping significantly and are expected to continue to do so in the coming years. In fact, this more favorable economic situation has encouraged utilities to seriously examine new DR opportunities in both the elusive small-to-medium size businesses (SMBs) and the challenging residential customer segments. So far, these two customer groups have not been the focus of attention for ADR. But this is about to change, as power suppliers are looking for ways of increasing their peak reduction or grid balancing capacity.

Utilities that have invested in smart meters are looking for ways to take advantage of those networks in residential homes for ADR, while other utilities are turning to the Internet as a path into the home or small businesses for automated load control.

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Promising Market Growth across the Globe

The United States represents the largest ADR market, but other countries are gradually catching on and pilots have been launched in Canada, the United Kingdom, France, Israel, Australia, China, and Hong Kong. As these pilots demonstrate the increased cost effectiveness, predictability, reliability, and responsiveness (speed) of ADR, interest in automation will most likely spread across the globe, especially in countries that are grappling with increasing stress on the grid – either from rising demand for electricity or from the need to integrate intermittent renewables like wind and solar power onto the grid. Navigant Research expects that power suppliers outside the United States will leapfrog directly to ADR as they begin to adopt DR rather than investing their resources in a traditional and manual approach.

In 2013, Navigant Research estimates that 41,315 facilities in the world will be enabled for ADR. Because of a very robust CAGR of over 35% for 2012 to 2019, the total number of ADR sites will increase more than fivefold to 226,203 on a global basis by 2019. Although North America will represent the lion’s share of ADR sites throughout the forecast period, this region is expected to lose its leading position over time as other countries ramp up their use of ADR, especially in Asia Pacific. By 2019, Asia Pacific is expected to account for almost 35% of total ADR-enabled global sites – up from less than 0.5 % in 2013. North America’s share, on the other hand, is expected to drop sharply from almost 90% in 2013 to 53% in 2019.

Utilities Rely More upon Real-Time Grid Analytics

In the distribution control center of the future, the operator has complete and current situational awareness of tens, hundreds, or thousands of feeders, facilitated by stackable monitors, colorcoded visualization, and the capability to quickly zoom in and out of hot spots and alarms. Like a pilot in the cockpit, the grid operator will rely on a system that utilizes weather forecasts, measures wind speeds and insolation data, and uses a network model peppered with real-time supervisory control and data acquisition (SCADA) points, asset information, and geographic information system (GIS) data. These systems will allow state estimation and simulations supporting decisions in real-time at the distribution level. While centralized control and decentralized actuators are automated for optimal fuel economy and high quality of service, the operator can focus on keeping line crew safe and the customers’ lights on. The utility control centers will rely on a distribution management system (DMS) as a graphical interface and a platform to integrate modular advanced analytics applications.

Pioneering utilities are already relying on real-time grid analytics to manage their grids. Navigant Research recently chaired a conference where one subject matter expert from a large investor owned utility (IOU) expressed that he wanted to share his thoughts on the IOU’s smart grid distribution automation deployments. The mere concept of utilities sharing such information is a new trend in itself. Grid analytics are integral to the successful large-scale conservation voltage reduction (CVR) deployments. Historical load profiles are dynamically augmented by real-time data from the intelligent devices in the field, allowing control loops to hit the targeted voltage set points with greater accuracy and ultimately increasing the savings.

As the grid becomes more dynamic due to the prevalence of electric vehicles (EVs) or DG, distributed energy resource (DER) analytics come into play. Solar alone is now a $100 billion industry annually and the penetration of DG is already significant in many countries. In Germany, renewables constitute 25% of the power needed; the goal is 80% by 2050.

Roughly 1.2 million PV systems (31 GWp) are installed in Germany, of which nearly 70% is connected to the low-voltage grid. During some hours of 2012, PV contributed 40% of peak power demand.

There are examples of PV capacity in Germany exceeding peak load by 900% in high penetration areas, causing reverse power flow over transformers and a rise in voltage exceeding tolerance band.

Smart utilities are exploring ways to solve voltage (and frequency) issues via control strategies, rather than by curtailment alone. On the infrastructure side, the solution includes more intelligence further downstream. Reliable and interoperable distributed voltage regulation equipment will supplement intelligent inverters. Cost-efficient medium-to-low voltage online tap changing transformers (OLTCs) housed in standard form factor packaging and type tested for an average of 700,000 switching operations have been launched recently. These robust OLTCs can be switched remotely every 15 minutes for 20 years. Finally, grid analytics are necessary to be able to take full advantage of the active low-voltage system. IT/OT requirements are likely to include dynamically updated systemic overviews of DER, weather, load, control I/O, and performance indicators.

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Disaster Recovery and Service Restoration Become More Efficient

In the event of outages, utilities rely on operational systems to notify customers of causes and estimated restoration times. Next-generation outage management systems (OMSs) will be integrated with DMS to provide additional inputs for visualization and decision support that can be beneficial, particularly when addressing large outages and major events.

The goal is to minimize customer impacts by reducing restoration time. Major events initiate the execution of disaster recovery plans. Disaster plans are being revised and improved, especially after recent catastrophic events have caused massive amounts of damage and widespread outages that make management an overwhelmingly difficult problem. Utilities are looking to IT/OT integration and increased mobility to assist with outages.

Advanced workforce management (WFM) solutions that enable utilities to forecast, schedule, dispatch, and monitor the progress of outage crew have gained increased interest. Desired capabilities include:

» Transparent and accurate forecasting of crew and work requirements

» Division of the disaster area into zones by priority, easy allocation of appropriate resources, and distribution of work for optimal efficiency

» Identification of dangerous or emergency situations for immediate dispatch; lower priority restoration work automatically put in the queue » Increased visibility; progress of restoration work is monitored in real-time WFM is carried out with the assistance of outage management tools that analyze outage reports to determine the scope of outages and the likely location of problems. An OMS or DMS compiles information on the times and locations of customer calls, smart meter outage notifications, and fault data from substations and monitoring devices on feeder lines.

Some utilities are reporting that the integration of advanced metering infrastructure (AMI) has provided the capability reduce outage time by being able to confirm if meters have power. The benefits of AMI can play out in two different stages of restoration as follows:

» After performing restoration work in a given are, service at all the meters can be confirmed quickly and remotely before crews move onto the next area.

» Individual complaints are followed up on in the wrap-up phase of a large storm restoration effort. Traditionally, a great deal of single customer outages end up being fine on arrivals, meaning a technician was dispatched to restore power only to find out power has already been restored. By confirming power has been restored via AMI and backing that up with a phone call to the customer, a truck roll is avoided. As a result, trucks are rolling on confirmed outages only and restoring customers more quickly. Hundreds of truck rolls can be saved in large storm events.

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Distributed Energy Generation Poses More Issues

As distributed energy generation (DEG) becomes more prevalent in the United States and across the world, these small power generation sites (typically less than 100 MW in size) are requiring utilities to do more legwork. While DEG sites can technically consist of small-scale fossil fuel, biomass, or even nuclear power, the vast majority are solar and wind plants.

Because of the finicky nature of solar irradiation and wind – the sun must shine and wind must blow for the plants to produce electricity – the energy DEG plants generate can be variable and unreliable. As a result of this variable electricity production, utilities have to work even harder to balance their electricity supply, demand, and reserves over the distribution areas that they service. No longer can utilities simply rely on predictable baseload and peaking power plants.

Weather and electricity demand forecasting, along with increased control over the DEG plants, have become priorities for utilities that are mandated to have a set percentage of their electricity generation coming from renewable energy. One example of how utilities are dealing with renewable DEG is Germany, which has a high penetration of solar PV. Distribution system operators (DSOs) in Germany can remotely manage residential solar energy inputs. Every distributed energy installation features a second meter controlled by the DSO. Meanwhile, utilities in the United States are reported to be heavily investing in DER management systems to deal with the increase in renewable DEG systems.

DEG Outlook

Renewable energy and DEG plants are forecast to grow over the next 5 years. The European Union (EU) has mandated that 20% of energy generation must come from renewable sources by 2020. In the United States, 16 states have solar or DG carve-outs. In these states, programs exist – usually sponsored by the utility – that support residential and small commercial installations of solar PV. Colorado, for example, has a DG carve-out in its RPS that mandates 3% DG by 2020, with 1.5% required to be on the customer site.

The outlook for renewable DEG plants is strong. Navigant Research expects nearly 208 GW of new renewable DEG capacity to be installed worldwide during the 2013 to 2017 forecast period, resulting in $367 billion in revenue from deploying these technologies. Distributed solar PV installations will continue to make up the majority of the renewable DEG market; therefore, the growth of renewable DEG follows a similar trajectory as the PV market.

Meter Data Management Struggles but Survives

Meter data management (MDM) predates smart metering at some utilities, where MDM was a method to manage and process energy usage data collected from manual sources or automated meter reading (AMR) systems. Traditionally, MDM was the basis for producing more accurate energy bills to residential, commercial, and industrial clients. That requirement remains, but the application of MDM has exploded during the past 3 years. MDM benefits essentially fall into three categories:

» Improved grid efficiency

» Improved financial management

» Improved customer engagement

MDM provides the gospel version of energy consumption data, more formally referred to as the system of record. A well-deployed MDM provides the utility a bedrock upon which to base many analyses and business decisions. MDM data combined with data from other systems such as outage management and power quality can enable much more effective WFM and more actions to prevent outages.

Speaking with utilities at industry conferences reveals a different picture of MDM. The utility personnel charged with implementing and operating MDM frequently report systems that fail to meet expectations. In some cases, they have to purchase multiple MDM products before finding one that meets their needs. As Navigant Research described in its 4Q 2012 report, Meter Data Management, the deployment of an MDM can be extremely complex. To judge by utility personnel, MDM vendors often gloss over this complexity and focus their messages on the benefits of MDM. Navigant Research believes that all but the largest utilities will require some form of professional services to achieve an effective MDM deployment. Meanwhile, nontraditional data analytics engines are making inroads into the very functions that MDM seeks to provide. While MDM products have been designed to process enormous volumes of well-structured data, analytics engines are adept at processing non-structured data such as social networking inputs and socioeconomic or even political data, right alongside metering and other data from the grid. Merging the structured with the unstructured holds the promise of much more accurate load forecasting farther into the future, resulting in smart grid deployments that plan for a longer horizon and reduce capital expenditures over the long term, as fewer upgrades and technology refreshes are needed.

Viewed from this perspective, MDM risks becoming nothing more than middleware that efficiently delivers data into analytics engines. Whether MDM survives as a viable business on its own rests upon two key factors, one of which is entirely out of MDM vendors’ control:

» MDM vendors have aggressively expanded into related back-office applications, especially customer-facing portals. To the degree that MDM can provide prebuilt solutions for key utility business problems and reduce the complexity of their integration, MDM vendors can increase their probability of their continued relevance.

» The data analytics market itself remains in a state of flux. Some vendors believe that utilities want highly flexible analytics engines, in which each utility effectively defines its own analytics in-house. Other vendors believe that utilities will want a prepackaged analytics solution, with little need for customization by each utility. Navigant Research believes the latter scenario is more likely, given utilities’ frequent refrain, “Just give me the answer,” especially from OT teams, which are far more concerned with energy reliability than with developing new IT skills.

To the degree that prepackaged analytics solutions prevail, MDM systems will be able to better define their interfaces to analytics and therefore remain a valued part of utilities’ decisionmaking. Moreover, predefined analytics solutions are likely to be far less expensive for utilities, leaving more funding available for spending on other systems such as MDM.

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Cyber Security Market Offers Limited Promise

Smart grid cyber security remains top of mind and bottom of budget for many utilities. It is perennially the most important thing that utilities do not want to spend any money on.

Many cyber security vendors appear resigned to their fate – their websites list mainly compliance benefits, without much discussion of actually protecting smart grids. Chart 2.7 shows that annual cyber security revenue is expected to increase from $370 million to $607 million over the forecast period – a relatively modest market with a relatively modest 6% CAGR.

The encouraging exceptions to this sad state of affairs are the cyber security vendors that were founded with a basis and expertise in control systems protection. Interviews for the 3Q 2012 Navigant Research report Industrial Control Systems Security showed that cyber security vendors divide sharply into two camps:

» Control system specialists, which reported outstanding sales performance during 2012 and steady inflow of requests for proposals (RFPs)

» General-purpose security vendors, which in interviews indicated that they were not seeing much business and wondered if the market actually exists

There are exceptions to prove the rule, but in general, cyber security approaches that start with grid reliability and change management appear to have been most successful. Thetra ditional approach of selling security as a compliance solution – which was successful in other industries such as finance and healthcare – leads many utilities to spend only the minimum necessary for regulatory compliance, without regard to whether that expense results in any meaningful protection.

The key market driver for smart grid cyber security is pull from utilities. As utilities continue to find other places to spend their funds, security vendors resist investing in the development of new products that may never sell. From a utility’s perspective, money spent on cyber security is money not spent on improving grid efficiency – which, unlike cyber security, has easily quantified ROI.

The final drag on cyber security investment has been a relative lack of innovation over the past 3 to 5 years. With many vendors giving the same presentations at conferences for several years in a row, there is not much exciting news. However, recent developments, such as a demonstration of quantum cryptography by Los Alamos National Labs and new products in behavioral-based security (rather than signature-based) suggest that product innovation may be resuming. While such innovation can often lead to point solution sales rather than full protection of a grid, at least there is encouragement that the cyber security market may be ready to start moving again.

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