When a capital-intensive industry enters an asset-building cycle, many companies will operate in the red for a few years or more. That’s not necessarily a bad thing, as cap-ex investments...
Money to Burn
Smart-grid stimulus targets the wrong problem.
The $800 billion stimulus bill has spawned a feeding frenzy among would-be recipients of the money. Smart-grid technology companies, for example, are excited about the bill’s $4.5 billion in 50/50 matching grants to “modernize the electric grid.”
However, not everybody is cheering. Some industry veterans at the Distribu-TECH trade show in San Diego last month expressed disappointment and skepticism about the bill. They found three main reasons for looking this gift horse in the mouth.
First, utilities and smart-grid vendors aren’t geared up to handle $9 billion in orders in 16 months. Second, bad projects don’t deserve government grants, while good projects don’t need them. Third, the smart-grid stimulus won’t resolve the real problem—the utility industry’s outdated business model.
$9 Billion in 500 Days
In the 1985 film, Brewster’s Millions , the late Richard Pryor played the role of Montgomery Brewster, a man who must waste $30 million within 30 days in order to inherit a greater fortune from a long-lost relative. As Brewster learns, blowing $1 million every day isn’t necessarily as easy as it might seem.
Although the smart-grid stimulus isn’t intended to waste money, its recipients face a similar challenge. To invest $9 billion by the end of September 2010, utilities must spend about $25 million a day, five days a week, on smart-grid projects.
From a certain point of view, this seems like a modest amount of money. After all, hundreds of operating utilities—investor owned and otherwise—are eligible for the funds. Divided equally amongst them, $25 million a day doesn’t seem like an unrealistic sum for the industry to spend.
But considering the time it takes to develop a strategy, engineer a project, specify technology requirements, evaluate bids, award contracts and obtain regulatory approvals—including rate treatment for IOUs—500 days might not give utilities enough time to spend $9 billion, at least not wisely.
Plus, the most troublesome bottleneck might not be found among utilities, but in the smart-grid technology industry itself, which today delivers somewhere around $3 billion a year in products and services for the U.S. market.
Unlike many parts of the economy, the smart-grid business has weathered the current recession pretty well. Business was terrific for many companies in 2008, and smart-grid vendors still are busy working off their backlog. With few exceptions, they haven’t laid off large numbers of workers or idled manufacturing capacity in recent months, which is great news for their utility customers. It means utilities can count on a strong group of vendors to provide technology and services for the smart grid. Unfortunately, it also means those vendors are working at or near their full potential already.
Gearing up to supply $9 billion in smart-grid projects will take some time—probably more than the 500 days provided in the stimulus bill. Even granting the fact that projects needn’t be completed, but just started, by the end of September 2010, getting all that work into the pipeline presents an unprecedented challenge for