Money to Burn

Deck: 

Smart-grid stimulus targets the wrong problem.

Fortnightly Magazine - March 2009

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 Third, the smart-grid stimulus won’t resolve the real problem—the utility industry’s outdated business model.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.

EES North America

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 this young industry. The few big-bang rollouts of advanced metering infrastructure (AMI) to date have tested the constraints of technologies and companies that are still evolving and growing. Witness Southern California Edison’s fast-track bidding process, which forced bidders to develop and demonstrate custom-built technologies within the space of a few months. Some vendors opted not to participate in that $1.63 billion bid, because they couldn’t justify diverting so many of their resources into the race for a single contract.

Of course, with $9 billion in orders on the horizon, vendors might be expected to invest in their own growth, including hiring engineers, technicians and project managers. Legislators intended the bill to spur job creation, and by some estimates a smart-grid stimulus of this magnitude might create 150,000 new jobs in the first year. However, the number of workers in the job market who are qualified to design, build and install the smart grid might fall short of what’s needed for the industry to move $9 billion worth of projects ahead in the next 500 days. Ironically, the Achilles heel for the job-creating smart-grid stimulus might turn out to be a people shortage.

Money Shovel

The stimulus bill is supposed to prioritize so-called “shovel-ready” projects, accelerating investments that have been delayed by economic hardship. The stimulus might enable a cash-strapped state to replace a crumbling bridge, or allow a city to modernize its water-treatment system. Some smart-grid projects fit this description, because their sponsors have frozen capital spending as a result of the economic downturn and credit crunch. However, most projects that legitimately can be called “shovel ready” are moving forward, because they’re part of a long-term investment cycle. The toughest work—engineering, planning and obtaining regulatory approvals—already has been done. Plus utilities still enjoy reasonably good access to capital markets, so generally speaking, money isn’t a big obstacle for well-designed smart-grid projects.

As a result, federal smart-grid grants will be distributed to three types of projects: those that have been delayed because the sponsor had to freeze its capital spending; those that already were moving forward, irrespective of federal funding; and those that wouldn’t get built because they don’t make economic sense. Only the first type of project really deserves government funding. Whether the DOE will define the program in a way that excludes the other two types remains to be seen.

Nevertheless, all things being equal, federal dollars arguably could be spent in worse ways than on smart-grid investments, even if it means some less-deserving projects win grants. The stimulus might spur some of the country’s slowest-moving utilities to accelerate their transition to a smart grid. This might clear the way for game-changing growth in distributed resources, including demand response capacity, dispersed renewable generation and plug-in vehicles. Moreover, the smart-grid stimulus might free up money that utilities can spend in other ways that serve long-term strategies and policy goals, such as investments in renewable energy and carbon capture and sequestration projects—both of which qualify for other incentives under the stimulus bill, and prepare utilities to meet future compliance requirements.

To the degree the smart-grid stimulus leads to such investments, it will yield tangible dividends for U.S. electricity users. But to the degree it presents utilities with a use-it-or-lose-it choice, and tempts them to spend money in ways that don’t necessarily serve long-term policy goals, taxpayer money might be wasted—or even spent in counterproductive ways.

For example, some companies might launch pilot projects that delay rather than accelerate the transition to a smart grid. Or they’ll de-prioritize progress toward AMI and smart rates, and focus all their stimulus spending on investments in reliability and outage management—which are worthy and necessary investments, but they don’t change the utility game.

If they’re being alert, regulators who review utilities’ smart-grid projects will guard against tactics that serve to perpetuate the old Thomas Edison-era business model. The smart-grid stimulus will accomplish the most good if it accelerates the transition to a 21st century utility system—in which the grid encourages rather than obstructs growth in alternative resources, and in which customers have more options and greater control over their energy consumption.