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Will the Recession Kill the Smart Grid? By Jesse Berst Nov 20, 2008 - 8:57:43 AM
In the last few weeks, many of the calls from our consulting clients have focused on whether the recession would curtail the Smart Grid boom. Let’s take a look at the forces for and against.
Forces against Smart Grid Investments
Higher cost of capital. The economic crisis has “seriously affected capital funding for Smart Grid investments, even for regulated utilities,” confirms Patti Harper-Slaboszewicz, Utilipoint’s Senior Director for Smart Grid. Some utilities are already reducing capex budgets (though primarily in generation). Others are creating contingency plans to cut back if liquidity does not free up quickly.
Rising rates. Utilities are beset with higher costs. Although natural gas prices have declined recently, the long-term trend for fuels is up, up, up. The same with construction costs. And carbon legislation, when it finally arrives, will dump even more new costs onto utilities’ shoulders. Utilities will be forced to ask for rate hikes… and that will make it harder for them to go back for more increases to fund Smart Grid projects.
Falling demand and slowing growth. People may cut back on energy in response to the recession, reducing demand and hence the urgency for smart meters and demand response. Likewise, as we build fewer new homes – and construction levels are now the lowest since WWII – we reduce the need for new power. That’s the theory, at least. In past recessions, however, electricity demand did not fall nearly as fast as demand for oil, gas, and autos, according to analyst Jean Reeve Rollins of the C Three Group.
Sky-Is-Falling Syndrome. Anyone who has been following the stock market recently can confirm that many economic decisions are made on emotional grounds. It is quite possible that the Smart Grid will fall prey to the same panic that has gripped much of Wall Street.
Forces in Favor of Smart Grid Investments
Past federal incentives. The October economic stimulus bill included provisions that let utilities accelerate the depreciation of smart meters and Smart Grids, cutting the depreciation period from 20 years to 10.
Future federal incentives. Before the election, the Obama campaign called for matching grants of 25% of qualifying Smart Grid investments as well as support for advanced metering and demand response. What’s more, our sources in Washington say the Obama Administration is already circulating concepts for a New Deal-style infrastructure stimulus bill that will spend money on roads, bridges and on a Smart Grid.
Regulatory favor. The National Association of Regulatory Utility Commissions just wrapped up a meeting in New Orleans. According to one attendee, “Smart Grid was all over everything.” More and more regulators see the Smart Grid as a path to better reliability and lower rates. They see the Smart Grid occurring elsewhere, and they want its benefits for their own jurisdictions. Although it’s always dangerous to make predictions about America’s fractious regulators, in general they are neutral at worst and advocates at best.
You can pay me now or you can pay me later. Standard and Poor’s says utilities may be able to delay some grid expenditures but they won’t be able to eliminate them. Many utilities have an urgent need to upgrade their aging infrastructure. A recent Black & Veatch survey claimed that as much as 60% of the electric power infrastructure is at the end of its life, with as much as 25% now past its design life.
Renewables, PHEVs, and other “fads.” Renewable energy and plug-in hybrids are hot topics these days. As they gain more attention, so does the fact that we must upgrade the grid to accommodate them. This puts pressure on utilities and regulators to announce programs to deal with these top-of-mind issues.
The SGN View
We expect utilities to cut back capital expenditures. But as they decide what to leave in and what to leave out, we predict that Smart Grid projects will often end up at the top of the “Keep” list. With everyone from Gore to Google championing the cause, we think most utilities will be reluctant to announce that they favor a Dumb Grid instead. Our conclusion is “cautious optimism.”
Utilipoint article on the economic crisis and the Smart Grid
Standard and Poor’s report on utilities’ ability to manage financing requirements (PDF)
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