Monday, December 27, 2010

Smart Grids - Data, Policy, and Privacy. Oh my!

A couple weeks ago, I attended a seminar on smart grids at the University of Minnesota Digital Technology Center. The presentation was by William L. Glahn, Director, Office of Energy Security for the State of Minnesota.

The presentation was informative, and I was very happy to learn that our legislators are aware that there are very important security, privacy, and policy issues that will need to be addressed. Mr. Glahn, laid out the issues across three categories of "policy challenges."
  • Security 
    • The system must be secure from outside attack and manipulation
    • Personal information must be protected
  • Consumers
    • Costs must be low and there must be perceived value for any costs incurred
    • Nobody wants "big brother"
    • People want to know who owns the data, and how the data will be used
  • Utilities
    • Costs and investments must be recovered
    • Utilities do not want another mandate
    • Who "owns" the customer is important...utilities do not want to give up control of their regulated monopoly or find that policy mandates effectively subsidize their competition
    • There is a likelihood that a new business model must be developed
Besides the fact that all those issues can be boiled down to "fear of change", the thing that strikes me the most is how the utilities are clearly trying to figure out how to cling to an out-dated business model...or at the very least control the speed of evolution. Their behavior seems awfully similar to that of the RIAA, but they have the added benefit of being a utility, rather than entertainment. The country runs on their power, and they know it. In the vast majority of the US, they have a captive audience. The power companies want no more costs or mandates from the regulators. But they're all for the regulations that keep them as the sole source of power for their consumers, and they're going to leverage that position to own as much of the smart grid as they can.

Most of the experiments with the "smart grid" that I'm aware of have been driven by the power companies themselves. And thus far consumers have had a relatively lukewarm reception to it. The reason for the lukewarm reception is simple: If all the technology and the devices are being pushed by the power company, nobody will buy the argument that the smart grid is there for the consumer.

But what if people bought smart grid appliances the same way they do any other electronic appliance, from PC's to DVD players to (for the most part) cell phones? What if power optimization features were simply built-in to every electronics device you bought, and didn't rely on any infrastructure investments from the power company? HVAC systems, lighting, and other power-hungry systems could particularly benefit from managing their own power consumption and being "internet enabled". But there's more to it than that. If standards were built and consumers had choice and control over the smart grid products they use, rather than being told what to use by the power company, it could help solve a number of issues.

First, the consumer bears the cost of the smart grid. They'll buy devices when they feel it is in their best interests to do so. Like any technology, you'll have early adopters, a chasm, a mainstream adoption, another chasm, and the late adopters. It will take time, but it would nearly eliminate the capital investment by the public or power companies.

Second, the consumers would be free to select brands they trust. Privacy concerns with the Google thermostat? Security issues with Microsoft controls on your air conditioner? Get the one from GE or HP instead.

Finally, it could result in a more "peer-to-peer-style" model in the smart grid, making the system as a whole more loosely coupled. This has the benefit of being more resilient to abuse and failure...whether that's from Big Brother, terrorists, or plain 'ol software bugs.

I think the power industry will drag their feet on adoption of the smart grid for as long as possible. They'll pay it lip service because green is trendy. But expecting the power companies to go green is at least a little like seeing the tobacco companies lobbying to remove their own ability to market in places where they might influence kids. The primary motivation is simply because they feel that the social pressure of being green is something they can't ignore.

Naturally, the power companies will approach this process in the way that benefits them most. For example, in many places you can have them install a device to turn down/off your air conditioner during peak loads. It's good for power consumption, of course...but only when it benefits the power company. If the power company can reduce the height of the peak load, they can operate a cheaper infrastructure at a higher level of efficiency. Green doesn't really have all that much to do with it...unless by "green" you mean "money".

In the end, smart device manufacturers will produce devices the consumers want. There isn't all that much the power companies can do to stop it. But expect the power companies to try like heck to find a way to build the Smart Grid around themselves...using their technology...on their terms. They know they don't move very quickly, and they know the average consumer perceives that everything power-related has to come from the utility company. So if they push the smart grid too fast, consumers will find someone else who can supply them with the smart widget to control their air conditioner.

If that happens, the power company will be out of the loop. They'll lose the revenue for selling the device. They'll lose revenue from any sort of subscription-based services. They'll lose the massively important data they can collect off devices like this. And most importantly, they'll lose "ownership" of the customer. At best, they'll have to actually compete for any value-add services they want to sell. Assuming they're not well-equipped to do that (they aren't today, at least) they'll be reduced to "only" supplying power, which is subject to the economics of a regulated commodity and therefore lower potential profits. But if they pull off owning the smart grid, they'll have the safety of a regulated monopoly and the profits of all those value-added smart grid services.

I'm not entirely sure what Mr. Glahn's perspective on the issue is. I was hoping the presentation would be a little more forward-looking than it was, but it was mostly a recap of the industry's past and didn't have much in the way of policy recommendations for the future. Some of the things he said during the presentation lead me to believe that the power companies are simply stuck trying to preserve their business model. But when asked about the potential of consumer choice, he briefly stated  that Best Buy would obviously love to start selling consumer smart grid electronics, and then took the next question.

Either way, I'm sure there's a lot of "strategery" going on...

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