One Smart-Grid Technology That's Already Saving Our Freezing Butts
Chris Wood

When you flip a light switch, you expect the light to turn on immediately. But what if it didn't? And not just for you, but for everyone else too?

Electricity is one of those things we often take for granted. I expected the lights and my computer to come on at the office early this morning (read: very early this morning) so I could write this missive. I expected the refrigerator to be running to keep my lunch fresh. I didn't really give it a second thought… but I probably should have.

Perhaps nothing—I would venture to say, definitely nothing—is more important to our modern society than electricity, yet the future reliability of on-demand electricity becomes more precarious each day.

The power grid is an amazing thing. According to the US Department of Energy (DOE), it consists of more than 9,200 electric-generating units with more than 1,000,000 megawatts (MW) of generating capacity connected to more than 300,000 miles of transmission lines. However, decades of underinvestment in power generation, transmission, and distribution infrastructure in key areas of the US, coupled with a dramatic growth in electricity consumption over the same period, have left grid operators and utilities alike unable to provide reliable electricity during periods of peak demand.

The DOE reports that since 1982, growth in peak demand for electricity—driven by population growth, bigger houses, bigger TVs, more air conditioners, and more computers—has exceeded transmission growth by almost 25% every year.

Just to keep up with demand growth, the International Energy Agency (IEA) estimated a few years ago that North America alone will have to add 698,000 MW of additional capacity at a cost of $2.4 trillion between 2008 and 2030. Worldwide, the IEA expects 4,799,000 MW of additional capacity to be required over the same period, at a total cost of $13.7 trillion.

What's more, this additional capacity does nothing to address the underinvestment in the transmission and distribution infrastructure required to deliver power from centralized power plants to end-use customers. The DOE reports that the majority of US transmission lines, transformers, and circuit breakers—the backbone of the transmission and distribution system—is more than 25 years old. And while hundreds of thousands of high-voltage transmission lines course throughout the US, less than 700 additional miles of interstate transmission have been built since 2000. The result is an overburdened power grid that periodically prevents the transport of power to constrained areas during periods of peak demand—as a result, brownouts and rolling blackouts are becoming more common. Obviously, this affects reliability when it's needed most and has a significant economic impact. Power outages and quality issues are estimated to cost American businesses more than $100 billion a year on average.

As the electric power industry confronts these challenges, a “smart grid” technology called “demand response” has emerged as an important solution to help address the imbalance in electricity supply and demand.

Before moving on, a little background on the electric power industry and the idea of the smart grid is in order.

Electricity cannot be economically stored using commercially available technology today, so it must be generated, delivered, and consumed at the moment that it's needed by end-use customers. Thus, maintaining a reliable electric power grid requires real-time balancing of supply and demand. Historically, to accomplish this balancing act, the only thing the electric power industry could do was to build excess supply (i.e., build more power plants—typically peaking plants that lie dormant for the majority of the year and drive up market prices the moment they're switched on) to meet needle peaks in demand. Needless to say, it's extremely inefficient to build all that infrastructure necessary to serve just those demand peaks.

That's where the smart grid—and more specifically in this case, demand response—comes in.

The idea of the smart grid is all about computerizing the power grid. For decades, utility companies have had to send workers out to gather all the data needed to provide reliable electricity. The smart grid hopes to bring the industry into the 21^st century by employing computer-based, two-way communication and remote-control automation technology.

Energy Acuity defines smart grid not only as automated, two-way communication based technologies that allow for the remote control of electricity networks, but also as software and services that can assist utilities in achieving a holistic, real-time view of operations.

Demand response is one such smart-grid technology. It's an alternative to traditional power generation and transmission infrastructure that enables grid operators and utilities to reduce the likelihood of service disruptions, such as brownouts and blackouts, during periods of peak electricity demand. Basically, it's just the reduction of electricity use (demand) during peak periods. So rather than building more supply to meet peaking demand, the idea is to remove less critical megawatts from the grid during those times when other loads are spiking.

Here's how it works. A demand response provider or aggregator (DRA) has a network of customer sites throughout the grid—places like industrial facilities, commercial buildings, universities, and supermarkets—that have hooked up to the DRA's metering and control technology. The DRA uses its software to remotely manage and monitor energy use at the customer sites in near-real time. When the DRA is notified by a utility company or grid operator that it's experiencing a sudden surge in demand, the DRA deploys its tech to remove megawatts from the grid by reducing energy use at customer sites in agreed-upon ways (like lowering the lights or air conditioning). As an added bonus for customers engaging in this demand-reducing process, the DRA shares a portion of its payment from the utility company with its customers who help reduce load. So, not only do the DRA's customers save money on their energy costs, they actually get paid to free up power through the company's network. Win-win.

In 2013, Navigant Research estimated that more than 10.3 million sites (residential, commercial, and industrial) across the world are involved in demand response programs. According to Joule Assets CEO Mike Gordon, the demand response market is worth approximately $3 billion today and is poised to double over the next five years. The total market size could eventually reach more than $65 billion in the US over the coming decades, he says, and markets abroad have even more potential.

Demand response has been in the news recently, as it's helped maintain grid stability during the cold spell that has gripped much of the US. According to an article from MarketWatch, customers of a DRA called EnerNOC across 17 states participated in 10 separate demand-response dispatches to balance transmission needs and prevent outages in the face of record peak demands.

Remember, as important as demand response is and will become, it's just one of the many technologies being deployed for the future smart grid. In our next issue of Casey Extraordinary Technology coming out one week from today, we'll be providing an overview of the entire smart-grid space, the technologies, and the investment implications. We'll also be covering the one and only smart grid company that we think is worth investing in today. So, sign up today for a risk-free subscription to Casey Extraordinary Technology to receive this important report and recommendation.

After graduating with honors in economics and finance from Loyola University New Orleans, Chris went on to spend several successful years as a commercial real estate appraiser and business valuation consultant before returning to school to receive his MBA with a finance concentration, also from Loyola.

Chris applies his vast knowledge of valuation theory and practical application to consistently uncover market-beating investment opportunities.

Currently, Chris is the senior analyst for Casey Extraordinary Technology and the manager of our analyst team. He also contributes to The Casey Report and serves as an editor of The Technology Investor.

www.caseyresearch.com