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Government Policy Determines Smart Grid De velopment

This article is based in part on research from Smart Grid Market Opportunities: The Impact of
Government Policies and Regulations

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The Smart Grid: Terminology and History

The U.S. and other developed nations are currently proposing and implementing numerous policy
initiatives intended to bring forth a "smart grid" for their electrical systems. However, current
terminology is not entirely appropriate to what they have in mind because electrical systems have
long incorporated both smart and non-so-smart technologies. Contemporary electronics and
telecommunications already bear key responsibilities for the reliable and economical operation of
regional grids. In fact, their roles have steadily expanded as loads have grown, non-utility
generators have proliferated and growing markets expand the geographic range of utilities' power
supply options.

Nonetheless, Smart Grids as they are currently being conceived present a complete rethinking of
the electricity grid technology and deployment for the needs of the 21st Century. They also
promise enhanced energy efficiency at a time when everyone expects energy prices to increase
and they promise enhanced grid security at a time when the world remains concerned about
terrorist attacks. Smart Grids also imply a modernization of the traditional grid to accommodate the
unique energy generation patterns associated with alternativ e energy sources.

NanoMarkets believes that Smart Grids currently represents a major opportunity for a wide variety
of businesses ranging from transmission equipment firms, through manufacturers of
communications and metering equipment, down to firms that make advanced materials. However,
like all major infrastructure projects, the new business revenues that are likely to flow from the
deployment of Smart Grids will depend heavily on government policy. And governments in the
U.S., Canada, Europe, China and Australia, among other nations and regions, are now following
similar visions as a way of addressing energy independence, climate change and network
surviv ability issues.

As a result, NanoMarkets believes that to fully exploit the opportunities that Smart Grids present,
firms will have to have an in depth understanding of the commercial impact of government Smart
Grid policies. Only through such an understanding will businesses be able to distinguish between

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hype and real revenue potential and be able to set realistic time frames and strategies for their
Smart Grid businesses. Smart Grid firms will also have to think beyond legislation and regulation
specifically aimed at Smart Grids; there will also be impacts on Smart Grid businesses stemming
from more general approaches to energy policy, as we all as from communications and national
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defense policies.

Bearing all this in mind, NanoMarkets believes that it is time for a study that analyzes and
quantif ies the opportunities that are growing out of current policy-regulatory-legislative efforts
related to the smart grid and this is the key motivation for the this report, the focus of which is on
the activities in the U.S., although opportunities and activities in other major industrial countries
are also be discussed.

The Smart Grid: Benefits and Opportunities

The sophisticated technologies of grid operation have already affected relations between utilities
and large industrial power consumers. Those consumers increasingly face rates that reflect the
contemporaneous costs of power production, and some are both consumers and producers of
cogenerated power. Communication and control technologies have made some of them partners
with utilities in maintaining reliability, whether by interruptible rates or by new abilities to bid
demand reductions into regional energy markets.

Relationships between utilities and their largest customers already provide a preview of the
functionality of the smart grids to come. New abilities to communicate and control power will put
utilities and their customers into responsive and mutually beneficial relationships that can reduce
the costs of electrical services and aid in the implementation of broader social and environmental
policies. The smart grid will open up new markets for many suppliers of equipment and services.
We can achieve a better understanding of these opportunities, however, if we treat the grid's
future less as a revolution and more as a massiv e extension of already-activ e trends.

There is no easy way to quantify the extent to which existing large customers and their utilities
already reap benefits like those of a smart grid. What we can quantify is that nearly two-third of all
power in the U.S. (and comparable fractions elsewhere) is sold to residential and smaller
commercial users whose relationships with their utilities have hardly changed in a century. Their
metering technologies are ancient and their abilities to monitor power costs and use patterns are

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nonexistent. Many of their load profiles display contemporaneous peaks which require that utilities
invest in capacity they seldom operate to maintain reliability, and even if they could track their
consumption they would gain no reward for cutting it under the flat rates that apply to most of
them. This in itself represents a long-term business opportunity as energy gets more expensiv e
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and it would be a business opportunity even if the smart grid was not so much to the fore.

But with the smart grid it is sometimes difficult to sort out the real business opportunities from the
hype; the smart grid literature mostly reads like utopian literature of the past. If the costs of the
hardware and software are manageable, customers who take advantage of the technologies will
benefit from lower bills under time-varying rates. New rate designs will encourage large numbers
of them to cut their costs by better managing their demands. Utilities will be able to defer new
generation and transmission while delivering power that may be more reliable than ever thanks to
the smart grid's data collection capabilities. They will gain the ability to integrate larger volumes of
intermittent renewables into their systems while maintaining reliability. Like industrial users, some
smaller customers will at times be suppliers to the grid of renewable solar power produced on their
premises. On top of these benefits, the smart grid offers hope for substantial reductions in carbon
emissions.

Again, these are benefits that could easily lead to new business opportunities at every level of the
value chain. But all of the usual business uncertainties are there too; how much must be invested,
whether the technologies will work, whether utilities are competent to oversee their complexity (in
light of the nuclear experience), whether customers will accept the change, and if they do whether
the impact will be worth the cost. What little we know about the answers to these questions has
largely been gleaned from an extremely small and nonrandom sample of pilot programs, so the
level of uncertainty is much higher than it might otherwise be.

Overall the smart grid is a seemingly agreeable and potentially rational solution that is at least
somewhat consistent with the interests of utilities, regulators, investors, environmentalists, and
possibly power users. A confluence of events is driv ing it forward, perhaps irresistibly. Ultimately,
the sustainable business opportunities that flow from the smart grid will be determined by the
objective issues listed above and others similar to them. For now, however, some of the
conventional business issues may hardly matter in light of the underly ing politics of electricity and
the environment, which is driving smart grid markets (and funding) at the present time.

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Events and politics alone, however, will bring little unless the technology materializes and becomes
commercially feasible. The extension of smartness to lower voltages and multitudes of smaller
customers has brought a driv e to conceptualize, engineer, and economically manufacture
numerous components that are integral to the grid; yet another business opportunity flowing from
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smart grid. For many of the basics potentially viable suppliers already number in the dozens. By
contrast, the numbers and identities of potential purchasers are much more uncertain. They will
depend on political and regulatory decisions that will unfold over the relatively near future, near
because both state regulators and federal energy legislation in the U.S. (and analogous institutions
outside of it) are rapidly accumulating momentum. That momentum has hardly been slowed by the
current recession. It has already triggered mass rollouts of equipment to low-voltage users in
nations like Italy and U.S. states like Texas and California.

NanoMarkets, LC | PO Box 3840 | Glen Allen, VA 23058 | TEL: 804-360-2967 | FAX: 804-270-7017