Smart Grid Blog
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Boulder's local newspaper, the Boulder Daily Camera, recently reported that the Colorado Public Utilities Commission has decided to take a larger role in regulating Xcel Energy's SmartGridCity project in the same manner that it regulates other large capital investments like power plants. This will increase the transparency of the project and is primarily a reaction to rising costs. In March 2008, Xcel Energy projected that capital expenditures for SmartGridCity would be about $15.3 million. The company now believes the total cost will reach $42.1 million, not including the costs of operating and maintaining the new grid. It's widely believed that the all-in cost will be around the $100 million mark.
In December, the Public Utilities Commission approved Xcel Energy's request to raise customers' rates 6.5 percent. The majority of the increase will be used to pay for Comanche 3, Xcel's new coal-fired unit at its power plant outside of Pueblo. But $11 million from the rate increase - which went into effect Jan. 1 - is earmarked to cover costs associated with SmartGridCity, including capital investment, taxes and operation and maintenance fees for 2009 and 2010.
Granted, much of the cost increase was due to difficulties encountered in laying the fiber optic network required to support the project (it's called Boulder for good reason), not to failures of the smart grid technology or mismanagement. However, what can we learn from this turn of events? I think there are at least two lessons.
1. Communicate with customers and get buy-in from the stakeholders (which Xcel did) but don't oversell the potential benefits. SmartGridCity was originally envisioned as a technology trial - testing various smart grid technologies in the utility back office, on the distribution network and in customers' homes to see if they would perform as claimed. It ended up being over-hyped and creating false expectations among customers, business leaders and the regulators. To date, customers in Boulder have still not been offered dynamic pricing or any other programs that could potentially reduce either their monthly bills or their carbon footprint. Although there have been benefits - like reduced outages - at the end of the day customers are still focused on their energy costs. "What's in it for me" trumps other concerns.
2. It will always be difficult for large multi-state regulated utilities to make investments and offer customer programs to one city in their service territories while asking all customers to pay for it. Yes, I know the justification is that the operational savings accrued in the smart city will benefit all customers and that the customer benefits will eventually be rolled out to all customers. However, it still poses a significant challenge in the short term. This is why I believe that cities with municipal utilities like Austin, TX and Fort Collins, CO, or cities served by investor-owned utilities whose service territories are roughly contiguous with the metropolitan area, will be the first to achieve smart city status.
P.S. If you want to hear more of my views regarding smart cities you can attend my keynote presentation - Smart Cities: Proving Ground for the Intelligent Economy - at IDC's Directions 2010 events March 4th in Boston and March 10th in Santa Clara.
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The company have been consistent that its project was originally intended to be, and remains, a testbed. With a move to offload costs to its customers, for what is effectively an R&D experiment, Xcel is taking a risky path. On one hand, I give them credit for having the temerity to soften the financial blow to its shareholders of a project that is incurring significant cost overruns. On the other hand, this could wake the sleeping giant of consumer voices not just in CO but in other 'smart city' projects as well. Questions of whether other utilities will take the same approach will be a legitimate concern for other state regulators as well. But those considerations are pure speculation from where I sit.....
The real head scratcher is why they chose fiber in the first place. From what I was told by the company last year the cost of fiber was approximately $2,000 per house in the pilot. Even though they believed a target of $500 per house was achievable on a full deployment basis. And that was the estimated per household price before cost overruns. And for reasons that are hard to rationalize, just what do you need fiber to the home for? It's the equivalent of buying a long haul tractor trailer to do the weekly grocery shopping for a family of four. It doesn't add up when other alternatives are available whether utility deployed wireless, or 3rd party public networks like Verizon or AT&T.
In all fairness to Xcel, the company stated Smart Grid City is about testing technology first and the business model second. In other utility deployments with smart meters and communications networks, too much focus on the business case resulted in questionable technology selections for the single purpose of supporting meter interval data, for example. Perhaps some lessons on striking the right balance between the technology and the business case will result from some of these investment profiles.
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And the story continues... Last week, the Denver Post ran an article stating that "the cost of upgrading the country's [distribution] system is set at $165 billion over the next two decades by the industry-funded Electric Power Research Institute" and citing resistance to smart grid costs from consumer advocacy groups in Colorado, California and Pennsylvania. Clearly the media has latched onto smart grid costs and consumer resistance as a hot topic. Don't expect it to get any better. Just wait until the republican party spins this a way to bash the democrats.
What the industry needs to focus on is some clear, high level messaging to the public explaining what we "insiders" all take for granted - the condition of the existing grid (aging assets, inability to integrate renewables, etc.), why a smart grid provides benefits for the nation as well as individual consumers, and the costs of doing nothing versus investing in a smart grid. This must be done as a coordinated public relations campaign involving the major stakeholders - government, utilities, technology providers and non-profit industry groups. A piecemeal approach, in my humble opinion, is doomed to failure.
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