Plugging in the Consumer

Thanks to new technologies and the spirit of independence and empowerment fostered by the digital age, consumers are taking on broader and more active roles in an increasing number of industries. Not only are consumers increasingly vocal and decisive about what they will or will not buy, they are in many cases becoming designers, producers, marketers and distributors of the products they once simply purchased.

As an example, consider the evolution of television and other video-based entertainment. Consumers in the early television era were passive participants, watching whatever programs the networks were broadcasting on one of the few available channels at any given time. Decisions regarding content sat firmly in the hands of broadcasters.

But in recent decades the media and entertainment business has changed dramatically. Cable and satellite made early inroads by providing viewers with hundreds of additional channel choices and niche programming. More recently, options such as digital video recorders, video on demand, video programming on mobile devices and online content libraries have emerged, giving consumers much greater control over what, where and when they watch. Moreover, pockets of media enthusiasts are taking on even more participatory roles, producing and marketing their own content.

Could something similar happen in the energy industry? One way to look at this question is to consider parallels between the way that media and entertainment have developed, and some of the realistic future business models for the energy industry. While the two industries are very different, there’s a strong possibility that consumer involvement in the energy business could evolve along similar lines, as illustrated in Figure 1.

Consumers have become more and more accustomed to choice, selectivity and multiple pricing schemes in services used every day. High tech products like mobile phones and Internet service usually spring to mind first, but personalization of services and products is occurring even in centuries-old institutions like medicine, education and food distribution. Fifty years ago, who would have envisioned customers accepting limitations on what doctors they could see in exchange for lower health care costs, pursuing degrees without attending classes or paying a premium for foods that met specific conditions on their production? Yet today health maintenance and preferred provider organizations, online degrees and organic foods are all commonplace concepts.

The more consumers enjoy the benefits of options and active decision making, the stronger the pressure will be on the energy industry to adapt. This means that utilities must revisit long-held beliefs about how best to serve customers and prepare to make fundamental changes in their strategies and operations in order to prosper in a more participatory market.

CONSUMER INVOLVEMENT

Many utility executives are skeptical about whether consumers really want to have different energy service options, and whether they will act on those desires. After all, electricity, natural gas and heating oil are essentially commodities. But so is broccoli, and millions of consumers are unwilling to settle for conventionally grown produce. Instead, they’re willing to pay more for food certified as grown without pesticides and artificial fertilizers, and under conditions that emphasize the use of renewable resources and the conservation of soil and water. [1] Given this perspective, can the energy industry afford not to prepare for rising consumer demand for multiple service programs and different pricing tiers?

To help address some of these questions, IBM conducted a survey of 1,900 energy consumers from six countries in North America, Western Europe and parts of the Asia-Pacific region. The survey focused on consumers’ current views and, perhaps more importantly, their expectations of the utilities that serve them. Their responses underscore four trends in energy consumer behavior, each indicating that customers value the same type of control they exercise in other parts of their lives: consumers are leveraging provider choice options, managing usage more actively, moving toward self-generation of power and making their opinions heard through multiple channels (not just public regulators).

Controlling Their Purchases

In some regions with competitive markets, consumers are already exercising their right to select energy providers. In the United Kingdom’s market of 48 million electricity consumers, for instance, more than 15 percent are switching per year.

In addition, the IBM survey demonstrates that a basic lack of awareness may still be holding consumers back. Across the worldwide respondent sample, one out of every five consumers did not know whether they could choose an alternative electricity provider.

Nevertheless, consumers were clear about wanting a choice. Among those who could not change providers or were not aware of their ability to choose, 84 percent wanted the option, as shown in Figure 2.

While price will always be a factor in consumer behavior, competition is also fostering a host of decision-making criteria that consumers might not have even considered before. According to the results of the IBM survey, consumers now consider a utility’s ethical reputation, alignment with community values and environmental actions as important as traditional “buyer values” like customer service and reliability.

Many consumers now have more choices about the type of energy they buy as well. More than 60 percent of the respondents to the IBM survey said they would be willing to pay a premium for green energy, and a significant minority (one in five consumers) indicated a willingness to pay at least 20 percent more for an environmentally friendly product.

Controlling the Switch

Only 30 percent of the consumers IBM surveyed expected their electricity use to increase over the next five years – yet 60 percent expected higher electricity bills. In times of rising energy costs, there is high motivation for conservation. But with many consumers also assuming a share of the responsibility for protecting the environment, finding new ways to better manage consumption has become a top-of-mind issue.

Although consumers have always been able to reduce usage through “brute force” measures – adjusting thermostats, switching off lights and the like – they are just now gaining the ability to truly manage consumption through greater awareness and better tools.

As smart meter deployment allows more consumers to obtain real-time usage data at the device and appliance level, households and small businesses will know which conservation actions really make an impact. This will enable better decisions and more permanent behavior changes.

Controlling Supply

When providers are unwilling or unable to satisfy their needs, consumers have an increasingly viable alternative: the technology to generate their own electricity.

As consumers weigh the self-generation option, cost is clearly a significant driver but not the only one, as illustrated in Figure 3.

If self-generation could reduce energy costs by 50 percent, well over half of the consumers we surveyed would be motivated to install, maintain and operate their own power generation systems. Yet among those same respondents, reliability and environmental impact seemed to matter more than a small (10 percent) cost reduction.

Interestingly, getting paid for surplus power received the most favorable reaction from survey respondents. Besides offering a financial payback that helps offset upfront investment and operational expense, we suspect this response also reflects an underlying desire to assert more control over a purchase for which conditions have historically been dictated to them.

Many of the industry executives we interviewed agree that widespread adoption of self-generation is not that far off. More than half believe that the value from a low-cost, low-emission generating technology could move a significant percentage of residential and small commercial customers to self-generation within the next decade.

It’s important to note that although the “competition” for traditional utility companies has traditionally been viewed as emerging alternative providers employing the existing distribution system, focusing only on this particular threat results in an incomplete picture. If technologies such as small-scale solar and combined heat and power generation were to rapidly drop in cost, customer migration to these options would serve as another competitive pressure for which utility executives would have to develop a defensive strategy.

Controlling Their Own Destinies

It’s easy to understand why consumers might become skeptical about the utility industry given power blackouts that affect millions of people, price hikes driven by factors that are little understood and the pursuit of mergers and acquisitions without benefits that are clear to customers. Events like these contribute to growing consumer concern – not only about utilities and their motives, but also about the regulatory process currently in place to protect the public. Consumers are increasingly unwilling to wait for regulators to act “in their best interests.” Instead, they’re going directly to lawmakers, the press and special-interest groups to try and enforce change.

For example, in January 2007, a 1997 Illinois deregulation bill expired, ending a 10-year rate freeze. As the shock of a sudden and dramatic rate increase set in, public pressure caused legislators to intervene – ultimately driving the state’s primary distribution utilities to provide a multi-year, billion-dollar rate relief package to help reduce the financial burden on ratepayers. [3]

Other Drivers and Enablers of Customers’ Desire for Control

Climate change is the one driver for which the goals and needs of both utilities and consumers converge. Consumers are clearly interested in the environmental practices of the companies with which they do business. Indeed, 70 percent of those surveyed reported that environmental considerations were already an important factor in choosing products other than energy, and that these concerns would ultimately also influence the energy products they purchased as well.

Of consumers who are aware of renewable power options available to them, almost 40 percent purchased some or all of their power under such a plan. Among the rest, more than 60 percent expressed interest in doing so. Utilities, for their part, are making major investments and operational changes to respond to climate change concerns and policies. In fact, the percentage of utilities spending at least 10 percent of their capital expenditures on environmental compliance over the next five years is expected to double.

To make the improvements needed to address the concerns discussed above, utilities will likely receive strong support for deployment of advanced energy technologies. Many of these have been available in some form for years, but their business cases have been rather lackluster. However, during the last three to five years, the technologies have continued to advance; their benefits have strengthened dramatically; and the costs of deployment have decreased. In the near term, smart meters, network automation and analytics, and distributed generation will likely drive the most industry change.

The emergence of these two trends, combined with growing consumer involvement, will have far-reaching consequences for the utility industry. Collectively, these drivers are overturning traditional assumptions about energy consumers and the fundamental value proposition of the industry itself. Companies will be forced to look at their residential and small commercial customer population in discrete segments, instead of as a largely uniform block of ratepayers. Ultimately, as the degree of control shifts from the utility to consumers, network and generation technologies will move away from the traditional centralized, one-way model to a more dynamic and distributed one. New industry structures will emerge, creating new opportunities and challenging existing models.

CONSUMERS: NO LONGER JUST PASSIVE RATEPAYERS

Our detailed analysis of the consumer survey responses showed that two primary characteristics define different types of consumer behavior. First, personal initiative, or the willingness to make decisions and take action based on specific goals – such as cost control, reliability, convenience and climate change impacts – will drive consumer behavior.

Second, disposable income – or the financial wherewithal to support energy-related goals in early adoption phases – will have a substantial impact on consumer actions, since only those with sufficient resources will be able to implement new technologies and buy more expensive products. Different combinations of these two characteristics lead to four distinct consumer profiles, as shown in Figure 4.

Each consumer segment has specific needs and wants, and utilities will need to adopt different strategies, and likely develop different offerings, for each. However, before utilities can begin tailoring their approaches to particular segments, most will need to invest in tools and capabilities that help them collect and analyze consumer data, particularly as huge quantities of real-time data and new information streams are generated by deployment of advanced sensing, metering and communications technologies.

THE IMPACT OF INCREASED CONSUMERS CONTROL

Recent trials have demonstrated that both customers and local utilities derive benefits from consumers taking a more active role in their energy decisions. For example, in a yearlong program in the Pacific Northwest giving consumers the ability to customize their energy use to save money or maximize comfort, participants saved approximately 10 percent on their electricity bills and reduced peak power use by 15 percent. Throughout the region, the information, communications and control technologies and algorithms provided by Pacific Northwest National Laboratory, IBM and Invensys Controls helped consumers in the study become an integral part of power grid operations on a daily basis – especially in times of extreme stress on the electrical distribution system. A combination of demand response and distributed generation reduced peak distribution loads by as much as 50 percent. (For more information about this program, see “Case Study: The GridWise Olympic Peninsula Project” elsewhere in this book.)

Another pilot, run by Canada’s Ontario Energy Board tested consumers’ inclination to shift and reduce demand when provided with smart meters and time-of-use pricing. On average, three-quarters of the participants shifted enough of their consumption away from peak times to save 3 percent per month on their energy bills. During four peak summer events, when penalties and rebates applied, shifts in consumption led to even greater savings – as much as 25 percent, depending on the specific plan the customer was using. As a result of their awareness of energy usage and behavioral changes, participants also reduced total consumption. This “conservation effect” amounted to a 6 percent reduction in overall usage. When combined with the effects of shifting, this allowed 90 percent of the participants to pay less than they would have paid on their prior plans – results that are particularly remarkable given that consumers were relying on monthly usage statements; if consumers had a near real-time view of their energy
usage, these reductions might have been even more dramatic. (For more on this trial, see “Case Study: Smarter Prices for Smarter Consumers in Ontario” elsewhere in this book.)

INDUSTRY MODELS: TOWARD A PARTICIPATORY NETWORK

We believe that studies like those outlined above demonstrate the strong benefits of both technology evolution and shifts in the balance of control between utilities and consumers. The nature of the benefits will depend on the path chosen to move from current “passive” business models to more active ones. Specific types of technology and customer behavior evolution will give rise to four industry models, as shown in Figure 5.

Although each model is distinct and requires different capabilities, the industry as a whole – at least in the near term – will represent an amalgam of all four models. In fact, many utilities will find themselves operating in more than one model, particularly if a company operates in different geographies. In addition, moves across boundaries will tend to be evolutionary and depend on local conditions.

Where consumers aren’t as eager to assume control of decision-making – or regulators don’t allow them the freedom to do so – companies will be most likely move from traditional models through a state of operations transformation before fully enabling participatory networks. Where this path dominates, utilities will need to build business cases around cost savings and environmental benefits to deploy new technologies. In a high-cost, carbon-constrained environment, however, this should be an easier sell to regulators and investors than in the past.

In markets where consumer demand for control grows faster than new technologies can be deployed, particularly in heavily regulated rate-of-return environments, constrained choice will dominate in the near term. Utilities will be pressured to meet demand for control in creative – and sometimes untested – ways. And regulators may need to be more flexible in viewing these investments than they might be with traditional utility capital investments. For both parties, early assessment of needs and review of available options will be critical.

Whichever path is adopted, we anticipate a steady progression toward a participatory network – a technology ecosystem comprising a wide variety of intelligent network-connected devices, distributed generation and consumer energy management tools.

Although the precise time frame for reaching this end-state is unknown, our research suggests a few major milestones. Within five years, the percentage of the world’s electric utilities generating at least 10 percent of their power from renewable sources should double. In that same time frame, we believe that sufficient supplier choice will allow meaningful consumer switching to emerge in most major competitive markets. Also, based on both consumer and utility responses, we expect utility demand management initiatives to expand dramatically and electric power generation by consumers to increase dramatically within a decade.

IMPLICATIONS: CUSTOMER FOCUS AS A COMPETITIVE ADVANTAGE

By leveraging the new technology ecosystem, utilities will be able to meet key objectives in coming years. Specifically, they’ll be able to:

Prepare for an environment in which customers are more active participants;
Capitalize on new sources of real-time consumer and operational information, and decide which role(s) to play in the industry’s evolving value chain; and
Better understand and serve an increasingly heterogeneous customer base.

The utility industry is fast approaching a tipping point beyond which consumers can (and increasingly will) demand equal footing with their providers. Those utilities that are prepared to share responsibility with their residential and small commercial customers, and help them meet their specific energy goals, can expect to enjoy significant competitive advantage.

Enhancing Energy Efficiency and Security for Sustainable Development

The United States Energy Association (USEA) is a private, nongovernmental organization that functions as the U.S. member committee of the World Energy Council (WEC), the foremost international organization focused on the production and utilization of energy. With members in more than 100 countries, the mission of the WEC, and correspondingly the USEA, has been to promote the sustainable supply and use of energy for the greatest benefit of all people.

The World Energy Council’s flagship is the WEC Congress, which meets every three years. The Congress helps establish how the global energy community looks at the world as well as how we impact that world. When the United States had the privilege of hosting the global energy community 10 years ago in Houston, it promoted the following theme: “Energy and Technology: Sustaining Global Development into the Next Millennium.” The most recent Congress, which took place in Italy in November of last year, centered on “The Energy Future in an Interdependent World.” One can easily see how the WEC’s combined objectives of energy efficiency and energy security – particularly in the context of collaborative action to mitigate climate change – have become critical global issues.

KEY CONCERNS

Efficiency, security and climate are being emphasized in WEC scenarios that project key global energy concerns to the year 2050. The critical factors that will drive energy issues into the future will include the following:

Technology;
Markets;
Sustainability; and
Interdependence.

It’s clear that we need to advance research into and development of energy sources; however, it’s even more urgent that we support the demonstration and deployment of advanced clean energy technologies. Currently, policymakers are paying considerable attention to consumer use of energy in buildings and transportation, and they are evaluating alternative technologies to meet these consumer demands. Equally important but often overlooked are the advances our industry has made, and hopefully will continue to make, in energy efficiency through technological improvements in production.

Research from the Electric Power Research Institute indicates that coal-fired electric power plants that achieve a 2 percent gain in efficiency can yield a carbon dioxide (CO₂) reduction of 5 percent. Hence, if we can move the rating of the global coal-fired power fleet from about 30 percent efficiency to 40 percent, we can realize a CO₂ reduction of 25 percent. And this is without carbon capture and storage.

It’s also critically important for energy technology deployment to address the nontechnical barriers to advancing clean energy technologies. Barriers to energy efficiency and energy services trade need to be discussed by the World Trade Organization, since robust trade is essential to ensuring that energy-efficiency technologies cross borders freely. Trade barriers such as tariffs, taxes, customs and import fees need to be eliminated. As World Energy Council Secretary General Gerald Doucet recently pointed out in the International Herald Tribune, “A recent U.S. and EU proposal calling for the elimination of tariffs on a list of 43 environmentally friendly products shows how support is building for a trade-based approach to climate mitigation.”

Perhaps most importantly, the global community must address the issue of the cost of advanced, clean energy technology. Trade barriers, capacity building, tariff reform and other issues can be overcome. However, if we refuse to recognize that advanced clean energy technology will cost more and make energy prices rise for the end-user, we’re refusing to address the real issues – namely, who will pay the incremental cost of advanced technology, and will it be the economically deprived end-user in a developing country?

This is not to say that the non-financial barriers to sustainable energy development are unimportant. Collectively, we still need increased focus on enforcement of contracts, protection of intellectual property, rule of law, protection of assets from seizure and the range of requirements needed to provide incentives for capital, especially foreign investment.

however, markets can only do so much; markets are imperfect, and market failures occur. Coordinated global cooperation – among governments and between governments and the private sector – is critical, particularly to address efficiency, security and climate concerns.

SUSTAINABLE REALITIES

Sustainability remains an elusive goal for many, because it’s not particularly clear how to go about both growing economies and protecting the planet for future generations. What is clear is that climate change must be addressed in an approach that is practical, economic and achievable. For our industry, achievable policy includes political realities. All industries are affected by domestic politics, but in most countries, the energy industry is dramatically influenced by local political concerns.

The move toward sustainability will also have an impact on the 1.5 billion people without access to commercial energy and the 1.5 billion with inadequate access. hopefully, no one believes that sustainability means denying the benefits of modern society to those who are unserved or under-served today. We must find ways to work toward ending economic and energy poverty for hundreds of millions of people around the globe. This calls for new approaches that continue to allow economic development while addressing both local environmental issues and global issues such as climate change.

AN INTERDEPENDENT WORLD

The concept of energy interdependence helps us recognize that very few nations are today – or ever will be – truly “energy independent.” Much of the rhetoric regarding the energy independence of the United States and other nations is, in fact, vague and not based on reality. Thus, it’s critical to expose this fantasy for what it is: wishful thinking. Interdependence is the ally, not the enemy, of energy security.

As Rex Tillerson, chairman and CEO of Exxon-Mobil, pointed out in his keynote address to the World Energy Congress in Rome in November 2007, the world needs to avoid “the danger of resources nationalism.” he also stressed the need to “ensure that the global energy markets and international partnerships do not fall apart.” In the United States in 2008, domestic consumption will continue to exceed domestic production. We will import more petroleum (about 60 percent of our petroleum is now imported) and increasingly more natural gas.

WORKING TOWARD A SUSTAINABLE FUTURE

Construction of critical energy supply infrastructure presents a huge challenge. As we begin 2008 in the United States, it’s critical that we recognize that all energy supply options – coal, nuclear, natural gas, petroleum and renewable – have severe constraints. This recognition must lead us to declare energy efficiency as Priority No. 1 for energy and economic security, and climate mitigation.

While we have done much in the United States to pursue efficiency, we still need to do more, including:

Increasing the utilization of combined heat and power applications;
Further improving efficiency standards;
Improving land use and transportation planning;
Providing incentives for efficiency investments; and
Decoupling regulated utility returns from sales.

On an international level, we must continue to:

Pursue energy efficiency in both supply and demand (increasing both end-use efficiency and production efficiency);
Decarbonize electricity (moving toward emissions-free power by mid-century);
Contain growth in transportation emissions and develop carbon-free alternatives; and
Support major collaborative efforts on technology development and deployment such as Asia-Pacific Partnership on Clean Development and Climate, International Partnership for the hydrogen Economy, Carbon Sequestration Leadership Forum, and Major Economies Process for Energy Security and Climate Change.

The trilateral issues of energy efficiency, energy security and climate change are reflected in all of our international partnerships. Nevertheless, much more international collaboration will be needed to speed the deployment of energy efficiency technologies.

As we think about energy efficiency, security and climate, it’s critical for us to remember the following:

No single source, technology, policy or strategy can meet the challenges we face. All energy options should be left on the table. No “one size fits all” solution exists.
No single approach will work everywhere. Different measures will be useful, and each economy or nation will consider the options that work for them. A range of measures is available, and actions must be selected that are appropriate to each circumstance.

The key for the global community will be to encourage each sovereign economy to put in place policies that support longterm investment in clean energy technology. International cooperation among governments, and between governments and the private sector, is essential. The focal points of international cooperation should stress energy efficiency (in both supply and demand), decarbonizing electric power (while recognizing that the world will continue to rely on fossil fuels, particularly coal for power generation) and reducing the growth – and eventually the level – of emissions from transportation.

Finally, but perhaps most importantly, we must continue to push for a coordinated, international effort in advanced technology demonstration and deployment. The international partnerships cited early are useful tools, but we can and must do more.

Intelligent Communications Platform Provides Foundation for Clean Technology Solutions to Smart Grid

Since the wake-up call of the 2003 blackout in the northeastern United States and Canada, there’s been a steady push to improve the North American power grid. Legislation in both the United States and Canada has encouraged investments in technologies intended to make the grid intelligent and to solve critical energy issues. The Energy Policy Act (EPAct) of 2005 mandated that each state evaluate the business case for advanced metering infrastructure (AMI). In Ontario, the Energy Conservation Responsibility Act of 2006 mandated deployment of smart meters to all consumers by 2010. And the recent U.S. Energy Independence and Security Act of 2007 expands support from the U.S. government for investments in smart grid technologies while further emphasizing the need for the power industry to play a leadership role in addressing carbon dioxide emissions affecting climate change.

Recent state-level legislation and consumer sentiment suggest an increasing appetite for investments in distributed clean-technology energy solutions. Distributed generation technologies such as solar, wind and bio-diesel are becoming more readily available and have the potential to significantly improve grid operations and reliability.

THE NEXT STEP

Although the full vision for the smart grid is still somewhat undefined, most agree that an intelligent communications platform is a necessary foundation for developing and realizing this vision. Of the 10 elements that define the smart grid as contained within the Energy Act of 2007, more than half directly relate to or involve advanced capabilities for advanced communications.

A core business driver for intelligent communications is full deployment of smart metering, also referred to as advanced metering infrastructure. AMI involves automated measurement of time-of-use energy consumption – at either hourly or 15-minute intervals – and provides for new time-of-use rates that encourage consumers to use energy during off-peak hours when generation costs are low rather than peak periods when generation costs are high and the grid is under stress. With time-of-use rates, consumers may continue to use power during high peak periods but will pay a higher price to do so. AMI may also include remote service switch functionality that can reduce costs associated with site visits otherwise required to manage move-out/move-ins or to support prepayment programs.

Other smart grid capabilities that may be easily realized through the deployment of intelligent communications and AMI include improved outage management detection and restoration monitoring, revenue assurance and virtual metering of distribution assets.

CRITICAL ATTRIBUTES OF AMI SOLUTIONS

Modern communications network solutions leverage standards-based technology such as IEEE 802.15.4 to provide robust two-way wireless mesh network communications to intelligent devices. The intelligent communications platform should provide for remote firmware upgrades to connected intelligent devices and be capable of leveraging Internet protocol-based communications across multiple wide-area network (WAN) options (Figure 1).

Critical for maximizing the value of a communications infrastructure investment is support for broad interoperability and interconnectivity. Interoperability for AMI applications means supporting a range of options for metering devices. A communications platform system should be meter manufacturer-independent, empowering choice for utilities. This provides for current and future competitiveness for the meter itself, which is one of the more expensive elements of the smart metering solution.

Interconnectivity for communications platforms refers to the ability to support a broad range of functions, both end-point devices and systems at the head end. To support demand-side management and energy-efficiency initiatives, an intelligent communications platform should support programmable communicating thermostats (PCTs), in-home displays (IHDs) and load control switches.

The system may also support standards-based home-area networks (HANs) such as ZigBee and Zensys. Ultimately an intelligent communications platform should support a model whereby third-party manufacturers can develop solutions that operate on the network, providing competitive options for utilities.

For enterprise system interconnectivity, an AMI demand-side management or other smart grid head-end application should be developed using service-oriented architecture (SOA) principles and Web technologies. These applications should also support modern Web services-based solutions, providing published simple object access protocol (SOAP)-based APIs. This approach provides for easier integration with existing enterprise systems and simplifies the process of adding functionality (either through enhancements provided by the vendor or add-ons delivered by third parties or developed by the utility).

Finally, the value of an intelligent communications platform deployment is driven by the ability of other enterprise applications and processes to utilize the vast amount of new data received through the AMI , demand side management and smart grid applications. Core areas of extended value include integration with customer information systems and call center processes, and integration with outage management and work management systems. In addition, the intelligent communications platform makes utilities much better able to market new offerings to targeted customers based on their energy consumption profiles while also empowering consumers with new tools and access to information. The result: greater control over energy consumption costs and improved satisfaction.

INTEGRATION OF DISTRIBUTED GENERATION RESOURCES

Deployment and integration of distributed generation, including renewable resources, is an important supply-side element of the smart grid vision. This may include the installation of arrays of solar photovoltaic panels on home and office roofs, solar carports, small wind (3-5kvA) turbines, small biogas turbines and fuel cells.

By integrating these resources into a common communications platform, utilities have the opportunity to develop solutions that achieve much greater results than those provided simply by the sum of independent systems. For example, intelligent plug-in hybrid electric vehicles (PHEvs) connected to a smart solar carport may choose when to purchase power for charging the car or even to sell power back to the grid in a vehicle-to-grid (v2G) model based on dynamic price signals received through the communications platform. By maintaining intelligence at the edge of the grid, consumers and distributed resource owners can be empowered to manage to their own benefits and the grid as a whole.

SUMMARY

Now is the time to embark on realizing the smart grid vision. Global warming and system reliability issues are driving a sense of urgency. An intelligent communications platform provides a foundation capable of supporting multiple devices in multiple environments – commercial, industrial and residential – working seamlessly together in a single unified network.

All of the technical assets of a smart grid can be managed holistically rather than as isolated or poorly connected parts. The power of a network grows geometrically according to the amount of resources and assets actively connected to it. This is the future of the smart grid, and it’s available today.

Wind Energy: Balancing the Demand

In recent years, exponential demand for new U.S. wind energy-generating facilities has nearly doubled America’s installed wind generation. By the end of 2007, our nation’s total wind capacity stood at more than 16,000 megawatts (MW) – enough to power more than 4.5 million average American homes each year. And in 2007 alone, America’s new wind capacity grew 45 percent over the previous year – a record 5,244 MW of new projects and more new generating capacity than any other single electricity resource contributed in the same year. At the same time, wind-related employment nearly doubled in the United States during 2007, totaling 20,000 jobs. At more than $9 billion in cumulative investment, wind also pumped new life into regional economies hard hit by the recent economic downturn. [1]

The rapid development of wind installations in the United States comes in response to record-breaking demand driven by a confluence of factors: overwhelming consumer demand for clean, renewable energy; skyrocketing oil prices; power costs that compete with natural gas-fired power plants; and state legislatures that are competing to lure new jobs and wind power developments to their states. Despite these favorable conditions, the wind energy industry has been unable to meet America’s true demand for new wind energy-generating facilities. The barriers include the following: availability of key materials, the ability to manufacture large key components and the accessibility of skilled factory workers.

With the proper policies and related investments in infrastructure and workforce development, the United States stands to become a powerhouse exporter of wind power equipment, a wind technology innovator and a wind-related job creation engine. Escalating demand for wind energy is spurred by wind’s competitive cost against rising fossil fuel prices and mounting concerns over the environment, climate change and energy security.

Meanwhile, market trends and projections point to strong, continued demand for wind well into the future. Over the past decade, a similar surge in wind energy demand has taken place in the European Union (E.U.) countries. Wind power capacity there currently totals more than 50,000 MW, with projections that wind could provide at least 15 percent of the E.U.’s electricity by 2020 – amounting to an installed wind capacity of 180,000 MW and an estimated workforce of more than 200,000 people in wind power manufacturing, installation and maintenance jobs.

How is it, then, that European countries were able to secure the necessary parts and people while the United States fell short in its efforts on these fronts? After all, America has a bigger land mass and a larger, more high-quality wind resource than the E.U. countries. Indeed, the United States is already home to the world’s largest wind farms, including the 735-MW Horse Hollow Wind Energy Center in Texas, which generates power for about 230,000 average homes each year. What’s more, this country also has an extensive manufacturing base, a skilled labor pool and a pressing need to address energy and climate challenges.

So what’s missing? In short, robust national policy support – a prerequisite for strong, long-term investment in the sector. Such support would enable the industry to secure long lead-time materials and sufficient ramp-up to train and employ workers to continue wind power’s surging growth. Thus, the United States must rise to the occasion and assemble several key, interrelated puzzle pieces – policy, parts and people – if it’s to tap the full potential of wind energy.

POLICY: LONG-TERM SUPPORT AND INVESTMENT

In the United States, the federal government has played a key role in funding research and development, commercialization and large-scale deployment of most of the energy sources we rely on today. The oil and natural gas industry has enjoyed permanent subsidies and tax credits that date back to 1916 when Congress created the first tax breaks for oil and gas production. The coal industry began receiving similar support in 1932 with the passage of the first depletion allowances that enabled mining companies to deduct the value of coal removed from a mine from their taxable revenue.

Still in effect today, these incentives were designed to spur exploration and extraction of oil, gas and coal, and have since evolved to include such diverse mechanisms as royalty relief for resources developed on public lands; accelerated depreciation for investments in projects like pipelines, drilling rigs and refineries; and ongoing support for technology R&D and commercialization, such as the Department of Energy’s now defunct FutureGen program for coal research, its Deep Trek program for natural gas development and the VortexFlow SX tool for low-producing oil and gas wells.

For example, the 2005 energy bill passed by Congress provided more than $2 billion in tax relief for the oil and gas industry to encourage investment in exploration and distribution infrastructure. [2] The same bill also provided an expansion of existing support for coal, which in 2003 had a 10-year value of more than $3 billion. Similarly, the nuclear industry receives extensive support for R&D – the 2008 federal budget calls for more than $500 million in support for nuclear research – as well as federal indemnity that helps lower its insurance premiums. [3]

Over the past 15 years, the wind power industry has also enjoyed federal support, with a small amount of funding for R&D (the federal FY 2006 budget allotted $38 million for wind research) and the bulk of federal support taking the form of the Production Tax Credit (PTC) for wind power generation. The PTC has helped make wind energy more cost-competitive with other federally subsidized energy sources; just as importantly, its relatively routine renewal by Congress has created conditions under which market participants have grown accustomed to its effect on wind power finance.

However, in contrast to its consistent policies for coal, natural gas and nuclear power, Congress has never granted longterm approval to the wind power PTC. For more than a decade, in fact, Congress has failed to extend the PTC for longer than two years. And in three different years, the credit was allowed to expire with substantial negative consequences for the industry. Each year that the PTC has expired, major suppliers have had to, in the words of one senior wind power executive, “shut down their factories, lay off their people and go home.”

In 2000, 2002 and 2004, the expiration of the PTC sent wind development plummeting, with an almost complete collapse of the industry in 2000. If the PTC is allowed to expire at the end of 2008, American Wind Energy Associates (AWEA) estimates that as many as 75,000 domestic jobs could be lost as the industry slows production of turbines and power consumers reduce demand for new wind power projects.

The last three years have seen tenuous progress, with Congress extending the PTC for one and then two years; however, the wind industry is understandably concerned about these short-term extensions. Of significant importance is the corresponding effect a long-term or permanent extension of the PTC would have on the U.S. manufacturing sector and related investment activity. For starters, it would put the industry on an even footing with its competitors in the fossil fuels and nuclear industries. More importantly, it would send a clear signal to the U.S. manufacturing community that wind power is a solid, long-term investment.

PARTS: UNLEASHING THE NEXT MANUFACTURING BOOM

To fully grasp the trickle-down effects of an uncertain PTC on the wind power and related manufacturing industries, one must understand the industrial scale of a typical wind power development. Today’s wind turbines represent the largest rotating machinery in the world: a modern-day, 1.5-megawatt machine towers more than 300 feet above the ground with blades that out-span the wings of a 747 jetliner, and a typical utility-scale wind farm will include anywhere from 30 to 200 of these machines, planted in rows or staggered lines across the landscape.

The sheer size and scope of a utility-scale wind farm demands a sophisticated and established network of heavy equipment and parts manufacturers can fulfill orders in a timely fashion. Representing a familiar process for anyone who’s worked in a steel mill, forgery, gear-works or similar industrial facility, the manufacture of each turbine requires massive, rolled steel tubes for the tower; a variety of bearings and related components for lubricity in the drive shaft and hub; cast steel for housings and superstructure; steel forgings for shafts and gears; gearboxes for torque transmission; molded fiberglass, carbon fiber or hybrid blades; and electronic components for controls, monitoring and other functions.

U.S. manufacturers have extensive experience making all of these components for other end-use applications, and many have even succeeded in becoming suppliers to the wind industry. For example, Ameron International – a Pasadena, Calif.-based maker of industrial steel pipes, poles and related coatings – converted an aging heavy-steel fabrication plant in Fontana, Calif., to make wind towers. At 80 meters tall, 4.8 meters in diameter and weighing in at 200 tons, a wind tower requires large production facilities that have high up-front capital costs. By converting an existing facility, Ameron was able to capture a key and rapidly growing segment of the U.S. wind market in high-wind Western states while maintaining its position in other markets for its steel products.

Other manufacturers have also seen the opportunity that wind development presents and have taken similar steps. For example, Beaird Co. Ltd, a Shreveport, La.-based metal fabrication and machined parts manufacturer, supplies towers to the Midwest, Texas and Florida wind markets, as does DMI Industries from facilities in Fargo, N.D., and Tulsa, Okla.

But the successful conversion of existing manufacturing facilities to make parts for the wind industry belies an underlying challenge: investment in new manufacturing capacity to serve the wind industry is hindered by the lack of a clear policy framework. Even at wind’s current growth rates and with the resulting pent-up domestic demand for parts, the U.S. manufacturing sector is understandably reticent to invest in new production capacity.

The cause for this reticence is depicted graphically in Figure 1. With the stop-and-go nature of the PTC regarding U.S. wind development, and the consistent demand for their products in other end-use sectors, American manufacturers have strong disincentives to invest in new capital projects targeting the wind industry. It can take two to six years to build a new factory and 15 or more years to recapture the investment. The one- to two-year investment cycle of the U.S. wind industry is therefore only attractive to players who are comfortable with the risk and can manage wind as a marginal customer rather than an anchor tenant. This means that over the long haul, the United States could be legislating itself out of the “renewables” space, which arguably has a potential of several trillion dollars of global infrastructure.

The result in the marketplace: the United States ends up importing many of the large manufactured parts that go into a modern wind turbine – translating to a missed opportunity for domestic manufacturers that could be claiming a larger chunk of the underdeveloped U.S. wind market. As the largest consumer of electricity on earth, the United States also represents the biggest untapped market for wind power. At the end of 2007, with multiple successive years of 30 to 40 percent growth, wind power claimed just 1 percent of the U.S. electricity market. The raw potential for wind power in the United States is three times our total domestic consumption, according to the U.S. Energy Information Administration; if supply chain issues weren’t a problem, wind power could feasibly grow to supply as much as 20 to 30 percent of our $330 billion annual domestic electricity market. At 20 percent of domestic energy supply, the United States would need 300,000 MW of installed wind power capacity – an amount that would take 20 to 30 years of sustained manufacturing and development to achieve. But that would require growth well above our current pace of 4,000 to 5,000 MW annually – growth that simply isn’t possible given current supply constraints.

Of course, that’s just the U.S. market. Global wind development is set to more than triple by 2015, with cumulative installed capacity expected to rise from approximately 91 gigawatts (GW) by the end of 2007 to more than 290 GW by the end of 2015, according to forecasts by Emerging Energy Research (EER). Annual MW added for global wind power is expected to increase more than 50 percent, from approximately 17.5 GW in 2007 to more than 30 GW in 2015, according to EER’s forecasts. [4]

By offering the wind power industry the same long-term tax benefits enjoyed by other energy sources, Congress could trigger a wave of capital investment in new manufacturing capacity and turn the United States from a net importer of wind power equipment to a net exporter. But extending the PTC is not the final step: as much as any other component, a robust wind manufacturing sector needs skilled and dedicated people.

PEOPLE: RECLAIMING OUR MANUFACTURING ROOTS

In 2003, the National Association of Manufacturers released a study outlining many of the challenges facing our domestic manufacturing base. “Keeping America Competitive – how a Talent Shortage Threatens U.S. Manufacturing” highlights the loss of skilled manufacturing workers to foreign competitors, the problem of an aging workforce and a shift to a more urban, high tech economy and culture.

In particular, the study notes a number of “image” problems for the manufacturing industry. To wit: Among a geographically, ethnically and socio-economically diverse set of respondents – ranging from students, parents and teachers to policy analysts, public officials, union leaders, and manufacturing employees and executives – the sector’s image was found to be heavily loaded with negative connotations (and universally tied to the old “assembly line” stereotype) and perceived to be in a state of decline.

When asked to describe the images associated with a career in manufacturing, student respondents offered phrases such as “serving a life sentence,” being “on a chain gang” or a “slave to the line,” and even being a “robot.” Even more telling, most adult respondents said that people “just have no idea” of manufacturing’s contribution to the American economy.

The effect of this “sector fatigue” can be seen across the Rust Belt in the aging factories, retiring workforce and depressed communities being heavily impacted by America’s turn away from manufacturing. Wind power may be uniquely positioned to help reverse this trend. A growing number of America’s young people are concerned about environmental issues, such as pollution and global warming, and want to play a role in solving these problems. With the lure of good-paying jobs in an industry committed to environmental quality and poised for tremendous growth, wind power may provide an answer to manufacturers looking to lure and retain top talent.

We’ve already seen that you don’t need a large wind power resource in your state to enjoy the economic benefits of wind’s surging growth: whether it’s rolled steel from Louisiana and Oklahoma, gear boxes and cables from Wisconsin and New Hampshire, electronic components from Massachusetts and Vermont, or substations and blades from Ohio and Florida, the wind industry’s needs for manufactured parts – and the skilled labor that makes them – is massive, distributed and growing by the day.

UNLEASHING THE POWER OF EVOLUTION

The wind power industry offers a unique opportunity for revitalizing America’s manufacturing sector, creating vibrant job growth in currently depressed regions and tapping new export markets for American- made parts. For utilities and energy consumers, wind power provides a hedge against volatile energy costs and harvests one of our most abundant natural resources for energy security.

The time for wind power is now. As mankind has evolved, so too have our primary sources of energy: from the burning of wood and animal dung to whale oil and coal; to petroleum, natural gas and nuclear fuels; and (now) to wind turbines. The shift to wind power represents a natural evolution and progression that will provide both the United States and the world with critical economic, environmental and technological solutions. As energy technologies continue to evolve and mature, wind power will soon be joined by solar power, ocean current power and even hydrogen as cost-competitive solutions to our pressing energy challenges.

ENDNOTES

“American Wind Energy Association 2007 Market Report” (January 2008). www.awea.org/Market_Report_Jan08.pdf
Energy Policy Act of 2005, Section 1323-1329. www.citizen.org/documents/energyconferencebill0705.pdf
Aileen Roder, “An Overview of Senate Energy Bill Subsidies to the Fossil Fuel Industry” (2003), Taxpayers for Common Sense website. www.taxpayer.net/greenscissors/LearnMore/senatefossilfuelsubsidies.htm
“Report: global Wind Power Base Expected to Triple by 2015” (November 2007), North American Windpower. www.nawindpower.com/naw/e107_plugins/content/content_lt.php?content.1478