Towards Smart Grids: eMeter CEO Cree Edwards (Part 5)

SM: If I understand correctly, you are saying that energy pricing could be much more dynamic than it is today, and that if pricing more accurately reflected demand, it could adequately address supply concerns?

CE: Right now consumers pay the average, so it does not matter if you consume at midnight or at noon even though the wholesale market can be 10 times as high at noon. Having a solar panel is cost-justifiable if you are competing with peaking load from a utility. Our view is that if you create transparency, an enormous amount of innovation can take place. Electric vehicles can’t be supported in volume today because you can’t manage the distributed loads.

SM: What incentive do the utilities have to buy your solution?

CE: The public utilities commissions, who are ultimately the utilities customers because they affect utility profitability, have recognized there is a problem which can only be solved with better information systems. These commissions have come to the utilities and asked them to put in our products. They then allow the utilities to account for the cost in the rate base and earn on that.

SM: You essentially become capital expenditure on which they can earn 12.5%?

CE: Correct. That seems to be the best approach under the current regulatory structure.

SM: The current regulatory structure is convoluted and brain-dead. From my perspective, we need to see some new things happen. The return on assets at 12.5% is too high, and that should drop to somewhere in the 6% range. I also think that utilities should be able to share in efficiency earnings. Regulators need to create incentives for conservation and peak reduction; utilities should profit from not having to build power plants. A regulatory committee could create a baseline and let the shareholder earn 30% of what could be generated out of efficiency savings, and pass 70% on to rate payers. Right now there is no incentive for utilities to save energy.

CE: That would be a significant change to accomplish. What we try to do is create an environment in which all parties involved in the energy lifecycle can benefit from our innovation.

SM: I understand that, but I believe that utility companies have no real incentive to change. As long as they can use the accounting classification ‘Unaccounted-for Energy’, they have absolutely no reason to innovate. Why should they care if they are getting paid 12.5% for energy that they can’t account for? I don’t think utilities really care about improving because they do not need to improve. Correct me if I have my facts wrong, but weren’t people talking about giving power away in the 1970s when nuclear power came out because it was going to be so cheap? It seems to me the only reason people care now about efficiency is because of global warming. Nobody can tell me that it is acceptable for a company to be unable to account for 10% of its product. I know of companies that can account for everything in their operations, right down to the rolls of toilet paper they buy.

CE: Utilities have a unique marketplace because they must overproduce their product. You can’t allow peak energy to intersect with supply or you get a brownout, which is very bad for everybody. They keep generation capacity at 15-20% above peak demand to avoid brownouts.

SM: As a result, there are power plants which sit there year-round with full staff just in case they are needed to turn on, and utilities are earning 12.5% on that asset. The right answer is that as demand approaches supply, the price should change. It seems to me that we have a problem because utilities have no incentive to price energy that way because they don’t make money selling energy to the consumer. It is more profitable for them to go build another power plant that they can earn 12.5% on. There is no incentive to be efficient. In fact, it appears that there is a disincentive to be efficient. What I want to understand is how you are going to build a successful company in an environment in which there is no incentive to be efficient.

CE: Every utility in the developed world recognizes the need for the development of an information infrastructure as a direct feeder to the smart grid. It is a direct feeder to the energy industry of the future and all based on information they do not have today. Regulators are telling them to build the infrastructure to get the data.

We track the most advances states and countries throughout the world. We approach them and tell them that if they are going to build the infrastructure, they are going to need the software to run it. We now have a marketplace to sell to that does not require missionary sales through regulators.

SM: How many states and utilities have you been able to crack so far?

CE: We have a dozen utilities so far, as well as one starting up in Australia and another in Finland, which are building the infrastructures. There are early adopters in the utility industry, but to date nobody has installed and end-to-end system getting all the price points and functionality. Most utilities are sitting back and watching right now. There is no incentive to being first, and there is not a large disincentive to being last. What we are seeing now is the beginning of the movement of the herd to getting these things up and running.

This segment is part 5 in the series : Towards Smart Grids: eMeter CEO Cree Edwards
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