Our project is focused on the smart grid stack and the effect of the emerging smart grid technologies and business models will have on the larger energy industry. Figure 1 shows our preliminary stack analysis of the smart grid sector.
Figure 1: Smart Grid Stack
A smart grid delivers electricity from utilities to commercial and residential consumers using two-way digital technology. Using this digital communication, utilities can change their pricing to better reflect the true cost of energy at the time the energy is consumed. Consumers can change their energy usage to take advantage of this new pricing scheme. Device manufacturers build machines that automatically react to information generate by the smart gird. Consulting firms (in the Energy Management layer) help large energy consumers get maximum benefit from their energy decisions. Platform providers provide software that allows consumers, consultants, and devices collect and organize the information generated from the smart grid. The Generation, Transmission and Distribution layer is largely integrated by utilities and represents the smart grid’s interaction with the larger energy industry stack.
Integration of Smart Grid
Initial implementation of the smart grid infrastructure is being established by existing utility companies within their service areas. The initial smart grid suffers from a lack of standards that would allow for information sharing. While the free flow information would yield the greatest benefit to energy efficiency and end consumers, it may not be in the best interests of utilities to establish an open and integrated smart grid because such a smart grid could shift profitability to the platform and energy management layers.
The long term trend will be to move towards an integrated smart grid but how quickly that integration occurs creates two scenarios. Under the Slow Integration Scenario, the utilities keep their individual smart gird networks closed and unconnected. Under the Fast Integration Scenario, standards are set for hardware and software so that information can be freely shared within and between smart grid networks.
Information Security
The extension of two-way digital communications could make protecting the smart grid from a cyber attack very challenging. The smart grid would depend on computer-based control systems. These systems will be increasingly connected to open networks such as the internet, exposing them to cyber attacks. Any failure of our electric grid, whether intentional or unintentional, would have a significant and potentially devastating impact.
We cannot rule out terrorist attacks in the form of hacking into the control systems of the grid. Even a small manipulation of the system frequency can cause blackouts and damage equipments. So security risks need to be addressed properly to prevent billions of dollars of potential cyber attacks.
To mitigate the risks, a minimum of four layers of physical security must work to complement each other in the Smart Grid. The four layers are: 1) environmental design 2) mechanical and electronic access control 3) intrusion detection and 4) video monitoring. Some experts have suggested that monitoring transmission lines by satellite will be required.
Cross Industry Disruption
A quick look at the energy industry stack shows us that IT companies that have the scale of operations and the financial power to succeed have penetrated the energy industry. This has resulted in the blurring of industry boundaries. With the help of software solutions such as Google PowerMeter and Microsoft Hohm, these IT companies are creating and capturing value in the lucrative services layer of the energy industry stack. The entry of these companies carries the threat of commoditization for GE Energy’s core energy infrastructure products.
GE Energy appreciates the effort required to build competencies in Information Technology and to open a front against the established players such as Google and Microsoft. GE Energy is exploiting the disruptions caused by IT companies in the energy sector through strategic partnerships to drive growth in its core energy infrastructure and appliance businesses. GE Energy is using its current core energy infrastructure products and its consulting services as rich sources of cash. It then is using this cash to fund start-up companies that are leaders in the smart grid space. It is also using these ample resources to promote its smart meters, influence government policy and to promote the smart grid in a big way.
Strategic Partnerships
As the value in energy industry is shifted from traditional utility companies to more service oriented (storage, smart grid applications, etc.) companies, there will be two interesting battles in near future:
1. Standards: Standards for storage technology, smart grid device configurations (for the two way data flow), and finally, which platform will be the winner
2. Partnerships: Utility and device making companies have already begun fighting over strategic partnerships. They understand that the key to win in the new market dynamic is to influence winners in as many layers as possible. Notable partnerships are GE (device layer) with A123 systems (storage layer).
As most of our team identified “strategic partnerships” as a recommendation for our respective companies, we will focus on this issue in detail. We intend to focus on beneficiaries/losers of such partnerships and the effect of their subsequent reaction on the overall industry dynamic in the coming decade.
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