White Paper
Energy
Energy
Global Sourcing
May 7, 2009
From Policy to Implementation—
The Race to Build a Smart Grid
by Joseph Fagan, Michael Hindus, and Michael Murphy
North American utilities have been evaluating smart meter and smart grid
technologies for years. These implementations are difficult to plan and execute,
as utilities grapple with uncertainty surrounding the scalability of existing
technologies, the emergence of new technologies, a lack of guidance on future
standards and functionality and the risks associated with cost recovery and
regulatory support. Today, the development of the smart grid has taken on a
new urgency.
An effective national response to climate change and to the challenges associated with enhancing the efficient use of the country’s energy resources and infrastructure depends in large part on the modernization
of the electric transmission grid. The federal government has taken steps to address these challenges –
most notably in the passage of legislation aimed at facilitating the development and implementation of
needed standards, as well as in the allocation of economic stimulus funds to smart grid, renewable energy
and clean technology infrastructure. While these challenges are daunting in many respects, they also
present opportunities. New market entrants are appearing on a daily basis. The traditional meter/
networking industry has been eclipsed by a wave of home-automation and energy management products
and services. Utilities, energy companies, high tech giants and high tech start-ups are each scrambling to
capture their share of these emerging markets.
This paper outlines the issues and features of the deployment of smart grid technologies, from policy to
implementation. Pillsbury’s lawyers have decades of experience counseling energy, utility and service
clients in all facets of power generation, transmission and distribution (spanning policy, regulatory and
transactional issues) and have represented utilities in some of the largest smart grid deployments in North
America.
Assembling the Grid – Expanding Intelligence, Exploding Expectations
Tomorrow’s smart grid will extend far beyond the original conceptions of “automated metering” and “smart
metering.” Policy expectations now encompass a highly efficient and networked transmission system to
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accommodate a proliferation of renewable energy sources and the energy storage and management
challenges that they bring.
Within the distribution grid (including the “last mile” to the consumer), two-way, real-time information flows,
remote control of distribution infrastructure, and multi-directional power flows will become the norm.
Within the home, time-of-use pricing, home energy management systems fed by real-time price signals
and vehicle-to-grid power capability are on the drawing board. It is here that technology options have been
multiplying, as product and service companies see the potential to network home appliances and offer
web-based tracking, management and reporting services. In the fight for consumer mind-share, these
companies will compete with utilities, as well as with each other.
Across the grid, from the generation source to the home, interoperability, security and the ability to
upgrade devices remotely are the foundations for a truly smart and flexible grid. Work is under way to
refine existing standards, plug gaps in standards, and resolve technical conflicts so that utilities can begin
to deploy smart technologies with as much certainty as possible that their investments will not be
destroyed by major shifts in technology or the emergence of technology winners and losers.
Making the grid smarter means using existing resources more efficiently and more effectively. Smart grid
includes demand response and peak demand reduction. Advanced energy storage technologies will be an
important part of the smart grid of the not too distant future.
Adding to the complexity of these initiatives, there are simultaneous efforts to inject stimulus money into
the telecommunications sector through programs to expand broadband coverage nationwide. Those programs may create opportunities to leverage investment through coordination and combined use of infrastructure. They may also expand the range of communications options available to support the smart grid.
The smart grid will require a level of cooperation and integration among regulators, standards organizations, utilities, technology providers and service providers that the utility industry has never seen before.
Because funding is tied to economic stimulus policy, there is real pressure to move quickly – in some
cases faster than utilities and their regulators have traditionally been accustomed.
The Policy and Regulatory Framework
Federal Programs
At the national level, policy makers have driven the smart grid agenda through several key pieces of
legislation. The Energy Policy Act of 2005 (EPAct 2005) established a policy framework for the deployment
of demand response and advanced transmission technologies, but did not provide significant funding. In
particular, the EPAct 2005 directed the Federal Energy Regulatory Commission (FERC) to encourage the
use of advanced technologies, including those that emphasize demand response, distributed generation
and energy storage. The EPAct represented the first time that Congress established the development of
some of the key attributes of the smart grid as a national priority.
In 2007, the Energy Independence and Security Act (EISA) directed the Department of Energy (DOE) to
accelerate the development and deployment of smart grid technologies throughout the United States.
Among other things, EISA requires DOE to identify any regulatory/governmental barriers to the establishment of a smart grid; directs the adoption and implementation of nationwide standards for smart grid technologies; and provides funding, in the form of matching funds, for smart grid investments.
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As part of the more recent national economic stimulus efforts, the American Recovery and Reinvestment
Act of 2009 (ARRA) allocated $4.5 billion of federal funds for smart grid investments.
There are a number of additional proposed pieces of legislation addressing the smart grid:
„
The Heavy Duty Hybrid Vehicle Research, Development and Demonstration Act of 2009, a bill introduced in January 2009 by Rep. Jim Sensenbrenner, seeks to establish (among other things) a research,
development, demonstration and commercial application program to promote research of appropriate
technologies for heavy duty plug-in hybrid vehicles. The bill directs the Secretary of Energy to establish
a pilot program to research and test the effects on the domestic power grid of the widespread use of
plug-in hybrid vehicles.
„
The American Clean Energy and Security Act of 2009 (on which hearings began in the third week of
April, 2009), seeks to bring smart grid into the home. Appliance manufacturers would be encouraged to
have controllable applications labeled as “Smart Appliances,” following the very successful Energy Star
model. This bill also mandates peak demand reductions which could be met in part by energy storage
and other smart grid-enabled technologies.
Regardless of whether this legislation passes, it seems clear that smart grid will continue to be a favored
policy and one for which federal dollars will be available.
Standards Development
Federal policy makers recognized that there are significant existing technical barriers to the adoption of
smart grid technologies on a wide scale. Consequently, EISA directs the National Institute of Standards
and Technology (NIST) to coordinate the development of protocols and model standards to achieve interoperability of smart grid devices and systems across the national grid. NIST is now engaged in a public
program to develop a framework of interoperability standards on an accelerated schedule. NIST will submit
the standards framework to FERC, and FERC will implement it through a formal rulemaking process.
FERC has identified a number of issues that must be directly addressed by the interoperability standards:
„
data security and the security of smart grid devices;
„
the need for consistency with EISA and FPA reliability standards; and
„
the need for common standards that allow effective communication and coordination across different
systems interfaces when two or more grid systems need to exchange data with each other, even though
their internal systems may be quite different.
State Regulation
The most visible smart grid investments will be at the distribution level, where metering and other interactions with power consumers occur. These projects will therefore be reviewed by the local regulatory
authority in at least 51 state commissions and the governing boards of each publicly owned utility. As with
every other major capital expenditure for regulated utilities, smart grid projects will need to be approved
before the utility can get the expenditures in rate base and earn a return on the investment.
Accordingly, the time lag between the design of a smart grid program and its approval can cause complications for the smart grid rollout. By the time a program is approved, the original technology may have
been superseded. The utility may have to submit an amended or new application, often for higher costs
(but typically with enhanced functionality). It is critical for the utility and regulator not to enter into a
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counterproductive cycle where approvals lag behind the technology investment in order for utilities and
their customers to fully recognize the benefits of the smart grid and smart metering.
Federal Rate Regulation
Federal regulators also have a role to play. Investments in the interstate transmission electric grid are
eligible for rate recovery by utilities at FERC. Tasked by federal legislation with adopting smart grid
standards specific to the interstate electric transmission system and the wholesale electricity markets,
FERC proposed a plan in March 2009 to allow utilities to seek cost recovery of smart grid investments in
advance of the final implementation of any applicable standards. FERC proposed that utilities installing
smart grid technologies be allowed to recover their costs, provided they demonstrate system security and
follow existing reliability standards. FERC’s cost recovery policy dovetails with the Department of Energy’s
grant programs supporting smart grid deployments by transmission-owning entities under ARRA.
Challenges Raised By Smart Grid Development
This web of legislative initiatives and regulatory oversight creates significant challenges for the successful
implementation of smart grid technologies:
„
Will utilities find it difficult recover the costs of smart grid investments prior to the uniform adoption of
industry standards?
„
If investment in a smart grid technology is abandoned in favor of a superseding technology, will utilities
be permitted to recoup these investments?
„
Will regulators be able to adapt in a timely and supportive manner to the pace of smart grid technology
development?
„
Who will bear the costs of the deployment of these investments?
„
How will industry and regulators deal with the data privacy and cyber security issues? Leaving aside the
technical issues associated with protecting data from unauthorized access and use, the proliferation of
potential uses of grid and consumer data raises questions about the extent to which those uses should
be permitted and/or restricted by regulation or contractual arrangements among industry participants.
Acquisition of Smart Grid Systems
Unlike traditional utility investments, the smart grid will not be a single investment in one technology or
system. It will be assembled from many technologies and external services and, in its most mature form,
will be a constantly changing ecosystem or “system of systems” – field equipment, network equipment,
computing infrastructure, middleware, applications and web-based services. This creates special challenges for traditional utility procurement practices, and requires utilities to address unique contracting
issues.
During the acquisition process, it may be difficult to define “use cases” and technical specifications for the
technology, because expectations for the grid are changing and standards are evolving. This creates
uncertainty in the bidding and negotiation process, as evaluators struggle to compare products’ divergent
functional characteristics and maturity. The selection process must therefore be based on carefully constructed objectives and technical criteria that neither over-specify the product requirements nor permit
ambiguity in the key functional and performance requirements for the technology.
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The acquisition process will likely involve parallel negotiations with multiple service and product providers
who will be expected to deliver interoperable, integrated solutions. This requires a high degree of collaboration and coordination during the selection process as well as the product development and
implementation phases.
Utilities should carefully assess the nature of the contracts that they will require to deploy smart grid technologies. Options range from traditional product supply agreements through product integration, turnkey
system delivery, build-operate-transfer and software-as-a-service to full business process outsourcing.
There may be significant opportunities to reduce and/or transfer risk by adopting non-standard contracting
models.
Contracts for the acquisition of smart grid technologies require customized provisions for product licensing,
warranty, supply chain management and IP protection. Product license terms must be broad enough to
give the utility/licensee the right to use the product for a variety of purposes, some of which may not be
part of the utility’s business model today. Warranty terms should take account of the expected economic
life of the asset, a particular problem for end-point devices that are expected to have a long field service
life. The product development and supply chain dependencies among various component, product and
service providers in a complex smart grid deployment must be understood so that delivery commitments
and exceptions are both sensible and well understood by all parties.
The risk of IP infringement claims has multiplied in recent years, as the volume of patent applications for
relevant technologies has increased. Patent infringement suits have been brought against several utilities
and smart grid technology providers. A careful assessment of infringement risk should be conducted.
Reflecting the political origins of the stimulus funding, DOE funding grants are burdened with an array of
federal, DOE and NSF terms, conditions and policy requirements including requirements relating to local
manufacture of products and government ownership of patent rights and technical data created from
funded programs. Specific requirements may vary and should be studied carefully before an application is
made. Applicable requirements must be flowed down into contracts with funding sub-recipients such as
component suppliers.
For further information, please contact:
Joseph Fagan (bio)
Washington, DC
+1.202.663.9121
joseph.fagan@pillsburylaw.com
Michael Hindus (bio)
San Francisco
+1.415.983.1851
michael.hindus@pillsburylaw.com
Michael Murphy (bio)
San Francisco
+1.415.983.1303
michael.murphy@pillsburylaw.com
This publication is issued periodically to keep Pillsbury Winthrop Shaw Pittman LLP clients and other interested parties
informed of current legal developments that may affect or otherwise be of interest to them. The comments contained herein
do not constitute legal opinion and should not be regarded as a substitute for legal advice.
© 2009 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved.
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