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McKinsey on Smart Grid

Number 1,
Summer 2010

4

18

33

45

U.S. smart grid
value at stake:
the $130 billion
question

Evolution of
the smart grid
in China

Maximizing value
from smart grids

The smart grid
opportunity for
solutions providers

12

24

38

53

How Europe is
approaching the
smart grid

Best practices in
the deployment
of smart grid
technologies

The smart grid
and the promise
of demand-side
management

Perspectives on
smart grid from
leading solutions
providers

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The strategic stance that utilities adopt during the development of the smart grid in the United States will help determine how much value is captured and who captures it. significant process complexities. To reap the expected benefits from the smart grid. 4 24 U. Top managers from leading equipment vendors and solutions providers discuss the future of the smart grid industry. U.S. smart grid value at Best practices in the stake: the $130 billion deployment of smart question grid technologies 38 53 The smart grid and the promise of demand-side management Perspectives on smart grid from leading solutions providers The next generation of DSM technologies will enable customers to make more informed decisions about their energy consumption. utilities face steep organizational hurdles. systems and organizational models to capture the most benefits from smart grid deployment. 12 33 45 How Europe is approaching the smart grid Maximizing value from smart grids The smart grid opportunity for solutions providers Uncertainty about standards and support is slowing progress. though smart meters have passed 50-percent penetration in some markets. and difficult governance issues. the global market for smart grid technology and services will run into tens of billions of dollars annually. adjusting both when they use electricity and how much they use.1 McKinsey on Smart Grid Number 1. Utilities must actively reshape processes.S. By 2014. Summer 2010 2 18 Introduction Evolution of the smart grid in China Development of this enormous market could shape the future of the smart grid globally. .

and facilitation of the adoption of energy. particularly The accelerating adoption of advanced as they affect utilities. however. The prospect of a global framework to demand—has intrigued energy experts for years. In the United States providers define their roles and set technology alone successful deployment of smart grid standards. issue of McKinsey on Smart Grid. The underlying technologies of this landscape-changing approach to power remain expensive. Here we consider how the smart grid assumptions of significant changes in customer will affect utilities. Ken Ostrowski. especially for customer applications. the Its advent promises improved reliability by enabling presence of ample global stimulus funds for quicker and more effective response to outages. . pricing programs. energy infrastructure and smart grids in greater customer awareness of energy usage and particular.2 Introduction David Mark. their business cases rely on distribution. utilities. Many core systems remain unproven technologies could yield savings to society of and as we go to press. the heightening interest in renewable costs. AMI system has been stably and fully deployed in Customer applications. and the promise of electric vehicles are technologies such as renewable generation all building additional momentum for the smart sources and electric vehicles. collection discuss the key themes that we believe will define the future of the industry. The business model is still that can also harbor enormous opportunities. which could soon be policy-makers—the forces that will determine the deployed in nearly 40 million locations. and Humayun Tai The smart grid—an electricity grid that uses created a platform for utilities to add intelligence two-way digital technology to optimize supply and to the grid. in-home displays and direct-load controls could save society The forces of change $59 billion. and cost-effective integration of providers. In this inaugural grid project. technology vendors and metering infrastructure. equipment and systems behavior. smart grid technologies (AMI) can save $9 billion and grid applications promise to have a profound impact on the a staggering $63 billion by improving electric power industry. Advanced metering infrastructure Despite the challenges. and third-party service The stakes are substantial. is with leading utilities and other players on the future yet far from clear. such as dynamic the United States at scale. has pace of development and deployment. as regulators. and policy-makers. and how these existing systems and emerging technologies is actors should respond to the daunting challenges not yet proven. not a single full-feature $130 billion annually by the end of this decade. address greenhouse gas emissions. emerging. The articles in this transmission efficiency and reliability. we have marshaled insights developed through our work The course of smart grid adoption.

the expected operational benefits vehicles. electric intelligently. unless the much wider range of assets—traditional genera- impact on front-line employees is handled tion. Both are members of the leadership team for the Americas Electric Power and Natural Gas Practice. and systems plotting a course in such an uncertain realm is integrators. smart grid momentum is growing and its to adapt to the long and consultative sales cycles. The wave of infrastructure investment to surmount the attending challenges. Copyright © 2010 McKinsey & Company. Without careful analysis and Policy-makers will have to ensure appropriate planning. distributed generation. For the actors in the regulatory requirements and organizational electric power industry. however. While providers. development of standards as well as gauging the technical feasibility of large capital Smart grid technologies will reduce outages projects in the near term. New shifting the existing regulatory regime from technology will also help utilities make the being supply-focused to one that gives added transition from an aging workforce—nearly 25 to weight to demand-side opportunities. but it also presents them with significant goals such as greenhouse gas abatement. the long-term benefits will often be semiconductor producers. Similarly. of regulatory rate cases. Achieving those goals will require achieve increased operational efficiency. software firms. and all could energy costs. a risks. while also offering need to evaluate social benefits as part a wide range of new products and services. . IT and grid hardware obscured by the near-term disruptions. Ken Ostrowski is a director and Humayun Tai a principal in McKinsey’s Atlanta office. They will increasingly and improve power quality. ultimate arrival is certain. technology. billions of dollars could be wasted on supply and demand resources across a automated systems. David Mark is a director in the Silicon Valley office and a leader of McKinsey’s Business Technology Office. business models. Some will see bottom-line benefits from more reliable electricity supply and lower enormous capital deployment. the biggest risk consensus that marks utility procurement would be in waiting to see how others prepare processes. have daunting and the likelihood of early missteps is to exploit partnerships and add expertise in order high. Technology vendors Smart grid deployment by utilities will create $15 billion to $31 billion annually by 2014 in potential As is true for any truly transformative sales for telecommunications companies. All rights reserved. demand response programs—while may not materialize. 35 percent of the utility technical workforce is Policy-makers will have to focus on facilitating likely to retire over the next 5 years. will benefit traditional grid equipment players by spurring demand for legacy products as well as smart grid-enabled equipment. and be open to The challenge will come in the form of supporting more innovative pricing and pro- increased complexity in operations and grams to influence customer behavior. then.3 Utilities Policy-makers Utilities stand to gain the most from the smart The smart grid can advance major societal grid. guaranteeing customer service. These companies will.

Mike Greene.S. in-home displays. with the total aimed at encouraging customers to smooth and potential value generated in the United States reduce consumption. and Humayun Tai The development path for the smart grid has customers. which value proposition. comprises packages of pricing. reduced and customer applications is accelerating. smart grid value at stake: The $130 billion question The strategic stance that utilities adopt during the development of the smart grid in the United States will help determine how much value is captured and who captures it. technology providers. service reached an inflection point in the United States. these from a fully deployed smart grid reaching as high demand-management programs should lead to as $130 billion annually by 2019. driven power consumption. smart appliances. utilities will have to develop estimates of the evolution of A large and new set of opportunities—worth some the smart grid and strategies to address its overall $59 billion—is in customer applications. be installed by 2015 and deployment of new grid improved utilization of the electric grid. and reduced stimulus funds. improved ability for in part by an infusion of federal government customers to manage electricity. Before these technologies mature economic losses from power interruptions. and information portals. Taken together. utilities.4 U. and society at large will each receive a More than 50 million smart meters are slated to share in the form of improved utility operations. all The stakes will be enormous. providers. Adrian Booth. and their benefits become clear. Electricity improved ability to manage electricity and . however.

such as TOU (time-of-use) pricing or in-home displays. and customer applications. components or design features can be difficult. Furthermore. environmental and billing . a second advantage of DR is the technological and policy innovations in question opportunity to reduce overall energy consumption are expected to generate. critical-peak pricing. only the gross annual and tariffs to manage demand. The estimates in voluntary customer behavior. energy efficiency.Article title here substantially lower energy consumption. smart grid providers shall actually capture the these programs use technology. value. there are other future opportunities that are hard to value at this time Customer applications—$59 billion (e. management. Exhibit 1 soft cost savings like deferred capital on the following page shows the relative value of expenditures and societal benefits such as these categories and the discrete value levers that improved reliability and lower greenhouse gas make up the $131 billion in estimated annual emissions. software. No assumptions are by increasing information to customers and being made about which customers. which will determine the total value respectively. consumption. renewable demand from peak to off-peak times based on generation. real-time pricing. efficiency and reliability. such as in-home displays that provide pricing. Will customers want it? • Tariffs and rate structures. installation. and by whom? pricing. substantial investment will be of energy management solutions to specific required in equipment. attributing the appeal and effectiveness realize the value.. without high-tech products that influence consumer taking account of the cost to capture. rather than individual applications clear how fast and by how much. and particularly those that own and • Technology. In addition to the value at stake value in 2019. the costs effectiveness of whole customer application are expected to decline although it is not yet packages. electric vehicles). utilities. and other services. and customer awareness thereby. Given the rapid It is therefore more useful to talk about the evolution of technology and standards. such as time-of-use How much value will be captured. Broadly defined.g. What role will utilities play in unlocking the and other financial incentives value? What regulatory framework will optimize the roles of key stakeholders? One thing is certain: utilities. are at the center of the applications and advanced metering could yield debate. In addition to peak this article are based on the total surplus the shifting. These packages could include: Development of the smart grid and its potential value remain uncertain. Value of smart grid applications The estimated value at stake includes hard cost Smart grid applications can be grouped into three savings such as reduced operational expenses broad categories: advanced metering.g. Grid 5 operate distribution assets. grid and reduced power consumption for utilities and applications. mostly in the form of improved grid realized as well as who captures it.. They have important strategic choices to an additional $63 billion and $9 billion make. As with other benefits available are calculated here. education. estimated here. In order to behavior. the value of data) or are in adjacent value Smart grid customer applications can enable pools that are potentially influenced by smart demand response (DR) programs that shift grid (e.

Exhibit title: The $100 billion dollar question Exhibit 1 The $130 billion question Smart grid benefits by 2019 $ Billions annually. First. average or current load vs. smart grid value at stake is over $130 billion annually. up-to-date information about their energy use and its cost results in an overall reduction in electricity consumption for two • Education and marketing about the new packages and ways to use energy more efficiently. Description of benefits Automated meters eliminate the need for manual meter reading and meter reading equipment • Operational and billing benefits from remote disconnection/connection • 2 9 Volt-VAR 43 10 FDIR 8 M&D WAM Total Volt-VAR increases energy efficiency through conservation voltage reduction (CVR) • Fault detection. provides early warning of potential failures • Wide area measurement (WAM) increases transmission throughput • 2 63 information. ing an old refrigerator. and energy usage data to better understand the incentives needed to reduce the burden they place return on investment resulting from upgrad- on their finances. the information integrate distributed generation. Second. given information about what devices use energy and Future customer applications will also likely the price of energy. 2009 dollars Customer applications Shift peak 16 17 26 Total AMI Grid applications 59 Meter data 7 over network Advanced meter functions Total Shifting demand away from the peak lowers peak prices • Demand-side management programs aim to reduce energy consumption by customers and the number of KWh that need to be generated • Decrease in peak and energy consumption reduces need for new power plants in the future. Effective combinations will provide residential customer could use granular customers with the transparency.S. as well as load-control devices and Customer applications could provide $59 billion programmable communicating thermostats that in annual benefits by 2019: allow a utility to shift peak demand without significant impact to customers • Energy conservation—$17 billion. electric vehicles. they receive allows them to make targeted and more sophisticated energy management energy efficiency investments—for example. tools. Pilots suggest that providing customers with • Analytics. the grid. reasons. a neighbor’s detailed. isolation and restoration (FDIR) reduces outage time through automated switching • Monitoring and diagnostics (M&D) reduces inspection and maintenance costs. a systems. . such as current load vs. and the environment. resulting in an avoided cost of capacity • Energy conservation Avoided cost of capacity The U. customers can make effective trade-offs in how they use energy.6 McKinsey on Smart Grid Summer 2010 McKinsey on Smart Grid US Value at stake Exhibit 1 of 1 Glance: The US smart grid value at stake is over $100 billion annually.

Electricity grids typically have prominent “The Smart Grid and the Promise of Demand- daily peaks that carry strong ramifications for Side Management. Many pilots have shown • Advanced meter functions—$2 billion. to decline. Smart meters will of high air-conditioner use. • Smoothing critical peaks—$26 billion. boosting wholesale prices during peaks. been initiated that will upgrade 50 million typically during heat waves in areas and times meters within next 5 years. pricing. In the absence of smart meters. • Meter data over network—$7 billion. for information about outages. in years to consists of digital electricity meters equipped come. These peaks of just generate $9 billion in direct benefits by a dozen or so critical hours a year set the eliminating the need for manual meter reading. consumption to off-peak hours by waiting to sometimes referred to as “smart metering. revenue assurance by reducing theft and and automation tailored to an individual enforcing disconnection policies. would with bi-directional communication capabilities cause the average cost of generation—and the that will enable utility operational benefits overall average price of energy to customers— estimated at $9 billion by 2019. capacity requirements of the entire distribution but they will also enable many new customer grid.” run energy-intensive appliances or. smart grid value at stake: The $130 billion question • 7 Smoothing daily demand profiles—$16 billion. As of 2005. 38–44). Automated metering eliminates the need The willingness of customers to implement for manual meter reading and meter read- these solutions or change behavior to capture ing equipment. control.S. have been criticized for must rely primarily on contact with customers allowing biases of self-selection and/or novelty. If demand reduction measures such as the applications that will generate indirect benefits application of higher prices or the cycling of (discussed later in the article).U. with its remote disconnection and applications could be. Advanced The real question is what the impact of customer metering. for example. charging of electric vehicles. the required generation types and capacity. given the right level of reconnection capabilities. however. fewer than 2 million of an estimated 150 million meters in the United States were smart meters.” pp. then total grid capacity could be significantly lower. Few if any of these have been will thereby know almost instantly the location conducted in a manner that would robustly test and extent of outages. customer’s needs (see accompanying article. Many of these quickly. . user interface. the conservation and efficiency gains is currently unknown. numerous large-scale projects had experience critical peaks several times per year. will also increase information. Advanced metering—$9 billion Persuading customers to shift some peak-time Advanced metering infrastructure (AMI). The direct benefit selected customers’ air conditioning can be breaks down as follows: agreed upon and applied. Grids As of 2009. significant impact—from 5 to 14 percent Advanced metering sends more and better consumption reduction relative to baseline information directly to the utility. Utilities consumption. enabling them to restore the applicability and scalability of the benefits power and resume selling electricity more to a broader population. utilities pilots.

a new or measurements. Smart substation relays are the most service restoration FLISR). The comes from conservation voltage reduction primary benefit of this capability is improved (CVR). Smart work crew to the exact location. Grid applications involve monitoring. potentially including re-routing power control of the voltage level and power factor from adjacent feeders to continue service to all throughout the grid. transmission networks. This voltage reduction lowers the of precisely timed monitoring devices variously need for total electricity delivered—and also called synchrophasors or phasor measurement reduces grid capacity needs. measurement (WAM). and Restoration grid are 1) volt-var optimization (sometimes called (FDIR)—$10 billion. Isolation. 2 Other applicable metrics for reliability include the System Average Interruption Duration Index (SAIFI) and the Customer Average Interruption Duration Index (CAIDI). it possible to achieve this voltage reduction while WAM provides real-time information about the staying within regulated power quality state of the transmission grid using a network guidelines). these applications can provide over $63 billion in The benefits begin with detection. a utility can obtain a real-time modified regulatory framework will be needed to picture of network conditions. sensors and mid-circuit reclosers and ties. the grid in response to unplanned or planned sometimes called fault location. possible without dynamic. Depending on annual value to society by 2019. 3) wide-area prominant example of this reconfiguration. as well as on customer behavior. The majority of the benefit but those immediately around the fault.1 (Smart grid technologies permit but utilities will also benefit from the ability to significantly more precise voltage control than is streamline their repair operations. the As one grid operator explained. allowing the safe encourage utilities to capture these benefits. incentive to implement CVR. based on a “middle-of-the-pack” value for this ratio. Hence the estimates here are approximate. consumption. as operation of the transmission grid closer to its most utilities currently have little financial true capacity. thereby reducing congestion costs. FDIR systems may be able to estimate its location and type and auto- • Volt-var optimization (VVO) and conservation 1 The exact ratio between reductions in voltage and consumption is a matter of some debate and will depend heavily on the mix of endcustomer devices connected to the grid. These systems enable the integrated volt var control or IVVC). an action in which utilities lower the reliability (often measured using the System endpoint voltage in order to reduce overall power Average Interruption Duration Index [SAIDI]2).8 McKinsey on Smart Grid Summer 2010 power voltage reduces reactive line losses that would otherwise cause a percentage of power to Grid applications—$63 billion be lost en route from the generator to the meter. “You can stand ability of VVO systems dynamically to correct closer to the edge of a table if you know where . isolation. The four main applications that provide the most benefit to the • Fault Detection. the nature of the fault. The result is reduced emissions and lower and automating operation of the distribution and electricity bills. 2) fault utility remotely or automatically to reconfigure detection. isolation and outages.and meter-based benefit. Together. and restoration (FDIR. Additionally. matically dispatch an appropriately equipped voltage reduction (CVR)—$43 billion. In many jurisdictions. making • Wide Area Measurement (WAM)—$2 billion. By aggregating synchronized few percent. real-time monitoring of and response to conditions in the grid. Careful activa- technologies such as tap changers and capacitor tion of reclosers and ties could provide a second banks that can respond to grid. controlling. and 4) remote substation although other components may include fault and feeder monitoring and diagnostics. by isolating the fault to a smaller section systems could enable real-time management and of the grid. all on the order of a units (PMUs).

substation and feeder equipment. utilities— Grid applications may leverage AMI specifically those that own and operate distribution communications and/or IT assets. The majority of this benefit is concerned with supporting the power due to transformer monitoring systems. it might be relatively familiar in nature. the most significant strategic determinations are which pools The implied business model of an infrastructure of value to pursue. grid-side applications offer a valuable of nearly real-time operational data about way to continue investing capital in the grid. for example. but particularly effective trade-off between capital and for utilities. a utility might focus on being an grid applications. capitalizing on the The magnitude of the value at stake raises strategic trend toward smart metering and achieving an questions for all interested parties. At one end of a spectrum regulatory changes will be needed fully to deploy of choices. deployments. For infrastructure technologies can provide utilities with a wealth providers. As for capabilities. looking at the net present value of the resulting savings. smart grid value at stake: The $130 billion question 9 the edge of the table is. allowing generate operational benefits through enhanced preventive rather than corrective maintenance visibility into grid conditions. the utility would remain more supply-oriented and focus on • Substation and Feeder Monitoring and building or assuring enough generation and grid Diagnostics (M&D)—$8 billion. which infrastructure to ensure reliable service and can warn of an impending failure. operate as an energy services provider. infrastructure providers will need to make significant organizational investments to ensure .U. They are a assets—lie at the center of smart grid deployments. asset management.S. and generally improve asset lifetimes Infrastructure providers will be primarily and utilization. under what business model.” While some services it decides to offer. better controls. such as the one the industry. which in turn will influence the total An infrastructure provider is likely to evaluate its value realized as well as who captures it. This data can while streamlining operations and improving be used quickly to address impending failures. operating expenses. investments in a traditional way. the regulatory challenges will infrastructure provider. albeit it may limit total potential experienced in the U. value capture. and avoiding collateral damage. technology providers and service providers stand to capture portions of the value. Northeast in 2003. regulators. natural next step for the improvement of overall They are uniquely positioned to set the tone for reliability and realization of operational savings. optimize inspection and maintenance schedules. While ratepayers. and improved meter functionality. The role of infrastructure provider is one option WAM also reduces the likelihood of major for utilities anticipating an evolutionary path for cascading blackouts. At the other end. In this approach. For a distribution operator.” By alerting utilities Infrastructure provider quickly to developing conditions on the grid. Smart capacity to meet demand. The provider resembles that of utilities today: a rate of answers depend on the scope of operations the return related to the amount of prudently invested operator decides to target and the range of customer capital that is “used and useful. An infrastructure provider will typically roll out Implications for utilities advanced metering first.S.

The role of infrastructure provider may be a more attractive one for many utilities concerned with The ESP stance presents bigger challenges but managing their exposure to technological and also higher potential rewards. the ESP will threaten the traditional utility business model by deploy smart meters as a first step. will ultimately be supporting capabilities and incentives. public emphasis on grid applications as next-generation distribution green infrastructure will reward and possibly even management systems. causing customers and public monetization of the unlocked value. deploy. utility commissions (PUCs) increasingly to demand more effective tools to allow customers to manage Customer applications will require a new set of their electric bills by managing the amount of institutional capabilities resembling those in . Power and IT engineers mandate reductions in consumption for will need to work more closely together and be complementary non-financial reasons. and manage customer applications. which otherwise could account for new customer-facing capabilities and develop new more than half the total potential value from the business lines. As a result. Energy services provider A greater share of the value created through For an ESP. but it will view lowering overall energy consumption (or reducing metering as a foundation on which to build future the rate of increase that would otherwise occur). the utility will need making a strategic shift toward delivering more dramatic new capabilities to design. Many core business processes. completely redefined. such acting as ESPs will be uniquely positioned to enable as outage management. ESPs test. the design of a metering system will customer applications will be available for a utility emphasize strategy and flexibility rather than that adopts a stance more akin to an energy services operations and cost effectiveness. As a result. low-cost energy. while also expect that per-unit energy prices will continue ensuring a regulatory strategy that allows to rise in the future. but will also have to build applications. field force management demand management. build. An added drawback to the choice of growing. However. whose benefits will furthermore help defray the costs. unregulated. In parallel. this approach will limit same obligations and objectives of an value-creation opportunities from customer infrastructure provider.10 McKinsey on Smart Grid Summer 2010 A greater share of the value created through customer applications will be available for a utility that adopts a stance more akin to an energy services provider successful deployment and management of such electricity used. some of which may be fast- smart grid. applications which are on the horizon could Like the infrastructure provider. Utilities cross-trained. the ESP utility will begin to reach behind the meter and inside the customer premises. the provider (ESP). As smart orientation of the ESP is one that sees the industry meters are deployed. The that of an infrastructure provider. services than simply reliable. and will tend to pursue the and asset management. and inclined to reward infrastructure provision is that the customer marketing and design more than pure operations. customer applications. It will face all the market risks. The ESP position involves a more investment in smart meter capabilities for an ESP holistic view of the value chain and considers will likely be higher and more sophisticated than demand-side management a core capability.

Adrian Booth an associate principal San Francisco. start- With $130 billion at stake. Although the execution risks for an ESP are higher than those Today’s utilities have few of these capabilities of an infrastructure provider. and non-traditional players like Google and make a sound decision. Copyright © 2010 McKinsey & Company. and suitable interaction methods. and convenience to customers with whom to partner and with whom to compete. and their benefits become clear. smart grid value at stake: The $130 billion question consumer marketing industries. and Humayun Tai is a principal in McKinsey’s Atlanta office. the latter may in-house and will need to start building or ultimately face a greater strategic risk. their focus on the core business of providing a They will also need to produce results in the form reliable supply of energy. companies (ESCOs). Mike Greene is an engagement manager in the Chicago office. highly customized products with meticulously refined messaging. both of which have launched products ESP-style utilities will need to provide greater in this space. through the right combination of customer segmentation and insights. evolution of the utilities industry. and customer of reduced bills.U. Utilities are uniquely positioned to set the tone for Even so. but these choices must be example of this approach. All rights reserved. applications may not catch on. 11 Microsoft. If customer acquiring them quickly. will play out longer term. comfort. The user-friendly technologies. it will be important to ups. To succeed. Will there be ESPs will require a regulatory framework that multiple sustainable business models for the allows for monetization of the benefits of “utility of the future”? Will some emerging models demand-side management programs. product with homogenous messaging to with limited access to the value at stake in the sophisticated marketing agents offering a range of deployment of smart grid technologies. utilities could lose and messaging. The credit card industry applications and demand-side management offers an instructive analogy: over the past 20 become mainstream in the utility industry. which in turn will influence the likely pursue the same value pools: energy service total value realized as well as who captures it. Together they co-lead McKinsey’s Smart Grid Service Line. technology vendors. but its emerging dynamic poses fundamental questions for the The ESP business model will demand innovation. many players other than utilities will deployments. design innovation and The risks of pursuing an ESP posture are real. The organizational changes that facilitated the credit card industry’s transition closely parallel those that may be Opinions diverge on how smart grid deployment required for utilities to succeed as ESPs. The dominate while others die out? The strategic shareholder-incentive mechanism in place for choices facing utilities would be difficult under energy efficiency programs in California is one any circumstances. the years. card providers have moved from being infrastructure provider may face disinter- financial engines offering a single credit card mediation and confinement to a smaller market. An ESP utility must quickly decide control. although many made before smart grid technologies are mature potential alternatives exist.S. . meaningful marketing revenue base could decline.

) are generally interpreting it as binding. and disappointing demand for smart 80 percent of households by 2020. Enrico Giglioli. especially as a result of several factors: the lack of clear technology the adoption by the European Union of the standards for smart meters and home-area Third European Energy Liberalization Package. network (HAN) communications. uncertainty The main goal of this agreement is the about the level of regulatory support for necessary installation of “intelligent metering systems” in investments. NVE. or where no business case at all has been developed by 2012. Yet while the smart grid landscape in the EU will depend on almost all consumers in Italy now have smart how national regulators and governments decide meters. European utilities. investment and development activity to support investments and how these decisions vary widely across the region and among smart influence the investment behavior of leading grid segments. . et al. Ofgem. While these caveats are present in the language of the agreement. who do not services by pioneering utilities such as perceive a strong value proposition for bringing Germany’s Yello Strom have also helped raise this technology into their homes.1 New grid-enabled services by consumers. Cosma Panzacchi. most EU politicians and regulators (CRE.12 How Europe is approaching the smart grid Uncertainty about standards and support is slowing progress. and Leonardo Senni 1 The 80 percent target is described as binding wherever a “positive long-term business case” for deployment has been made. The evolution of the profile of this new technology. though smart meters have passed 50-percent penetration in some market. Public awareness of smart grid technology has More comprehensive adoption has been slowed by expanded in Europe.

Exhibit 1 EU progress Smart meter deployment by EU member states Early adopters Mandated rollouts and limited pilots No mandated rollouts and limited pilots Inactive countries Nonmember countries . In Norway. country-level must be examined: deployment of smart meters falls into four categories (Exhibit 1). local network management. penetration rates have network automation. In Italy the “Progetto Telegestore” initiative begun in 2002 has Status of key segments resulted in installation of over 30 million smart Although some governments and utilities have meter points covering close to 100 percent made significant investments in the introduction of of Italian households. • In early adopters.13 In order to understand this evolving context. • The status of key segments • Challenges slowing investment • The outlook for growth. Smart meters: increasing market penetration three key aspects of the European smart grid Within the European Union. Europe SG Exhibit 1 of 2 Glance: Exhibit title: EU progress increases expected. with continued McKinsey SmartinGrid and HAN on remain early stages of development. medium. rollouts have been completed or are well under way. smart meter technology. risen above 50 percent. and Denmark.and low-voltage Finland. Sweden.

promulgated in September 2009 to help the EU achieve two overarching energy goals. for 2020. The exception is Italy. such as Germany and the low level of development. national regulators and are seen as a tool to foster competition among governments have imposed strict timelines for utilities by increasing the transparency of energy full deployment of smart meters: 2016 in costs while allowing more precise pricing France. First. has made deployment voluntary. Second.000 meter points. thousands of smart meters have largest European countries. HAN: early development but increased interest member states are trying to foster a decrease Interest in home-area network applications is in—or optimization of—energy consumption by rising rapidly in Europe.14 McKinsey on Smart Grid Summer 2010 • In countries with mandated rollouts. To date. smart meters limited deployment. primarily the former Eastern Bloc states. Another sign of increased interest and make efficiency savings of 20 percent relative came at the Cleantech Conference in Copenhagen . The growing importance of pilot projects. in preparation for subsequent Network automation and local network nationwide rollouts. both of which would a result.K. This activity comes in the absence of stations are remotely monitored and controlled specific implementation deadlines for new and fewer than 25 percent of the medium-voltage metering systems. distributed generation and the greater penetration of renewable energy sources. As segmentation by utilities. pilot projects. and many utilities are their citizens. 2018 in Spain. In all but one of the Netherlands. remotely dim lights or alter the status of electricity) from renewables like wind and solar. The 20/20/20 Directive (December 17. appliances. utilities have launched or are launching encourage switching between operators. has partnered with Digital Strom. where significant investments have been made to improve grid • In inactive countries. but no medium. for instance. the only change to the status quo has been Malta’s potential benefits attributable to reductions in pledge in February 2009 to spend up to €85 electricity theft and losses. some as large as 300. despite the significant reliability and quality of service. Yello Strom in Germany. budget constraints million to automate its network fully as part of have discouraged the launching even of small its smart grid plan. for example. fewer than 20 been installed in experiments led by local percent of the medium-voltage and low-voltage utilities. transport. network management. The Netherlands. automation of • In countries with active pilot projects. management: limited new investments In most major EU countries. in order to reach EU energy targets piloting new applications. Adoption rates of smart meters will be pushed however. lines are equipped with automatic fault detection. but to all forecast consumption. and 2020 in the U.and low-voltage networks remains at a mandated rollout. enabling them to source 20 percent of total energy (heat. consumption in real time. have led several large utilities to study higher in the next decade by elements of Third the technical and economic feasibility of local European Energy Liberalization Package. and others to offer some customers the energy use by EU member states: cut greenhouse ability to monitor and control their electrical gas emissions by 20 percent from 1990 levels. 2008) established several goals for 2020 related to Google.

where discussions about the smart would be needed. • L ack of a clear regulatory framework and incentives In the short term.How Europe is approaching the smart grid 15 in April 2009. and investment in other Third. the Package does not address whether smart grid segments limited in size. Although the Third European grid focused mainly on HAN (two out of three Energy Liberalization Package represents a invitees in the smart grid panel operate in this step forward. with potential for country-by-country differences in deployment of smart meters generally falling the required capabilities of smart meters. full development of the smart • Absence of significant consumer demand grid within the European Union will continue to • Segment-specific issues. the “Package” refers explicitly is still in an early stage. even in countries like the only to meters.” Lack of clear regulatory framework due to dire budgetary conditions in most EU and incentives states and by the weakened financial condition of Member states have neither shared definitions many large European utilities. It will also be hampered by the limited availability of incentives 2 The Energy Liberalization Package defines smart meters as “intelligent metering systems that shall assist the active participation of consumers in the gas and electricity supply markets. 2 below expectations. Three factors (and how) member states will financially are slowing the pace of development: support investments made by utilities in smart grid technologies. remain. nor provided a by 20 percent or more despite strong public clear description of what investment incentives incentives for investment. . modernization of distribution networks. where public attention to the is not specific. such as by introducing smart grids. Second. however. First. the Barriers to greater smart grid investment directives need to be localized and then Despite much discussion about the smart grid. Development of HAN solutions. reference to the other segments United Kingdom. three important uncertainties space). but generally encourages the smart grid has been more pronounced. Several of these for the functions that make up the various utilities have reduced investments in renewables segments of the smart grid. be impeded by these uncertainties. adopted by each member state—creating the development has been slower than expected.

publicly and retailing of electric power. Exhibit 2only of 2 32 percent of British citizens understand what smart meters Glance: are. domestic market. for example. The the retailer should make these investments. these two segments have been negatively the generally low level of awareness among affected by the lack of EU-wide technical European customers about the size of their standards. but also from the still limited ferent meter manufacturers and utilities are using understanding of what the smart grid is and different communication solutions (Exhibit 2) how its implementation could create value. it was commissioned by the Energy Retail Association. A and protocols such as Lontalk and DLMS (device recent survey carried out in the United language message specification) creating a risk that Kingdom showed that. utilities interviews . Finland Mix of PLC/GPRS with PLC preferred due to lower cost. for full rollouts technology will be either GPRS or RF (radio frequency) Uncertainty persists on technological preferences in the long run Source: McKinsey analysis.16 McKinsey on Smart Grid Summer 2010 Lack of customer demand for smart grid- 3 The  survey was conducted in August 2009 and had 2. Segment-specific issues enabled services Smart meters and HAN applications have been While development of the smart grid has been hurt by EU-mandated unbundling of distribution slowed in part by a lack of clear. despite a lively political utilities will be locked into suboptimal technologies debate over issue in the second and third McKinsey onthe Smart Grid and limited economies of scale in sourcing. which represents the major electricity and gas suppliers in the U. In lack of customer interest stems not only from addition. Denmark. which has created supported incentives. but other solutions being analyzed for full roll-outs Netherlands Prefer PLC for cost. however pressure to improve PLC outage management features United Kingdom GPRS used during pilots (and interest for PLC). reliability and control Spain Major players have identified PLC as the preferred technology. dif- electricity bills. PLC preferred due to lower cost but bandwidth a concern for one of the “big 4” France PLC currently being tested in pilot.3 Investments in network automation and local network management have also been held back by Exhibit title: EU standards vary Exhibit 2 EU standards vary Varying technology standards are emerging for smart meters in key EU countries. weak demand from uncertainty about whether the distributor or customers has also contributed to the delay.014 adult respondents. In the case of meters. quarters Europe SGof 2009 (extensively covered by the media). unclear level of sophistication OFDM (orthogonal frequencydivision multiplexing) vs traditional spread spectrum Sweden. Germany Mix of PLC (power line communication) and GPRS (general packet radio service) in pilots will continue into full rollouts.K.

With service and Unfortunately. It is still unclear which standard will be proposed by German utilities.How Europe is approaching the smart grid 17 While some of the segment-specific issues will continue to slow smart grid development. regulators and utilities will will likely increase slowly. . Copyright © 2010 McKinsey & Company. Enrico Giglioli and Leonardo Senni are principals in the Milan office. unless targeted need to work together to find an optimal solution marketing campaigns heighten customer that develops both a societal business case for awareness of the economic benefits. thus foregoing the societal limited expectations for the penetration of electric benefits of smart grid implementation. while an upgraded version of the current solution is likely in Italy. vehicles in the short and medium terms. smart grid development. All rights reserved. such as those regulatory measures and incentives that can around network automation. the good news is that definition of EU-wide technical standards for smart meters and HAN should soon be in sight. the good news is that definition of EU-wide technical standards for smart meters and HAN should soon be in sight a combination of causes. The satisfactory. and Cosma Panzacchi is an engagement manager in the Rome office. While some investment in the smart grid and coherent of the segment-specific issues. the fiscal difficulties facing EU reliability of the medium-voltage and low-voltage members create a real risk that the lack of networks at levels considered generally proper regulatory incentives will persist. will continue to slow maximize the societal benefit. Major utilities and key equipment makers in this space have launched the Open Meter project and the PRIME Alliance with the aim of defining these standards by 2010 or 2011. automation appears to be relatively absence of incentives could lead utilities to opt costly. particularly in the absence of significant for solutions designed solely to minimize their amounts of distributed generation and with investments. Outlook for the future Consumer demand for smart grid-based services To avoid that outcome.

fully exploit this players. create a suitable vision for the nation’s smart China’s smart grid market will be large and policies and incentives. David Xu. communication device China may not. and integrated solutions providers from opportunity. however.18 Evolution of the smart grid in China Development of this enormous market could shape the future of the smart grid globally. landscape. which own 80 and 20 percent of the grid increasing commitment to green development will system respectively. China has a unique poised to become a major consumer of smart grid structural context that could enable it to leap technology. and Kevin Chan China has become the world’s largest market for lead to a tremendous need for smart grid power transmission and distribution (T&D) and is technologies. Second. the by 40 to 45 percent by 2020 relative to 2005 and market’s ability to drive down equipment costs. First. The ambitious plans have attracted top equipment makers. State Grid and Southern influential for two reasons. Commitments by China’s political ahead in the development of the smart grid: leaders to reduce the carbon intensity of its GDP government ownership of the T&D sector. China’s Grid. will need to establish grid and provide appropriately supportive . Michael Wang. Government regulators will have to around the world. Claudia Wu. to increase the use of renewable power promise a and the central role that government can play in massive transformation of the nation’s energy the economy make this possible.

among other reasons.19 effective standards and build systems and greater attention. could reach $2 billion and $800 (BIPV) and rooftop solar PV are also receiving million respectively on an annual basis. . The next 12 to 24 months total power consumption could accentuate peaks will reveal just how fast China’s smart grid and troughs in the load profile. Solar power presents China’s smart grid market could total $20 similar challenges. As is true with many demand-side energy On the supply side. 1 China’s  own definition of smart grid as characterized by State Grid’s “Strong smart grid” includes a broader range of applications than the definitions used in accompanying articles. we estimate that installed wind capacity. Equipment makers can facilitate the process and profit from development of this market: On the demand side. their technologies and help China move The increasing share of residential demand within down the cost curve. difficulty of dispatching intermittent power. Local players will need to upgrade from 640 million in 2010 to 840 million in 2020. McKinsey most important and competitive smart grid estimates that China’s urban population will grow markets. China is forecast Working from China’s definition of a “strong to have more than 100 gigawatts (GW) of and robust”1 smart grid. which will need to be managed carefully. due to significant environmental benefits through energy limitations in the transmission network and the savings and emissions reductions. 2020. it will need smart grid vehicles will add significant load to the electricity capabilities to transform the demand and supply grid. the continuing urbanization global players will need to bring their best of China’s population and the potential for technologies and solutions to bear in order to distributed power together create tremendous earn a share in what will be one of the opportunities for the smart grid. though China is targeting an billion annually by 2015. These and clean energy. In particular. by 2015 the markets for increase in combined heat and power (CHP) smart meters and wind power connectivity. percent of that investment is expected to be associated with the rollout of the UHV China is furthermore expecting a significant transmission system. By 2020. Urbanization is also speeding introduction of China’s tremendous need for electric vehicle (EVs). for capacity. the net present value of many renewable energy sources will increase the need smart grid opportunities is positive. will actually develop. the market estimate here includes some components of grid transmission excluded elsewhere. sides of the nation’s power industry. Our for grid connections and management systems experience suggests that a pilot focusing on smart to handle the intermittency of these sources. As meters and home-area networks in a Chinese city of 2009. especially ultra-high voltage (UHV) transmission. a massive build-out of efficiency measures. CHP could grow capabilities that focus on demand and supply in from less than 100 GW in 2009 to 400 GW by a balanced way. if it proceeds on an aggressive development path. and create plants were connected to the grid. less than one-third of wind power could pay for itself in 6 to 7 years. which China is aggressively the smart grid promoting. While more than 60 installed capacity of only 20 GW by 2020. while building-integrated photovoltaics example. projections indicate that 5 million EVs As China increasingly embraces energy efficiency could be on Chinese roads by 2020.

plans to develop a smart grid- technology into its system. Yangzhou. The net effect players. including enable China to drive unparalleled consistency of leading grid companies and domestic and global standards across the nation at lightning speed. and its utilities will be cascaded to provinces. equipment and service providers. for permit China rapidly to incorporate the latest example. Crucial role of key stakeholders China’s success in becoming a global leader in the • Ability to standardize and replicate. and new materials industries. Due to cost advantages across grid cluster. power generation equipment from China can be 30 to 50 percent cheaper than • Centralization of political leadership. set its own standards. and with key industry offered by leading global utilities. Many local governments are to grow at an annual rate of 15 to 20 percent over restructuring their economies through the next 10 years. In 2008. . • World’s Largest T&D market. Replication of these standards over the next 5 years. technology cluster together with photovoltaic and even lead standard-setting efforts globally. a number of other factors will allow China to leverage its massive present in China will contribute to its global production capacity fully and utilize intense smart grid impact. the government could accomplish two goals at the same time—driving economic development and increasing environmental protection China’s unique structural context and renewable energy connectivity with the Beyond the sheer scale of demand that this expectation that these standards will be market will generate for smart grid technologies piloted in 2010. cities and towns. In its drive for greater energy efficiency. of this ultra-competitive equipment sector the central government has adopted key is that China has ready access to cost- performance indicators that have been rapidly competitive equipment. able to build out their infrastructure faster than anywhere else. This scale of spending will investments in the smart grid. Integrated development of the smart grid depends. China has already become the original and coordination across multiple departments equipment manufacturer for smart meters and jurisdictions.20 McKinsey on Smart Grid Summer 2010 If the smart grid grows in line with its potential. the value chain. however. with the State Grid is drafting standards for smart meters government taking a critical leadership role. Wuhan is seeking to distinguish itself as the EV city • Potential to drive down costs and grow with a strong interest in developing a smart equipment supply. a figure expected development. ownership of utilities and the T&D system will on all stakeholders playing their parts. internal competition further to reduce costs of the smart grid rollout. capital expenditures by State Grid and Southern Grid • Local governments’ focus on economic combined reached $43 billion. China’s comparable products manufactured in developed central government can expedite policy setting markets.

This role could involve up in several cities. the same time—driving economic development and increasing environmental protection. Power grid companies: Set standards and adapt 1. Although these services represent a To realize the full potential of the smart grid somewhat unconventional business model. and collaboration models to facilitate If the smart grid grows in line with its potential. in much demand-supply balancing. creating the largest savings to reduce energy bills and pay back installed base in North America. reducing the need for additional . but rapid urbanization combined with businesses.” from pursuing demand-side management Funding and assistance with talent benefits through demand response or energy development will be central to this effort. China’s government will need to play are financially viable. California has sought to decouple utility revenues from the number of 4. the company had installed consumption can generate sufficient energy almost 3 million meters. four market-shaping actions. Cities could actively sources more effectively. was able to begin management services that help building owners deploying advanced smart meters in 2006. China’s emphasis on a supply operating systems Development of the smart grid offers China’s dispatch paradigm reflected an urgent need power grid companies a remarkable opportunity to expand generation capacity in the early to transform their performance and develop new 2000s. as well as facilitate participate by piloting special financing. Energy leading utility. investments made by the energy management provider. A leading metropolitan area is how regulators can provide the support needed considering creating a special industry fund for smart grid efforts to thrive. they opportunity. conservation programs. The 3.Evolution of the smart grid in China 21 Government: Provide critical enabling leadership tariffs. Supporting the development of industrial State of California offers a useful illustration of clusters. in parallel have been possible anywhere else in the world. California’s integrating energy services. As a result of these efforts. They could significantly reduce capital increases in distributed power will expenditures associated with smart grid necessitate shifting to an emphasis on deployment through economies of scale. P  ush for holistic city-level solutions by kWh sold. Such a smart the same manner that China completed the energy system will require the government to world’s largest build-out of power generation and create incentives to support demand-side grid infrastructure cheaper and faster than would applications for the smart grid. with supply-side developments. By and occupants reduce their energy the end of 2009. C  reating a vision for the smart energy system. peak-shifting. and pilots are being set a vital and visionary role. the testing and implementation of smart the government could accomplish two goals at grid technologies. The smart grid could also enable grid companies 2. PG&E. D riving pilots and implementation with to handle the intermittency of renewable energy supportive policies. To clear away and 20 city-level incubation platforms to some of the disincentives preventing utilities transform itself into a “smart grid valley.

22 McKinsey on Smart Grid Summer 2010 generation capacity by as much as 25 percent. . Standards. Grid companies could help first-class technology that can be localized for prioritize and establish standards by China’s needs and expectations about the total systematically leveraging pilots to test the cost of ownership. role by running pilots of smart meters and home-area networks. however. Electric Power Company (KEPCO) did. is per smart meter versus an expected $200 to $400 beginning to set standards for grid connection in the United States. bringing the best solutions In step with these technology upgrades. To realize the full potential of this opportunity. competition on similar technology is driving the market toward commoditization. In the T&D sector. and establishing an Finally. testing technology not yet the cost curve. introducing 1. for latest technology and verify the business case example. The smart grid will create demand opportunity to break through the existing for new or highly enhanced capabilities in such structure of the T&D industry and seize a true areas as data management. based on lower expected of renewable energy sources and information functionality and shorter expected lifespan (7 to transmission. leaders. and have been increasing their market share in recent then work backward to develop a transition years. used elsewhere. though they are not yet seen as technology plan to that future state. Local utilities can play a similar 10 years versus 10 to 25 years or more). success in China players should leverage local relationships to means capturing a share of the largest T&D scale up production and help China move down market of the world. about how they compete. utilities will be expected to go For Chinese firms. companies to build a new platform for China’s power equipment sector is. Local equipment and service providers: Upgrade technology and drive down the cost curve 2. which The challenge will be to maintain a distinctive used its experience in smart grid technologies to offering and position at a time when active local create advantageous international partnerships. State Grid. charging leadership position. the smart grid could enable China’s grid advantageous cost position to compete globally. Success will likely require tailoring product offerings. the smart grid is a major opportunity that could provide a platform for beyond making incremental improvements to global leadership. For them. local players establish a vision of service for the future. local For a global equipment maker. China is looking at a cost of $100 or less for deployment. In the smart meter space. globalization in the same manner as Korea already one of the most competitive in the world. missing this wave of smart grid development would mean the loss of an important 3. infrastructure for EVs. The crucial breakthrough for local players will be to upgrade and build core technological Global equipment and service providers: capabilities through a skillful combination of Compete for a place in the largest market by in-house development and global partnerships. Capabilities. S  ystems. grid companies would need to address three Global players will have to be aggressive but smart core areas. and customer service that can support new smart grid applications. Given the transformative potential of the smart grid. for example.

including many renewables. Despite China’s advantages. and global equipment makers—seize this momentous opportunity. tremendous value at stake for all players in China’s two giant grid companies. as well as local this market. there is to which the key stakeholders—the government. Given of global impact. working T&D market. and in McKinsey’s Shanghai office. All rights reserved. with government and key utilities to nothing guarantees that it will achieve that level co-develop standards and support pilots. David Xu is a director. Michael Wang a principal. and Claudia Wu and Kevin Chan are associate principals. Another possible indicator would be the testing of advanced smart meters capable of supporting two-way electricity flows. a necessary first step for integration of distributed power sources. however. Copyright © 2010 McKinsey & Company. One indicator of China’s resolve could be the speed with which it starts piloting customer applications (especially HAN applications). in the same way take this period of uncertainty as an that it has emerged as the world’s most important opportunity to shape the landscape. Much will depend on the degree the significance of the potential prize.Evolution of the smart grid in China 23 China could soon become the most significant Proactive equipment and service providers will market in the smart grid arena. . in parallel with the testing of more flexible time-of-use electricity tariff schemes.

as utilities will have to make involved. and rigorous governance. Some utilities have had to interrupt . be as geographically diverse as a new telecom- the electric utility industry around the world is munications network. The first stage of a smart grid rollout is generally in the deployment of smart meter technology. one that would test the managerial capability of any industry. and difficult governance issues. Successful deployment will joining in. Here the record of utility companies has been The complexity of smart grid projects will add to mixed—unsurprising given the level of complexity that challenge. change. significant process historically not in months or years but decades. utilities plan to install more than 40 million significant investments in information two-way smart meters in homes and businesses technology. this surge in activity is a challenge of unprecedented scope and scale.5 billion of federal stimulus funding and (ERP) is to the manufacturing industry. it will rapidly maturing technology. and Jason Green U. Adrian Booth. In an industry where the pace of require strong coordination across customary technology adoption has been measured organizational boundaries. U.S. significant process complexities. Anjan Asthana.24 Best practices in the deployment of smart grid technologies To reap the expected benefits from the smart grid. spurred by core systems as enterprise resource planning $4. The smart grid will be as integral to projects are not far behind. utilities face steep organizational hurdles. To varying degrees. an area generally outside their core over the next 5 years and other smart grid competence.S.

Still others have incurred hundreds of road map to get there millions of dollars in cost overruns due to Smart grid applications have many potential systems integration issues. a utility’s the odds of success. a process which should take account highly instructive. relative prioritization becomes a results—as well as the many successes—have been critical step. Define the smart grid vision and develop the vendors. Based on these experiences. and sub-par are important. applications. and it is important for utilities to have failed to realize the expected benefits from determine which of them they will seek to smart meter projects because of change- maximize: reduction in operational cost? management issues. (More detail on these factors McKinsey on Deployment Exhibit X of X Glance: Exhibit title: 10 best practices for successful smart grid deployment Exhibit 1 The do’s and don’ts of smart grid deployment Where to do it What to do – 10 best practices What not to do Vision and business case 1 Define a smart grid vision and the road map to get there 2 Build a compelling business case tailored to technology maturity and the regulatory environment 3 Develop a capability-driven regulatory case articulating stakeholder costs and benefits. for example. a of the strength of their connection to overall set of best practices is emerging that can improve corporate strategy. cost overruns. it supporting utilities has led to ten emerging best should align its smart grid vision by focusing on practices across three major categories which grid-side benefits as opposed to customer-facing together define successful smart grid deployment. And some utilities benefits. and some have switched 1. If. improved reliability? reduction in greenhouse gas (GHGs) emissions? When all these objectives These false starts. and addressing technology obsolescence and security concerns • Implementation 4 Set up program architecture that considers risk and industry maturity 5 Select technologies for the long term and use pilots strategically 6 Pursue true strategic sourcing to optimize providers capabilities while minimizing risk 7 Maintain significant business focus on IT integration activities • Operations and 8 Employ lean operations techniques to accelerate change management cost-effective technology deployment 9 Actively define end-state business processes and change required to deliver 10 Set up cross-functional governance across all key business units Pursue stand-alone projects when each becomes a positive business case • Assume technology is a static choice and business-case framework of one service area will work in another • Translate internal business case into a regulatory filing and assume regulators and stakeholders will understand it Assume a narrow approach to systems integration will succeed • Map technology to current needs or fail to test technology marketing claims • Use a procurement-led process that fits other categories of spend where functionality is well known • Assume clear business requirements will lead to successful IT integration Scale up current capabilities and assume an unrealistic learning curve • Plan on capturing the benefits in the business case without significant change management • Lead the project from either an IT or single business unit perspective • .25 their rollout of smart meters to reassess the Vision and business case technology selected. McKinsey’s experience in focus is on operational benefits and reliability.

Build a compelling business case tailored uncertainties exist. This grid deployment. These incremental cost. and the ability to support offering the potential for broad coverage at future technologies and applications.26 McKinsey on Smart Grid Summer 2010 can be found in the accompanying article. • Create a vision and road map that incorporates all available information even though significant 2. for example. it is as important to be flexible in approach while incorporating key lessons. utilities use an expense). 4-11). which specifically is an optimal balance between benefits. The road map should enable management to communicate • Each business case is unique. and vendors. With all the practices include: uncertainties. found • Develop a capability to assess new technologies as a key input into the vision. and design of the existing grid. iterative process. To financial metrics (both capital and operating deploy these applications. Smart grid that demand-side management benefits generated 40 percent of the value in the business technologies evolve far more rapidly than case through rates and behavior change. realized. customer satisfaction. so a best practice for for other utilities it was under 20 percent. value at stake from each application according to and demand-side management programs. safety. The increased bandwidth and non-financial benefits will be realized across now standard for AMI deployments. customer satisfaction. The smart grid deployment is a regular assessment of business case must demonstrate how financial the enabling technology. company goals. connects the goals in the smart grid vision with f lexibility. costs. and risks management. Smart Grid Value at Stake: The $130 Bil- to be periodically updated and refined based on lion Question. has created an opportunity for grid-focused operational efficiency. for example. • Treat the vision as a living document that needs “U. The business case clearly its smart grid vision to employees. while traditional utility assets. reliability. benefit-realization approach. and ratepayer advocates. grid applications. technological and economic developments and most notably on the regulatory strategy and continually re-evaluate their technology strategy. the value chain through grid efficiency. . Emerging best experience and learning. The most effective utilities to technology maturity and the regulatory pull together thought leaders from across the environment organization to develop a comprehensive The road map will indicate the stages of smart inventory of smart grid opportunities. regulatory regime. shareholders. This opportunity is built which defines the impact of the assessment can then be combined with an application. regulators. The business cases can then be analysis of the technical and change-management used to gain the support of relevant stake- measures that each opportunity will require to be holders. applications to run on the same AMI network. First wave applications are inventory is then prioritized by calculating the often AMI/smart meter. The result of this multi-step analysis is regulators.” pp. the investments needed to get there. for each utility will vary according to the customers. including company leadership. Companies must track determinations will have substantial impact. First a business case for each and the environment.S. environmental impact. One utility. The goal the smart grid road map.

and technical access to timely usage and pricing information. even a complex business model requires only a few minutes of computation time. risks. selected technologies and plan for realizing benefits are • Actively address risks like security and technology obsolescence that regulators might .e. capability-driven regulatory case • Communicate the uncertainties by identifying Regulators view smart meter and smart grid for regulators their potential size and the steps initiatives as tools to drive efficiency and being taken to reduce the associated risk. and • D efine capabilities. In environmental and customer benefits. 1 The most commonly used technique of probabilistic modeling. not technologies. but leave the choice of the specific technology to the utility. business collaborating with the regulator. We have seen regulators the size of the benefit is difficult to predict respond positively to filings that: precisely. Regulator concerns can be • Explain the benefits and timeline by assuaged by conducting a Monte Carlo organizing them into categories which simulation1 to show that the business case is allow commissioners and advocates to positive even under conservative assumptions understand the value created and how benefits for DSM benefits. business case should guide subsequent decisions about technology vendors. the Monte Carlo simulation was named for the casino at Monte Carlo to indicate the random sampling element of the method. but utilities can cite results from similar deployments. for instance. minimizing rate impact. while demand-side management (DSM). Engaging stakeholders early ensures that the final scope.Best practices in the deployment of smart grid technologies • The business case should materially shape the 27 well understood by the time the filing smart grid program. dependencies involved.. Develop a clear. with different values for the input assumptions fed into the model for each iteration. The benefits defined in the is submitted. Investments can be prioritized the regulator and the company might agree according to the relative size of the benefits. the that the filing will require that customers have investment required. The software for the Monte Carlo simulation is easy to use. will accrue over time. functionality. 3. process redesign). The approach involves taking an underlying deterministic model and running it several thousand times. For example. and with proper upfront structuring. by changes to utility operations (i.

Many smart grid projects assume all the implementation risk? Is a “build- last more than 4 years. Although simple in concept.28 McKinsey on Smart Grid Summer 2010 Finally. Select technologies for the long term and use addressed. utilities should consider the technology itself. The result is that • What is the risk of technical obsolescence? How the price of shifting risk from utilities to a third well does the vendor conform to industry party is steep and therefore utilities end up standards? Does the vendor employ open access bearing more risk than initially desired. 4. and the maturity of the technology. is difficult when few reference cases exist. utilities may find it tempting to transfer project Utilities should canvas early adopters on the true risk to a third party. the project operate-transfer” process an option? How many itself takes on many business operations vendor contracts will a project require? And how without a clear “cut-over” to a business-as- much risk will remain for the utility to manage? usual. standards are available to define an appropriate agreement with a third party. as opposed to proprietary access? The NIST . Set up a program architecture that considers risk and industry maturity • A smooth transfer from project deployment to Will the utility act as the prime contractor and business operations. the time or a systems integrator. such as a technology vendor capabilities of specific products. few reference cases and few industry emerging standards. utilities should communicate the results of the pilot to regulators to set expectations around actual value to be captured through full deployment target by addressing them and describing • Clear roles and responsibilities of the parties mitigation tactics. utilities should evaluate third-party re-designs can be difficult. can dramatically reduce the risk of the overall project. Key components of the program following questions when choosing their architecture include: technology partners: • A clear and simple description of who is taking • Is the technology proven? Distinguishing what risk. Smart grid projects will required for system readiness and longer-term ultimately affect many of the core business reliability. In how technologies comply with existing and addition. including the maturity of business pilots strategically processes. and into their core systems. however. as long as key considerations are 5. so the project approach to business The right program structure and operating model operations is inefficient. Given a relative lack of experience between “vaporware” and tested functionality with smart grid technologies and projects. many programs kick off without clear roles as a result Implementation of the inherent complexities and unknowns. As a result. the number of reference examples of Given the rapid evolution in smart grid similar projects. Along with successful integration processes within the utility. involved.

Utilities must build the the metrics and evaluation criteria for the capacity for such applications into their systems. technology. • Can the new technology be integrated with systems integration. it is utility timelines. Because many applications are unproven. and security issues raised by operating a single network. ecosystem of companies behind the vendor and Utilities can also work with suppliers on pricing. such as installation per device.Best practices in the deployment of smart grid technologies smart grid working group has not yet established 29 should their AMI network support their grid all the needed standards for smart meters and applications as well? Utilities must consider the other smart grid programs. lower many of which already exist. Finally. such as low latency for critical grid feasibility best begin with a process of identifying applications or high bandwidth for interactive the questions the pilot will address and defining customer applications. immediate failure rates. a fundamental vendors can deliver what they contract in the architectural question will have to be decided: volumes and timelines required. the proposed technology. can be checked other utility systems? Smart grid applications against real-world experience. Demonstrations of technical capabilities. and understand the price- important to verify the existence of a broad performance trade-offs the utility will accept. Estimated costs in a pilot. If a vendor has communicate the results of the pilot to regulators had difficulty integrating with back-office to set expectations around actual value to be systems. hardware providers. 6. . it could signal a risk of IT cost overruns captured through full deployment. as important as what is purchased. and O&M. future validate assumptions about costs and benefits in smart grid applications will require greater the business case. Pursue true strategic sourcing to optimize • What is the “ecosystem” of providers? Smart grid deployments require a variety of partners providers’ capabilities while minimizing risk How smart grid technology is purchased is nearly like systems integrators. best practice must include supplier capability consider expanding beyond advanced meters assessments to determine whether selected into grid applications. the pilot should test the most systems. Utilities can directly incremental cost to deploy and maintain a affect the standard-setting process by forming separate network for grid applications against alliances with vendors or standards groups. As utilities market. such as customer information and significant and uncertain components of the outage management. the potential for increased latency. • Do technology choices take into account the long-term priorities set out in the road map? Pilots can be used both to demonstrate the Just as streaming video necessitated significant technical feasibility of vendor systems and to upgrades to communication networks. meet system integrator’s on-the-job training. To avoid being locked procurement best practices can ensure that into vendor-supplied support or paying for a vendors deliver the expected functionality. utilities should grid and customer applications. which may be more fluid in a rapidly evolving area like smart grid technology than in a mature • What is the total cost of ownership? Ongoing costs can dwarf upfront investments. as well as with new business case. General and hosting companies. bandwidth. in the future. Perhaps more must mesh with utilities’ critical legacy importantly.

and adopted by the frontline.000 meters Three critical factors must be weighed as part of installed or a certain geography covered). 100. Focusing the attention minimum. allowing for the 7. strategy. such as managing network operations. only a subset of them define the critical path. and jointly develop solutions. • Optimize the contract structure by building “off-ramps” with AMI vendors. the • Consider managed services as a way of program team needs to manage the elements outsourcing functions that had been regarded as that could have the largest negative impact on core. with metrics such as course corrections as functionality is released up-time. At a cost and schedule time. discuss potential pitfalls. Unlike a traditional waterfall release operational improvements. In IT systems integration: systems integration contracts. this test-and-learn mindset shortens the time to launch and creates greater alignment • Set performance expectations through service- with the business by allowing more chances for level agreements (SLAs). Budgeting annual cost reductions in contracts ensures that utilities and • Iterative deployment versus a “big-bang” their vendors benefit from the service provider’s approach. To prevent the “fire-fighting” mentality that many utility IT • Develop a performance dialog with vendors organizations have developed during AMI or by evaluating performance on a quarterly smart grid deployments—and the inevitable cost basis—more often during the initial stages of overruns that are its by-product—utilities should a deployment. valid meter reads and valid bills. Maintain significant business focus on IT re-evaluation of technology providers at defined integration activities milestones (for example. A smart grid program schedule compliance control costs better than time- typically contains thousands of activities.30 McKinsey on Smart Grid Summer 2010 Utilities have adopted a number of best practices • Set up regular workshops with other utilities to build true partnerships with their vendors deploying similar technology to share best while ensuring high levels of performance. Once a technology has been selected. practices. but and-materials contracts. target a greater number of simpler releases that . allowing the vendor to stabilize the of the program team and management on systems at the start of a deployment minimizes the most crucial tasks can assure that budgets risk and creates a bridge for the utility to build and dates are met. many utilities have found that fixed-price contracts with • P roject management focus on critical-path well-defined metrics for quality and schedule activities. its internal capabilities.

In a development approach might. assuming that they will figure things out as they go along. PG&E chose the warm Central Valley in California to capture near-term demand- • S et up change management as a core response benefits from a region with high peak capability. companies have • Business requirements designed to support new separated complex work reserved for specialists processes. This • Geographic sequencing involves balancing approach will often result in an inordinate initial benefit capture with operational expenditure of time and resources on problem efficiency and risk mitigation.000 smart meters a day across their and change required to deliver service territories. typically as a result of an inaccessible location. As part communicating performance through of this process. Some utilities have deployed more 9. For example. Employ lean operations techniques to measures such as the linking of a bonus or accelerate cost-effective deployment compensation of a meter installer to an expected Deploying smart grid technology will affect nearly success rate. For example. The designs must be detailed enough from more routine installations. ensuring sufficient safety stock. also follow best practices of front-line systems integrator. while reducing risk by avoiding the the smart grid will bring the biggest change in more challenging topography and aging concentrated time to customer care and infrastructure in coastal areas. These utilities for the technology provider—software vendor. Actively define end-state business processes than 15. Additional features can be associated with a broad deployment of smart layered on top of a functioning base. Following an agile software installations by as much as 20 percent. Progressive utilities recognize that demand. complexity and cost where a meter was not installed as expected. for a select few of the process steps being manual at example. for example. utilities Many utilities embark on smart grid programs have looked at three factors. Really digging into the root cause oftentimes Business operations and change reveals problems that can be easily remedied. lean inventory ongoing front-line change and accelerating the management reduces holding costs while realization of benefits. To improve productivity in the field. lead to smart meter project a typical cost driver. is “meter not installed”: situations the onset to minimize the risk. distribution operations in 30 years. all customer premises and much of the grid over a short period. To achieve that scale. the business and IT groups must scorecards and metrics. This . without enough preparation. and issue resolution. management These easy wins can be encouraged with 8.Best practices in the deployment of smart grid technologies can be transitioned easily to lower the cost of 31 • Lean operations help reduce the cost and risk O&M support. or in-house IT staff—to use as management—rigorously measuring and a foundation for detailed technical design. of the initial deployment. minimizing grid technology. map functionality for each step of the process flow and identify the degree of automation appropriate • Root-cause analysis can reduce failed for each step.

Including a broad representation of stakeholders and starting the process early allows the organization time to build awareness and prepare for the The electric utility industry is on the verge of resulting change. In one situation. the project can “drift” or best way to gain early buy-in and momentum is fail to utilize its resources fully as a result of to initiate a cross-functional business process inadequate project governance. Set up cross-functional governance across energy management systems. Fully realizing the smart grid vision—smart meters. and integration of renewable energy— One of the unique aspects of smart grid projects will require years of work and billions of dollars of is the cross-functional nature of the work investment. distribution. Copyright © 2010 McKinsey & Company. 33–37). while defining the meter projects is having the heads of changes needed to achieve those benefits.32 McKinsey on Smart Grid Summer 2010 requires concerted change management to • C ross-functional steering committee. enhanced consumer 10. Once the benefits have been critical importance to include all key identified. utilities should communicate to stakeholders across lines of business and everyone involved which of them they are functions. And many resources will be involved • Define target state business processes early. Utilities can leverage their required to be successful. The result was a achieving project goals. All too often. “Maximizing Value from Smart Grids” pp. (For customer care. redesign effort early in the process. • Good project governance. Following the best practices a cross-functional project team was set up but identified here will improve their odds of with unclear decision rights. automation in the all key business units T&D system. All rights reserved. IT. engineering. The typical smart considerable experience managing capital- grid project cuts across customer care. The part-time. please see the accompanying article. intensive projects to ensure that these efforts distribution operations. investors expect. project could not incorporate competing demands successfully. grid deployment. Key elements of good cross-functional governance include: Anjan Asthana is a director in McKinsey’s Chicago office. and chain. customers. . It is of ensure success. Of particular importance to smart committed to capturing. Adrian Booth is an associate principal in the San Francisco office and Jason Green an associate principal in the Calgary office. vaulting the industry into project that drifted for several years as the a new era in a timely and cost-effective way. supply deliver the benefits regulators. and other organizations. revolutionary change. and IT on the more on change management during smart steering committee. Smart grid programs often involve a wide array of capabilities and functions.

Three steps to success and organizations will be better positioned to For utilities to capture the business benefits realize the full value of smart grid technologies. demand-side management.33 Maximizing value from smart grids Utilities must actively reshape processes. typically starting organization. ensure that new systems are in place to support those processes. Utilities able to adapt their processes. operational cost be grounded in a thorough understanding of how savings. inherent in a deployed smart grid. A utility’s approach to capturing the to produce significant economic benefits through benefit from smart grid technologies will need to improved grid efficiency. Andre Christensen Jason Green. systems. 2) smart grid projects. integration of distributed generation sources. and 3) manage the impact on Smart grid applications will be deployed in waves people while building new skills in the over the next 10 to 15 years. By demonstrating mastery through with an advanced metering infrastructure (AMI) those three steps. and the these technologies will change the way it operates. and Roger Roberts Smart grid deployments worldwide are expected deployment. systems and organizational models to capture the most benefits from smart grid deployment. utilities will also increase the . they will have those that do not change their operating models to master three critical steps: 1) identify the will run the risk of hundreds of millions of business process changes needed to maximize the dollars in cost overruns and failure of their value potential of smart grid deployment.

but best practice of systematically definining the negatively. and business processes? new connections. billing errors. Identify the business process changes needed remote connection capabilities. state processes What new business requirements must systems • Reduced unbilled energy. or leave themselves after a move request to avoid the cost of a service unprepared to capture the full value. We have seen a number of utilities anticipated how automated disconnection would insufficiently define how their future operations affect customer experience. restorations of service. One utility for example for new occupants to move in. measured in months for maintaining service overestimate the benefit. utilities should adopt the analysis revealed that customers reacted service could be shut off immediately.34 McKinsey on Smart Grid Summer 2010 likelihood of securing regulatory approval for This evaluation process helped the utility focus subsequent waves of technology deployment. its organizational planning on defining how core processes would evolve to deliver the 1. by narrowing now fulfill? How will the company manage the the gap between a move-out request and transition to new systems? actual disconnection Business requirements must be designed to support new processes. will work with smart grid technology. Ensure that new systems support future- remote connection and disconnection of service. Those designs in turn • Fewer costly service truck deployments must be detailed enough for the technology provider—software vendor. the business and IT groups must map . What new business processes will be required? customer-generated or utility-generated What changes are required to existing disconnections. • L ower costs in the call center. The utility will have to define The planning revealed that the utility had specifically how existing processes will be altered overestimated the net benefits from the smart or replaced to capture the opportunities to which meter implementation because it had not it aspires. Like many utilities. including to maximize smart grid value changes to the processes for customer moves. through or in-house IT staff—to use as a foundation for provision of more self-service options and fewer detailed technical design. systems integrator. identified three major benefits during its evaluation of an AMI system that would enable 2. As part of this process. smart grid business case will demand business process changes. Each benefit identified in the through smart meter technology. To avoid these pitfalls. With remote disconnection. leading the company had previously used a threshold them to underestimate the investment. Each of these processes was Utility leaders driving a smart grid program will redesigned in light of the additional need to be business process architects as well as information and functionality available technical engineers. truck deployment. and so the utility decided to future-state processes that will deliver the reinstitute a threshold of several weeks to allow expected impact.

Manage the impact on people and build new and identify the degree of automation skills in the organization appropriate for each step. utilities should define “transition capture maximum benefit. errors. impact on how employees perform their jobs and how customers interact with the utility. An ideal future state might. and cost of the initial deployment functionality for each step of the process flow 3. enable remote service connection. As a low-risk interim step and the magnitude and pace of the change. The optimal software What will be the impact on employees? What development approach might leave a few process additional skills will be required? How should the steps without automation at the outset to change be communicated and prepared for? minimize the risk. Discipline will be needed to assure that a utility does not become “stuck” in a transitional stage. and . eliminating a truck roll). as for the training and mentoring needed to help employees adapt. One utility.Maximizing value from smart grids 35 The optimal software development approach might leave a few process steps without automation at the outset to minimize the risk. complexity. and cost of the Smart grid technology will have a dramatic initial deployment. for example. while giving the utility These leaders should be responsible for a chance to test the technology without explaining how the deployment of smart grid incurring the cost of integrating the technologies will change different roles as well functionality into call center software. include a remote disconnection system. prevent common billing staged approach. the utility Then it should charter a group of “change might enable disconnections from a smart leaders”—well-respected individuals from meter operations center. who will support the capture the majority of the benefit (by adoption of the new technology and processes. for skill mix of their workforce. To In general. complexity. however. concluded that its but overall the need for risk mitigation in such a future-state process would require fewer field large and inherently complex combination of employees because smart metering would technology and process changes demands a automate meter reading. utilities will need to states” that allow for increasing automation change the mindsets and behaviors as well as the over time. Such a step would across the organization. whereby customer service To address this step utilities must first identify representatives could disconnect service from every group affected by smart grid technologies their terminals. toward this ideal state. example.

to provide discounts to retain customers who are considering in-home display support. At the same time. such as rate enrollment. and are given greater latitude technologies will result in new call types. and give detailed information about the benefits of when the shift would occur. As a result. useful analogy. the This required close collaboration with the union utility launched a broad education campaign and clear communication with front-line to inform them about the installation process employees about how their jobs would be affected. all of which service cancellation. contracts. The Finally. The at least the first 3 to 5 years of the program. “The Smart Grid Call Center”). to the new operating model. and how it will affect them. The telecom industry offers a their staff.36 The smart grid call center McKinsey on Smart Grid Summer 2010 A number of utilities have tested the impact of smart meter and required more highly skilled call center representatives. as well as the skills required from towards managing call centers. For customers. more precisely detect the location of outages. as and “save desks” staffed by specialists to address high-value well as customer-initiated outage notifications and connection calls such as moves to a new residence and requests to terminate and disconnection calls. employees. With the rollout of AMI and time-of-use are typically more complex than bill-inquiry calls and have higher pricing programs and the increasing importance of energy per-call handle times. saw that it would have to communications and training program increase the number of call center employees and to inform employees and customers about how invest in upgrading their skills and training (see smart metering would affect them. . utilities will need to paragraph. the utility planned for the transition of and targeted training to ease the transition field staff into other roles within the company. but it also caused a reappraisal of the expected call center Some utilities will also have to change the cost center mindset benefits of an AMI program. this program involved a mix of “town-hall” style meetings. For the box above. the utility launched a broad-based same company. In the pilot described in the previous efficiency and energy conservation programs. an increase of 12 piloted time-of-use rates coupled with an energy conservation to 15 percent in call minutes over the baseline was estimated for program and in-home displays with residential customers. new rate structures. Taking other smart grid technologies on call center operations. High-performing telecom call centers segment calls by potential value and often set up dedicated “move queues” Deployment of smart meters should reduce bill-inquiry calls. smart meters. and conservation coaching. quarterly newsletters. conservation-coaching calls on how to reduce energy evolve their call center operations in a similar fashion to ensure consumption had average handle times of 8 to 15 minutes and capture of all the benefits that will be out there. pilot yielded significant energy savings and capacity reductions. and also to what alternative roles would be available. One utility into account the new call mix and call volumes. These specialists are highly trained in the techniques of energy conservation programs and support of in-home product up-selling and cross-selling. however.

but one that should yield transform their operating models and prepare significant returns. however. Jason Green is an associate principal in McKinsey’s Calgary office.Maximizing value from smart grids 37 Deploying smart grid technologies requires a major Utilities that orchestrate this well will truly investment of resources. Copyright © 2010 McKinsey & Company. All rights reserved. Andre Christensen and Roger Roberts are partners with McKinsey’s Business Technology Offices in Toronto and Silicon Valley. Those returns. . and complete understanding of how the utility will redesign its business processes building on the capabilities of the new technology. The realization of the benefits and the changes for field and back-office personnel must be phased in to ensure a smooth transition to the future state. will their organization and customers for an informed not meet expectations without careful planning and interactive future.

Shifting daily peak demand customers a greater role in shifting their own flattens the load curve. adjusting both when they use electricity and how much they use. and energy efficiency and management (DSM). and Robert Uhlaner The next evolution of smart grid technology will demand for electricity during peak periods. allowing more electricity . Humayun Tai. It on the following page). demand to off-peak periods and can reduce critical peak demand (the 20-50 hours of Demand-side management: What is it? greatest demand throughout the year) or daily Demand-side management is a set of peak demand (the maximum demand during a interconnected and flexible programs which allow 24-hour period). demand response programs or “load shifting. Demand response (DR) programs helping utilities operate more efficiently. and allow customers to make more informed decisions reducing their energy consumption overall. the timing and quantity of their electricity use. adjusting both programs comprise two principal activities. Brandon Davito. DSM about their energy consumption. and • Load shifting. offers the promise of cutting costs for commercial customers. and it could translate into as conservation programs on the other (see Exhibit 1 much as $59 billion in societal benefit by 2019.38 The smart grid and the promise of demand-side management The next generation of DSM technologies will enable customers to make more informed decisions about their energy consumption.” on This ability to control usage is called demand-side the one hand. in turn transfer customer load during periods of high reducing emissions of greenhouse gases. saving money for households.

Demand-side management programs have existed across the globe since the 1970s. McKinsey research has found that degrees in summer to reduce air conditioning. successful DSM programs incorporate some or all Energy efficiency programs allow customers to of the following six levers: rates. of building additional generation capacity to meet future critical peak demand. Exhibit title: How it works Exhibit 1 How it works DSM means load shifting. such as when they replace an old marketing. incentives. “The Six Pilots have shown that real-time access to Levers of Effective Demand-Side Management”). (see the box on the following pages. California • Energy efficiency and conservation.39 to be provided by less expensive base load provide targeted education or real-time generation. utility controls. such as turning up the thermostat a few 30 years. DR programs can also save the cost verification of customer demand reduction. and customer insight and verification refrigerator with a more energy efficient model. energy efficiency. access use less energy while receiving the same level of to information. energy efficiency. Energy utilities have used such programs (in tandem with conservation programs encourage customers to a changing customer mix) to hold per-capita give up some energy use in return for saving energy consumption nearly constant over the past money. information McKinsey on provided Smart Gridthrough smart grid networks can cut energy consumption by up to The first wave of DSM programs were limited by DSM 18 percent. and energy conservation. education and end service. the technology available –measurement and Exhibit 1 of 3Additional gains in energy efficiency are possible through technologies that can verification efforts were time-consuming and Glance: DSM means load shifting. more controllable energy offering . and energy conservation The major impact areas of demand-side management Impact area Description Shifting customer demand during the ~20 hours per year with the highest demand for electricity Critical peak shift • Daily peak shift • Shifting customer demand during the ~1 hour per day with the highest demand for electricity Energy conservation • Reducing overall demand for electricity by reducing the amount of utility the customer receives Energy efficiency • Reducing overall demand for electricity while maintaining the amount of utility the customer receives Load shifting Energy efficiency and conservation (load reduction) Increased customer satisfaction through an easy-to-use.

These controls could be integrated objectives. •A  ccess to information. To drive improvements. The smart grid will enable customers to manage their own demand (and distributed generation resources) based on price or • Rates. When consumers have access to real-time information they become much more aggressive A sample of design options for each of the levers is summarized in about managing their usage. Fully 60 percent of the benefit from demand preferences. A as an in-home display can increase customer adoption. depending on the circumstance of the particular utility. customers reduced their electricity consumption by 6. Hydro One in Canada. In a series of pilots conducted by Exhibit 2. such as its customer base and geography. To encourage participation in demand-side •C  ustomer insight and verification. Providing both in-home displays services company. Utilities will need carefully to tailor their tariff enabling utilities to bid this capacity into markets as a resource. such as socio-economic to different market segments. or classes. designs. powerful benefit of the smart grid is that it enables verification of the impact of DSM programs over different time horizons. ensuring load shed and pricing programs. Utility tariffs are already designed to achieve a range of other signals from the utility. essential to verify DSM program results and collect feedback.40 The six levers of effective demand-side management McKinsey on Smart Grid Summer 2010 Based on our work with major utilities. home energy income customers to making electricity prices better reflect the controllers. •U  tility controls. . or other automation tools to match customer cost of generation. utilities have found that rebate checks. • Incentives. impact on customer behavior.5 percent based on information provided Successful pilots indicate complementary effects interact across through an in-home display. Municipal Utility District (SMUD) and has produced energy and customer insight and verification. and. do not bear unnecessary costs. produce greater results. technology and controls. it is management programs. incentives. a smart grid information the levers and design options. different channels. access to This software has been piloted by the Sacramento information. to yield the desired behavior. Each lever has a distinct savings of 3 percent. different education goals. compensation for participating in a pilot. has developed software that analyzes a (IHDs) and pre-pay options. Direct load control programs are used to curb certain combinations of actions within and across levers will demand. such as air conditioning. OPower. for example. Increasing levels of control by utilities will enable response predicted by FERC for 2019 will come from altered automated demand response programs. while IHDs alone yielded area with similar attributes such as house size. from making electricity more affordable for lower- with programmable communicating thermostats. education and marketing. levers of successful DSM initiatives: rates. we have identified six key then provide recommendations on how to reduce energy use. during critical peak periods. Utilities (and their regulatory partners) must • E ducation and marketing. including opt-in or opt-out participation. The utility can a median impact of 7 percent. or free technology such regardless of whether the targets are broad or narrow. Customer education on the also account for the winners and losers in any rate design and benefits and the technology of DSM programs can be targeted ensure that particular segments. resulted in energy customer’s bill and compares usage to other customers in the conservation benefits of 13 to 15 percent.

. can be paired with above • Real-time billing information No automation of devices to reduce energy consumption Automated AC control Automated appliance on/off Centralized control & automation of major home appliances • Optimized charging of PHEVs • Optimized usage. and later discharging of energy • • Base case Vary by income. and DR) and economic utility captured by customers . newspaper. etc. increased competition with neighbors. kW. etc. attitudes • Use various means: e-mail. • Emphasize different HAN benefits (reduced energy costs and carbon emissions. Exhibit title: Putting it all together Successful DSM optimizes multiple design options across 6 levers. storage.The smart grid and the promise of demand-side management 41 McKinsey on Smart Grid DSM Exhibit 3 of 3 Glance: DSM applies pertinent design options in every realm. bill inserts.g. informed close to instantaneously • Increase rate for higher use customers Base case Debit bill based on degree of behavior change • Provide separate check to encourage behavior change Monthly paper bills and consumption information Notification of DR events under way • Consumption at a given moment (e. Exhibit 2 Successful demand-side management Successful DSM optimizes multiple design options across 6 levers DSM lever Rates Incentives Information Controls Education Customer Insight and verification Description Design options • Flat rate Critical peak pricing (CPP) • Time of use (TOU) • Real-time pricing (RTP) • Interverted block pricing • • • • No incentives Provide rebates on bill • Provide cash compensation • • • • None Event notification • Real time usage • Historical usage • Comparative usage • Device-specific usage • Billing usage • • • • None Programmable communicating thermostats (PCTs) • Smart appliances/plugs • Home energy controller • PHEV smart chargers • DG/S control devices • • • • No education Educate by segment • Educate by channel • Educate by positioning • • • • • None Verification of benefits capture Same rate at all times Extremely high rates during critical peaks • Variable pricing for prescheduled blocks of time • Variable pricing at all times. consumption behavior.) • • Base case Verify DSM (EE. EC. light bulb equivalents) • Consumption compared to previous period of time • Consumption compared against last month’s or peers’ • Individual device usage in real time.

peak load Gigawatts of peak load Description Peak load 2009 (w/o DR) 810 Expected growth to 2019 140 Peak load 2019 (w/o DR) 950 Business as usual (BAU) DR (baseline) 38 Existing programs –4% Expanded BAU DR 92 –10% Achievable penetration DR 138 Existing programs expanded to all states Opt-in dynamic pricing. and an intelligent on only the largest customers.S. 9. full AMI –20% 762 Source: Federal Energy Regulatory Commission (FERC).S. effective and convenient. Exhibit title: Reducing demand Exhibit 3 Reducing demand Customer demand response can reduce U. . This data can be into place: the increasing penetration of smart transmitted to consumers in their homes via a meters. “A National Assessment of Demand Response Potential” expensive. smart meters over the next 5 years. technologies give the DSM programs now being McKinsey estimates that by 2020 the United designed by utilities a number of crucial States could cut end-use energy consumption by advantages over those of the past. The The growing role for smart grid utilities to collect and analyze usage Smart grid provides the scale and scalability— information at intervals as narrow as 1 hour or to make demand-side management cost- even 15 minutes. over one-fifth of its total projected demand. McKinsey Global Energy and Materials. July 2009.1 quadrillion BTUs.42 McKinsey on Smart Grid Summer 2010 McKinsey on DSM Exhibit 2 of 3 Glance: Customer demand response can reduce US peak demand by 20 percent. allowing real-time data on usage and price. full advanced metering infrastructure (AMI) –15% Full participation DR Peak load with full participation DR 188 Opt-out dynamic pricing. causing programs often to be focused ubiquitous data networks. The next wave of grid that gives utilities visibility into real-time DSM programs promise to change the face of supply and demand balancing. utilities alone have response programs could cut peak demand by up committed to the purchase of over 40 million to 20 percent within 10 years (Exhibit 3). Economy. U. These energy savings throughout the global economy.S. peak demand by 20 percent Impact of demand response (DR) on U. which may allow homes to connect to home-area network (HAN). the promise of feedback on consumption.1 FERC estimates that demand • Real time information.S. rather than relying on a inevitable prevalence of smart meters will allow 1 Unlocking Energy Efficiency in the U. The pieces are falling manual monthly reading.

including development of energy management applications. fully. and build targeted which increases the ability to verify impact. Capabilities required Network costs are low enough to justify near- While smart grid technologies will make these ubiquitous deployment. Some states. The smart grid is driving utilities to stitch together many disparate information • Increase the number of products and programs. Ancillary Services Market Project. response as another source of generation through “negawatts. but it will of real-time data on energy costs and also enable utilities to use the demographic data consumption comes at a time when customers they gather to target micro-segments of their are increasingly aware of the cost and customer base with tailored programs. By communicating the developing. demand (load shed). The two-way load upon request. and refining DSM underlying cost of electricity.” or the ability to reduce • Accelerate the pace of testing. allowing utilities to savings possible. targeting of customers. Utilities and regulators have variety of complementary partners. technology solutions into highly capable Smart grid technology will slash the cost of decision engines. Smart grid networks allow 43 opportunities. Many utilities and and an ability to respond to price. Lowering the cost of deploying DSM programs not only will make it cost effective to • Shifts in customer behavior.The smart grid and the promise of demand-side management • Two-way networks. allow They will be able to “test and learn” to utilities to bid demand response capacity into understand which program features are most the wholesale market as if it were generation. Some states and regional reach of smart grids will allow utilities to speed grid operators. options. environmental impact of their energy usage. and programs to appeal to specific segments makes it easier to test and refine different design of customers. . utilities will need to develop that allow utilities to recover revenues lost due the capability to manage and coordinate a wide to DSM programs. such as the New England ISO’s and widen the testing cycle for new products. The availability provide offerings to the mass market. and will also explored opportunities to use demand need to clearly define their role in the ecosystem. regulators predict smart grid networks will become open platforms that allow third-party • Regulatory changes. managing. utilities can programs. A primary focus will be on augmenting program design functions to enable the micro- • Integration of utility information systems. utilities will have to build new communicate in near real time with their entire capabilities to capture the potential benefits customer base. California. and may improve the efficiency utilities to collect usage data and verify reduced of the market as a whole. and have begun to expect price fluctuations • Manage a partner ecosystem. their customer base. effective for specific segments. thereby reducing This encourages utilities to pursue DSM the time to market for new ideas. Smart meter networks provide begin to develop a comprehensive view of near-ubiquitous connectivity to electric meters. have enacted decoupling regulations In this world view. as well as send time-of-use rates and other information to the customer. Some day.

however. some have never been directly mixed results. to adopted to optimize results. much work at all levels remains manage their energy use. • Build account management capabilities. The good news is that there has been significant progress in areas vital to the success of DSM. were affected by these programs. two hurdles marketing strategy measure the relative impact remain for DSM to become a reality: the right of hundreds of thousands of different offers blend of technology and program design must be (rates. and. importantly. determine which ones have the greatest effect regulatory reforms that will allow utilities to on customer behavior. Even with these new capabilities being brought whose rigorous analytics and iterative to market as part of the smart grid. And regulators are considering develop easy to understand programs that give reforms that credit utilities for demand-side customers the tools (and the incentives) to better reductions. These efforts. pilots to measure the impact of various DSM To reach this market. All rights reserved.000 large Utilities have every reason to be skeptical about commercial and industrial customers. they have tried to capture DSM programs such as curtailment and direct load shifting and load reduction benefits. While projections of demand-side management many of these customers participate in fledgling results. . Still. card designs. utilities will have to program designs. capture value from demand-side management need to be established. The Federal Energy Regulatory Commission estimates that two-fifths of the DSM opportunity in the U.S. proprietary develop full-service support for customers to technology solutions. Copyright © 2010 McKinsey & Company. navigate and manage what will likely be increasingly complicated DSM programs. lies in about 262. promotional materials). Humayun Tai is a principal in Atlanta. to be done if the economic and social promise of DSM is to be fully realized in the next decade. Since the 1970s. Almost half of Utilities are using federal stimulus funding the demand reduction potential for 2019 comes opportunities to deploy statistically significant from the highly fragmented residential market. with load control. and Brandon Davito is an alumnus of McKinsey. Robert Uhlaner is a director in McKinsey’s San Francisco office. • Educate residential customers.44 McKinsey on Smart Grid Summer 2010 utilities may be more like Capital One Bank. Utilities will need to limited in scope and relied on costly.

45

The smart grid opportunity
for solutions providers

By 2014, the global market for smart grid technology and services will run into
tens of billions of dollars annually.

Adrian Booth,
Nuri Demirdoven, and
Humayun Tai

Deployment of smart grid technologies is

various product and service segments, the

accelerating, particularly in the United States.

potential in geographic markets, and the drivers

Smart meters, often the first application

of growth and profitability. We estimate that the

deployed, should triple by 2014, reaching 50 mil-

global market potential for smart grid equipment

lion deployed meters. Despite such momen-

manufacturers and solutions providers will total

tum, the size of the smart grid opportunity for

anywhere between $15 billion and $31 billion

solutions providers is still unclear. Research

annually by 2014, with the value split among the

reports and forecasts abound. What is missing is

three main business segments: customer

a comprehensive overview of the developing

applications, advanced metering infrastructure/

applications and their interaction with the

smart meters, and grid applications. Just how big

evolving market. What are the critical smart grid

that market will be will depend on a wide range of

applications? How fast will the different

variables, all of which smart grid players in this

applications develop? How will the maturing

field will have to monitor carefully.

market alter that development?
Across business segments, growth and value will
To answer these questions, we analyzed the global

be determined by the technology, the level of

smart grid market, assessing the development of

competition, and emerging regulation and policy.

46

McKinsey on Smart Grid Summer 2010

Growth will likely be slower where existing energy

and telecommunications companies,

infrastructure is highly developed, such as in

semiconductor manufacturers, and systems

Europe. Growth on a percentage basis in China

integrators—will benefit from major technology

and other areas where the transmission and

investments. Capturing these opportunities,

distribution (T&D) infrastructure is still

however, will not be easy. Competition will be

developing, will be faster as smart grid

stiff, and solutions providers will need to develop

technologies will be used to leapfrog traditional

a market-entry approach that reflects the long

infrastructure investments.

sales cycles, technology obsolescence concerns
and regulatory constraints that characterize

Development of the smart grid will create

utility procurement processes.

opportunities for traditional energy
infrastructure vendors while opening the market

Estimate of the smart grid market in 2014

to new players. Traditional vendors will benefit

We began by defining three main business

from large-scale renewal of utility assets as

segments for smart grid technologies: customer

customer and grid applications are deployed and

applications, AMI/smart meters, and grid

will be able to differentiate their product lines

applications (Exhibit 1). We did not include in this

McKinsey
on Smartfunctionality
Grid
through
increased
and integration

analysis a fourth and more distant opportunity

Assessing
SG opportunities
with
other smart
technologies. New players—IT
that includes enablement of renewable generation,
Exhibit 1 of
3
hardware
providers,
software firms, networking
plug-in electric vehicle (PHEV) integration, and
Glance: The smart grid can be broken into key segments that have different drivers and potential
profit pools.
Exhibit title: Smart Grid segments
Exhibit 1

Smart Grid
segments

Transmission and distribution environment
Key Smart Grid components

The smart grid can be broken
into key segments that have
different drivers and potential
profit pools

Customer applications
support:
• In-home display with
real-time usage
and pricing statistics
• Usage aware appliances
• Home automation

AMI allows:
Report usage by
time and outages in
real time
• Remote disconnect
• Operational
improvements for
distribution/retail
companies

G rid applications
drive:
• Automation of the grid
• Reduction in losses
• Remote monitoring
• More accurate balancing

Integration of
renewables and
distributed energy
facilitate:
• Integration of back-up
generators, storage,
distributed solar
• Disconnection in case
of network overload

Data, IT systems
integration and back
office allow:
• Integration of front-end
engineering, middleware
and back office systems
• Data collection and
decision analytics

The smart grid opportunity for solutions providers

47

energy storage. This fourth category was excluded

The costs associated with updating these

due to the current absence of actual defined

components for a smart grid system are included

solutions combined with the likelihood that the

in our market-sizing analysis. Implementing

market for these solutions will hit an inflection

these components will also require utilities to

point after the assessed time period to 2014. A

change their business processes, as the added

fifth category—data collection, processing and

level of technology will require new management

back-office integration—was also excluded from

and oversight procedures.

this analysis due to the overlap with technologies
in other segments (e.g., AMI). Also many of the

Our estimates for the annual global revenue

new opportunities arising from data mining and

opportunity for 2014 in each of the three

more sophisticated applications are longer-term

applications areas are given and discussed below.

opportunities that will mature post 2014.
Customer applications: $3 billion to $10 billion
These applications require a range of com-

The level of functionality can vary from a simple

ponents across the value chain—transmission

in-home display (IHD) that shows energy

and distribution
a communiconsumption to a fully automated home with
McKinsey
on Smartinfrastructure,
Grid
cation
network,
and
a
computing
platform.
smart appliances and a centralized energyAsessing SG opportunity
These components
are the foundation that will
management system. Even the basic functionality
Exhibit
2 of 3
enable
smart
grid
applications
(Exhibit
2).
option across
would the
receive
usage and pricing
Glance: Smart grid business applications have common components
grid system.
Exhibit title: Common elements

Exhibit 2

Common elements
Business
applications
and projects

Computing
platform

Customer
applications
• Demand-Side
Management (DR/EE/EC)

AMI head
end system

Outage
Information
System (OIS)

WAM
WiMax
Cellular

Communication
network

Energy T&D 
infrastructure

Distribution
Mgmt System
(DMS)

Smart Meter
Advanced Meter
Infrastructure (AMI)
• HAN infrastructure
for the meter
• Remote disconnect

Cap banks

Reclosers
Substation

Grid apps
Integrated Volt/Var
• M&D FDIR
• Substation automation
• Wide area measurement

Geographic
Information
System (GIS)

Meter Data
Mgmt System
(MDMS)

LAN
RF Mesh
PLC
Switches

Sensors
Wires

Integration
Solar monitoring and
dispatch
• Storage/EV integration
• Supply/demand
balancing and load
forecasting

Asset Mgmt
(AM)

Customer
Information
System (CIS)

Home-Area Network (HAN)
Zigbee, Home Plug
Transformers

Meters
Customers

Storage

Security

Smart grid business
applications have common
components across grid
systems

Customer applications will likely be adopted more rapidly in North America Grid applications: $5 billion to $8 billion and Europe. resulting cellular. Our analysis production costs. Some regions. which use AMI systems use a variety of communication sensors with advanced communication technologies to connect with the utility. including capabilities to monitor grid performance and radio frequency mesh. management programs. Estimates suggest that The speed of penetration will depend on the nature systems deployed in China will cost on the order of the customer application technology and whether of 50 percent less than those deployed in the the regulatory framework supports demand-side United States. installation. AMI costs range from $200 to assumes per-customer costs range from $120 to $400 per endpoint in the United States. make its infrastructure more efficient and flexible. such as customer the ratio between gas and electric meters. banks and sensors with communication Smart meters and advanced metering lines and reduce load by operating the capabilities to reduce reactive losses on power infrastructure (AMI): $7 billion to $13 billion distribution network within a narrower and These meters support two-way communication lower voltage band. which use capacitor reducing the per-unit price. such as Asia-Pacific. They can also alert utilities . power-line carrier. recover the cost of basic IHDs or programmable communicating thermostats (PCTs) through • Volt-VAR optimization (VVO) and conservation rate-base mechanisms. will functionality such as whether it has remote have lower prices and penetration rates. enabling customers to adjust help detect theft.48 McKinsey on Smart Grid Summer 2010 information and data readouts through a home- to the magnitude and location of outages and can area network (HAN). operational benefits. This technology usually allows utilities to in reduced maintenance costs and improved connect or disconnect service remotely. and industrial energy-management sufficient scale to continue to drive down tools and the types of devices used. creating decisions on capital investment. and education. include the types of communications technology. and program costs. energy consumption to fit their price sensitivity and usage patterns. while in markets like China the focus These are applications that automate the grid to will be almost exclusively on meters and the grid. The $340 for residential solutions. Some utilities in developed countries may be able to They include the following elements. which will provide commercial. disconnect/reconnect capability. communication network systems. United States and China. Our customer applications reflects the range in our estimate for 2014 assumes strong growth in the assumptions about adoption rates for home. with an estimated The wide range in the projected market size for value in 2009 of $3 billion to $4 billion. Cost will also vary across regions. • Monitoring and diagnostics (M&D). and enable condition-based maintenance. driving up adoption and voltage reduction (CVR). between the meter on the customer premises and the utility and between the meter and the HAN. inclusive of factors accounting for this wide cost range hardware. The AMI market is the most developed segment of the smart grid value chain.

S. We estimate that utilities on average will relay of electricity from energy-rich central and invest $160 to $300 in incremental capital per western regions to power-hungry coastal markets. in condition of the existing grid. because the applications by 2020. isolation.The smart grid opportunity for solutions providers • Fault detection. on a per-endpoint basis. for more details about smart grid benefits. smart grid efforts • Wide area measurement (WAM). margins of 10 to 15 percent for smart meters. lack of standards has delayed efforts. the price of these factors is most visible when contrasting the smart meters in China is expected to be likely growth paths of Europe and China relative about half of what it is in the United States or to that of the United States (Exhibit 3). shorter meter life span. as China seeks to develop an ultra- to use the AMI network for grid applications as high voltage transmission system to improve the well. including the as opposed to 5 percent in the past. Fragmentation across the routing. and the of meters to have higher functionality and be makeup of its regulatory regime. What Europe. which will not likely come that measure the electricity’s phase to improve until 2011 at the earliest.” pp. but smart transmission infrastructure. depending on a number of factors. customer to enable grid-side applications. Regulators will have to quickly improves reliability and outage align incentives for society and industry. has pledged to roll out a smart installation of advanced metering infrastructure grid system with AMI and improved grid (AMI) by approximately 3 to 5 years. The impact of of higher quality. Current meter models are of relatively low functionality and quality. grid reliability and prevent cascading outages. 4–11. but a response for customers.1 In addition. the level of recognition of the need for future generations development and wealth of the economy. import taxes and lower transportation costs. Nonetheless. for example. which automates switching and deregulated market. installation costs. China Our projections suggest that the deployment of State Grid. Smart Grid Value at Stake: The $130 Billion Question. single player to invest in smart meter or The ability to isolate and locate faults more customer applications. . Transmission grid benefits from AMI are relatively easier for the applications are getting particular attention in the utility to capture. with an Regional differences in market potential expected lifetime of 7 to 10 years versus 10 to The growth of the smart grid and the value it 25+ years in other regions. pending adoption of the transmission level by using synchrophasors EU-wide standards. allowing utilities to reduce the cost of value chain has reduced the incentive for any manual switching and improve response times. The lower follows is a brief overview of key regional cost is attributable to cheaper labor and market differences. China may allow creates will considerably vary across geographies. In the Netherlands. and restoration 49 meter deployment has lagged due to Europe’s (FDIR). no 1 See the accompanying article “U. which works at were suspended in 2008. Europe and use of power line communications. the larger of China’s two state-owned these grid applications will lag behind the grid companies. depending on the level of functionality deployed. many utilities plan short term. Europe has achieved a higher level of grid which require few changes to existing automation than the United States.

a. but will experience significant growth rates in next 5 years 6–16 20–40% p. low- The smart grid market is in a relatively early state functionality products. especially in China Annual smart grid market growth in 2007 and 2014 $ Billions North America China 30–55% p. such as Asian What it will take to win OEMs.50 McKinsey on Smart Grid Summer 2010 McKinsey on Smart Grid Assessing SG Opportunity Exhibit 3 of 3 Glance: The Smart Grid market is growing fast. and investors—must consider services. Brazil is greatest profit potential depends on a number demonstrating increasing interest in grid of variables. 1. Low-cost suppliers.a. are beginning to offer low-cost. 0.2 • Who plays? Many new companies have entered the market.5 Europe 2007 5–13 50–70% p. especially in China. which Identifying the applications that will offer the a smart grid could help address. 1. for example. build depth by providing additional products and service providers. Solution providers should consider Other regions are also developing different parts managed services as an offering.” is a telecommunications technology that provides wireless transmission of data. equipment providers.2 • United States will remain the largest market • Europe will experience slower growth rates as deregulated market makes it harder for utilities to capture Smart Grid benefits • China will be a smaller market overall. Exhibit title: A fast-moving market Exhibit 3 A fast-moving market The smart grid market is growing fast. Retailers must evaluate which customers are likely to be the most • Who pays? The main customer segments will be utilities (and indirectly ratepayers) and . better to match customer needs with a set of Utilities. They will pools for different applications and regions. need to build breadth by integrating into other business applications outside of smart meter or All players—utilities. Utilities can also adopt more service- how these trends will affect the market as a whole. India. is focusing on grid and line loss applications and Finding attractive opportunities has a greater issue around electricity theft. though broad themes are players to maintain margins will depend on how emerging which may affect the growth of profit well they can differentiate their products.a. for example. of the smart grid value chain. which would allow them as well as their potential position in that space. and Australia is at the forefront of WiMax technology. applications. so the ability of established of development. McKinsey analysis Other regions profitable.” which stands for “worldwide interoperability for microwave access.2 2–5 2014 Source: ABI. need to decide whether or products and services. 2 “WiMax. oriented business models. not to expand the number of products and services they offer customers.

the patchwork more complex. smart grid players must build a develops for home-area network products such deep understanding of where the value is in the as IHDs.. analyses and quicker responses to changes on utility ownership structures. and they must also develop monitors. as vendors provide additional functionality and can create significant complexity in any integrate multiple devices. national road maps the intersection of global equipment and and targets) is critical.g.” and home energy evolving smart grid. allowing for more detailed of state-based regulatory frameworks. reduced operating expenses. Local customer preferences and Utilities are demanding more clearly articulated strategic priorities of regulators and utilities value propositions. the pace and face the prospect of dealing with dozens of scale of deployment is increasing. The Building the capabilities to win utility segment is attractive because it can buy In order to capture the smart grid business at scale. which will require a policy instruments deployed and the timing more consultative approach to sales and of specific interventions will vary widely marketing and coordination across by region. a utilities. which will leverage their buying power number of requirements will have to be met. accelerating providers to implement a single smart grid market development while driving margins project. “smart plugs. if an end-user market opportunity. margins are being driven by policies (stimulus efforts. and their direct linking to will play a critical role. and impact of software applications increases as the legislation. Developing or solutions market dynamics and local electric maintaining a competency here will be a power industries. As traditional equipment information transmitted to the utility becomes providers in the U. The winners will recognize the need to lower through greater scale. The nature of start packaging solutions. market size and margins will likely be a compelling business model to pursue this higher than if these products are bought by value. and existing the grid. traditionally siloed business units within a utility (e. It is likely that this trend will continue. reducing the lock-in providers go-to-market strategy. • Where are the margins? Margins have already begun to shift from smart grid hardware to the • D eep understanding of government and software and network layers. .. to drive down prices. To win utilities as a customer segment. improved • W hat will regulators and policy makers capital productivity). The value from regulatory incentives. and pending state and federal legislation. increased grid efficiency. markets. decide? As governments and regulators drive adoption of smart grid technologies • C onsultative solutions-selling.g. effect associated with physical devices. key differentiator. Niche markets for specific applications are emerging across regional • Deep understanding of full value at stake. underlying value drivers (e. distribution operations and IT).The smart grid opportunity for solutions providers 51 industrial and commercial consumers. know well. However. At Understanding the nuances of government the regional level.S. Utilities now through mandates or incentives.

the smart grid market will rapidly changing environment. The smart grid embodies the intersection of power engineering A compelling business model will be one that and information technology. Building a culture aligns with utility goals by creating rate-based that encourages rich dialog and compelling opportunities and reducing operating expenses. Companies are getting secure. Adrian Booth is an associate principal in the San Francisco office and Nuri Demirdoven is an associate principal in the Houston office. Adopting a “wait growth of this market. while also reducing risk. Copyright © 2010 McKinsey & Company. smart grid business models. utility customers grow rapidly. distributed generation. convene and as well as the capability of utilities to deploy the manage partnerships. future-proofed products has identifying the complexity of managing meter become a top priority. From the utility perspective. sustainable. as other players the building of large. and opportunities up and down the industry value scalability. Gone are the days of selling chain. solutions across these competencies is difficult. however. potential to help customers manage home energy Vendors are quickly being categorized as those use will create opportunities for white goods that “get it” and those that are holding onto manufacturers. consumer software providers. as well as in related industries.. In a In the next 5 years. The ability to identify. • Willingness to take risk on a forward looking market. data as an opportunity.g. and profitable will begin to get traction. Humayun Tai is a principal in McKinsey’s Atlanta office. Few companies can emanate from a number of areas. Concerns about risk but required in order to win. from customer-side applications to offered to incorporate future smart grid grid-wide automation upgrades and will vary elements (e. The proprietary products with minimal security. including or should develop the full suite of capabilities uncertainty around standards and interoperability in-house. flexibility. and legacy products. energy services companies. alliances and more new technologies successfully. electric regionally around the world. will depend on and see” attitude may be costly. All rights reserved. The fundamental vehicles. . The growth of the smart grid will create interoperability. This growth will occur across the are attaching greater importance to flexibility value chain. and looking at options to use a “software-as-a-service” model to reduce the • Seamless capabilities across power engineering cost and complexity of maintenance. distributed storage). informal consortia is growing in importance.52 McKinsey on Smart Grid Summer 2010 • Core architecture principles of standards. security. The market is growing rapidly. and information technology.

how does that change to attain significant size. Prior services. The stimulus funding the services they need from the utility.S. helping to test possible the grid needs to work and be managed? Think technologies. and what works about PHEVs and the fact that there will be a and what doesn’t. Think about smart grid technologies? mobile users and how the utility will need to Bob (GE) interact with them. The stimulus funding in the U. CEO of Landis+Gyr. Vice President of Transmission & Distribution for GE. Cameron O’Reilly. Executive Vice President and Co-Founder of Silver Spring Networks.53 Perspectives on smart grid from leading solutions providers In the following article. General Manager and Senior Vice President of the Cisco smart grid business unit. The article draws on interviews with Bob Gilligan. Now the new focus is on customers. One utility that has gotten a lot of press (and deservedly so) is Austin Energy. How are utilities currently deploying high concentration in Austin. and how will have a positive impact. Doing this let them pilots. is creating understand what will be needed to provide the more appetite for scale across applications. for example. services. As customers implement solar PV at as some of these smart grid applications have yet their homes. there was traction but they’re not just here to provide energy to more in a siloed manner. They defined Laura (Cisco) future services together with customers and Deployment is occurring today in pieces and in re-mapped their systems. Utilities have to shift their paradigm— to the stimulus package. They have to provide energy-related testing integration across applications and scale. Laura Ipsen. and Eric Dresselhuys. top managers from leading equipment vendors and solutions providers discuss the future of the smart grid industry. current policies. .

these three things. however. The ability to save money will drive massive Laura (Cisco) innovation. yes. The good news is that we see utilities beginning to think more strategically and recognizing the Bob (GE) need for convergence. There will customers. If we address The industry is very much in the dark ages on this. model that makes sense. so you can the 21st. Extending the long? You could say that our progress has brought communications network with AMI. I think we have a business case for making the grid smarter. The whole logic around dynamic need to be new regulations that utilities respond pricing draws from the efficiency of markets. Our econometric models describing call to complain that they have an outage. Cap and trade is one example that might play . AMI [advanced metering infrastructure].54 McKinsey on Smart Grid Summer 2010 The whole logic around dynamic pricing draws from the efficiency of markets Most technology today is deployed in forms people want to run their air conditioning all day adapted for specific uses. The payback Yes. but currently they still act For grid applications. we need standards. that’s good for a return on capital However. you Just look at the European Union with its directive can’t do that without remote management for related to smart metering deployments. use pricing for energy consumers. I think ultimately the killer application deployed. Cisco has seen this cooling the cat when no one’s at home. If to. Most utilities only find out that their see the status of the network—we should start customers are using their product when they don’t there. And [they show] a need for time-of- better manage their consumption and budgets. not digitized substations and sensoring. If you story play out before and sees real benefits in don’t have to buy wholesale power at peak times. that will drive innovation is variable pricing. You can’t do dynamic pricing without Regulated mandates help make this market move. we need the PUCs was generally under 4 years—in a utility [public utility commissions] to push adoption. which allow them to reliability. fine. with The question for me is why has adoption taken so at least a 10-year horizon. utilities need an economic quite tactically. you can save money. enabling the electricity industry into the 20th century. users get real-time feedback and a price for carbon and a price or penalty for pricing offers based on usage. In most returns for grid applications depend on defining other industries. converging infrastructure across applications. smart grid technologies? They want to be sure that additional Cameron (Landis+Gyr) infrastructure investments will be as solid. environment. Utilities have gotten comfortable with advanced metering What will accelerate the adoption of infrastructure as a solid economic investment.

but accelerant for adoption. industries and can change depending on geography and ownership structure. And from an economic analogous situations and ask whether people point of view. the market for seeing a massive ramp-up. It’s hard have a significant impact on the smart grid. The We’ve found that accelerating adoption is not just government investments that are flowing in are an about selling gear or licensing software.” or the intersection of grid Cameron (Landis+Gyr) policy. for example. I do see houses that have this believe they have enough bandwidth and overhead in-home technology. and economics. All we can do is look at will emerge as winners. more information leads to more side. In the past. GreenTech manufacturing bill in California is utilities went with a single vendor to minimize another example. legislation. A lot of people say that Eric (Silver Spring Networks) movement that people will respond to! Without electricity is not price-elastic. and contribute to providing a solution where we de-risk by offering establishing the smart grid reference architecture managed service. They Within 5 years. you substantial potential for investment. regulation. There are business models that they can hang a thermostat or distribution that might have a third party between the automation device off the network and it will customer and the utility. One area that really needs clarification is what I What do customers want? call “gridonomics. What we’re doing today. the incentives in the electric power reacted to more information. The industry finally price elasticity is too small. The key here I think there will be big innovation in home is that utilities and other market players will need automation. but it is not yet clear which of these spreadsheets? No. but will see technology “gridonomics” pillars. On the policy In most markets. is pretty basic stuff—basic switching break apart the functionality and pick each item and automation. CleanTech as a driver of job creation. the technology side. a managed network operations as a blueprint. They’re finding that picking the best in breed opportunity.Perspectives on smart grid from leading solutions providers out in the United States. Standards help to lower the risk. We’re seeing utilities laundry at three in the morning. On to say if demand is based on what we have today. If you however. doing things seamlessly. technology. . work. which will not demand much change to make the smart grid case along all three in consumer behavior. and standards play efficiency. The end up with a much better solution. I don’t see people sees it has an open. and the like. decide that the risk profile is dropping. we’re automated technology. industry are distinct from those of other and whether they benefitted from it. two-way Internet protocol- running around turning lights off or doing based network that works. center. It can create a huge export risk. This will create a 55 based on the standard approach for that task. In the AMI business. Many utilities today don’t know who large roles in influencing the industry and will their profitable residential customers are. President Obama has named built on a standard platform is actually lower risk. there has been a great deal of Did we all say we wanted a word processor or innovation. but there is a price The other factor is risk. such as price signals. however.

where they buy a meter from one Microsoft are making moves in this space. For example. that looked really different from what happened You might have two networks—one that is in the past—voice. is not with PG&E. but when they saw to market leadership. where customers have in-home come together? They used to be separate initiatives. advantages with integration. taken the cost of voice distribution automation and smart grid. you’ll see AMI players broadening into VoIP has. People didn’t will fade away. In general. with the utility world when zero-net energy consumers others coming into the market we’re playing in. that’s what you’ll get. video. I don’t . acquisition. integration of distribution automation. we have to move customers from market evolves. In some circumstances. and service down significantly. displays [IHDs]. rich applications. AMI. The home and customer-facing applications will That’s why our strategy has been to be prepared be the bigger driver for smart grid over time. and each to behave in the same way? player will make up its own mind about the most effective way to get that breadth—either through What do you see as the next wave of partnerships. modular believe that significant innovation will be seen at may offer more functionality. but there are cost the top in the application space. that customers don’t care—because I think utilities have been limited by technology that Eric (Silver Spring Networks) couldn’t provide what they needed. What will happen in you’ll see us broadening into smart grid. from pilots that didn’t work. I don’t think you’ll Telco service providers went through a period in have people building separate AMI. The taxonomy is already it. In a with either solution depending on how the macro sense. Cameron (Landis+Gyr) I think you’ll see more integration of AMI and DA Laura (Cisco) [distribution automation]. How will these things Gas and Electric. It is vendor. My different approaches in working with Oncor and conclusion. We from a third. 96 percent customer satisfaction but now they need to be managed as one. We’ll see broader solution sets. we have taken very being rate payers to being participants. I think The same thing could happen in the utility world. demand which their networks started carrying things response. for example. or building the smart grid applications? functionality themselves. and distribution automation networks. some newer companies will rise know they wanted an iPhone. begin to appear? Will anyone be able to Some utilities are going with a modular monetize the new models? Certainly Google and approach. general and one that is mission-critical. they knew it was cool. Electricity probably has starting to blur—product definitions are getting the highest penetration of any commodity or fuzzy and customers look for something that is service in the world—why do we expect everyone broader. and 15 percent savings on their bill—that’s see the normal market evolution—some big guys where the market starts to take off. if you look at an example like Oklahoma and distributed generation. You’ll rates.56 McKinsey on Smart Grid Summer 2010 Eric (Silver Spring Networks) think there will be one approach that succeeds. However. a network from another and an MDM still unclear what the revenue model is. If retailers can I’d characterize the next step as being all about the only differentiate on price.

what they are trying Europe like what’s going on in the U. Looking at California. but less that will affect their plans. there is influenced by each other. Electric Power. yet there looking more and more to the U. we see a real move rather quickly to a demand response intersection with smart grid and other trends to solution that engages consumers and tests develop smart connecting communities. and how communications-enabled electric meters. They our people in Europe hadn’t really heard about want to deal with tampering and inefficiency in smart grid. I expect them to the highest government levels. Two years ago. Bob (GE) Laura (Cisco) Different geographies have different needs and Many economies are facing similar problems. they are concerned about reduc- It’s not like one product will get the market going ing losses and driving efficiency in their network. people thought AMI and MDMS [meter data management systems] China and India have different needs. you’ll see behavior in Though systems can leapfrog. to solve is different. However. If you look at American The smart grid market is not like the iPod market. utilities are heavily If you go to Africa and look at Eskom. If 30 to 40 percent of concerned with communicating into the residence.Perspectives on smart grid from leading solutions providers 57 How do you see the market evolving different technologies in the home. At priorities. In Hawaii.S. now smart grid is a global their network.S. are huge losses in their delivery system. We see were only happening in the U. Now Europeans China implementing a smarter grid with want to know what is going on in the U.S. across the united states and around they are paying $7 billion to import oil. European utilities are a big mismatch of supply and demand. however. phenomenon. benefits do arrive. things will be different. everywhere equally. They need the world? high penetration of renewables to reduce their Cameron (Landis+Gyr) dependence on foreign oil. business-case benefits (such as the DSM That hasn’t been something they are focused on [demand-side management] benefits) are not today—consumption by consumers is relatively delivered. If these small compared to more mature economies. Two years ago. There .S.

energy provider point of view.58 McKinsey on Smart Grid Summer 2010 may even be a leapfrog effect in some economies clearly need to be proactive here to prevent being as they have more of a Greenfield opportunity. disenfranchised. but the development of communities will be tested. Providing services . healthcare. the smart grid may not play out purely from an The idea of connected communities can cut across to consumers and communities to allow them to big sectors: energy. security. I’m not saying there will be a Look at Jeju island in South Korea as an example single converged communications infrastructure where the notion of smart connecting across all these industries. It is not become more sustainable and interdependent will clear how it might unfold but the utility will be important.

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60 McKinsey on Smart Grid Summer 2010 .