With a stick and a carrot, moving toward energy efficiency

The construction of coal-fired plants has nearly halted in the United States. While that's good news for environmentalists, it's bad news for the energy sector -- but not for the reason you'd think.

Fueled by the ubiquity of electronic devices, America's thirst for energy has never been greater. But renewable energy sources such as solar, wind, hydro and thermal power aren't coming online fast enough. Which means utilities are faced with a lot more demand -- and precious little supply.

Enter demand-response technology. At its core, demand-response is about making the most of what's out there, adding efficiency to existing systems as a smarter electrical grid materializes.

I spoke with Honeywell Energy Solutions chief Jeremy Eaton about the state of the industry, how demand-response fits into the greater picture and why utilities need to rethink how they're selling the smart meter.

SmartPlanet: You made several big announcements at the GridWeek conference in October. How's business?

JE: I'm personally very pleased that we're really making a lot of progress with regard to entering the commercial demand-response space, connecting the smart grid side of the business with my core business, energy efficiency.

We've seen good commercial success with utilities in terms of wanting to embark on their own programs to field demand-response in an automated fashion for commercial and industrial programs.

We have one utility where a large portion of their energy comes from wind. What they're able to do is absorb some of that intermittency so that when the wind doesn't blow quite as hard, they can look at a demand-side reduction rather than firing up plants or tapping into a reserve.

Fast, automated demand-response reacts to the intermittency of renewables.

SmartPlanet: There has been a lot of concern within cleantech circles about the continued availability of subsidies from the federal government. How does that affect your business?

JE: I would never be one to, with certainty, place a bet on what happens.

Some of the initial focus on renewable generation has been fueled by subsidies. It's tough to say how long those will last -- some camps think we're moving into an era of austerity. But those subsidies were only going to have so much impact.

What is going to happen longer term, looking out to renewable commitments, there will be a certain percentage of capacity that must be from a renewable source. Long term, it's the [carrot and] stick approach -- if they don't have a certain generation from renewables, there will be a penalty assessed. The expectation is that more teeth and mandatory penalties will be put in place.

There's a large set of utilities focused today on what they should be doing to meet those mandates by PUCs [Public Utilities Commissions] or state legislators 10, 15 years from now.

SmartPlanet: And that's where demand-response comes in.

JE: If I am going to have 20 percent of my capacity generated from wind, what do I need to do to manage that? I can build more peaking plants -- that's a non-starter, since it goes against their overall mix -- explore storage, which is expensive and unproven at current, or go after demand-side resources.

The demand-response programs driven today are driven largely by grid stability. There's not enough renewable penetration yet to need to manage intermittency. Now, it's driven by needs for reserve capacity so that the grid stays stable and does not go down on peak days. The real driver is peak shaving. The severe summer peak is growing, faster than the baseload.

There hasn't been a single new coal-fired power plant that began construction in 2010. And 30 new projects have been canceled. The demand for electricity is still going up, the peak demand is going up even faster, and we're not building more capacity and canceling projects. That value proposition exists today.

Renewables are sort of a flywheel accelerator on top of it.

SmartPlanet: Sounds like a no-brainer. Why aren't more utility companies on board?

JE: Given the status quo, to better manage the peaks we have today, utilities face a choice.

Fundamentally, it is cheaper to put in demand-response resources than it is to build and run a peaking plant. The economics are cheaper.

So why don't utilities always do it? One is the way the rate structures are built. They don't necessarily recover costs on DR assets, rather than on generation capacity.

You could either spend $100 million and earn a guaranteed rate from the PUC, or you can spend $40 million to procure the exact same amount of peak kilowatts or megawatts through demand response assets. And it's much better green impact. But maybe you only recover the cost, and not a return, or worse, you never recover the cost.

In many cases, the rate structures don't allow the best economic outcome to win.

It gets back to a question of incentives. Are they there to allow institutions to make the best choice? They're behaving very rationally.

SmartPlanet: What does the smart grid look like in 10 years?

JE: If I look at the industry broadly, the last couple of years have seen an amazing focus on infrastructure. AMI [advanced metering infrastructure] -- a lot of money was focused on smart meters and those networks.

That is hugely valuable down the road as we think about what it enables. If we want to make this an economic marketplace, where the cost of electricity is mirrored in the price -- which is largely not what happens at the residential level -- it's necessary to have some of that infrastructure to do that.

In the past year, there's been some push-back on the consumer side and PUCs when the infrastructure investment precedes the features that make the infrastructure valuable. If I give you a smart meter and time-of-day pricing, and give you no means to do anything about it, your bill will likely go up.

Where it will head is much more focus, attention to and investment in the applications that actually solve a problem. We're going to shift from an infrastructure focus to an application focus.

What's the problem we're trying to solve? If I want to get consumers to accept the introduction of a tariff scheme that's based on time-of-day [pricing], I need to give the consumer the means to react to it. To us, that means giving them automated control.

Information and awareness is one thing -- that helps. But if we're going to get the impact we want, we have to give them the means to react to those price signals when they're not home. You need your home to react to high prices at 3 p.m. when you're not home. Automated control has to be a part of the equation.

Moving to some form of variable pricing to create a true market where scarcity in the market is reflected in its price -- if we want consumers to make good economic choices, we need to reflect the prices for a commodity and give them the tools to react to that.

SmartPlanet: Is grid build-out a necessary pain, the way a road is torn up before a subway line is built?

JE: In your example, you know what you're getting out of it. What do you get from a smart meter? Nothing. It's like building the stations without running any rails.

Maybe we should be more methodical and where we do AMI rollouts -- we couple that with the technology that makes it valuable. The rollout is going to be spotty anyway.

At the end of the day, communicating the message better that your bill is going to go up...that's still a bad message. It's communicating the benefit on the other side. What are the scenarios that actually help and create value and are beneficial -- when is the consumer going to get that? It's explaining those benefits, even though right now they're squishy and not defined.

You need that infrastructure investment. It's really important. Our strength, heritage and focus is on bringing the end users into this equation. Getting the consumer -- a homeowner, a manager of an industrial facility -- familiar with this new world of smart grid.

As a consumer of electricity, the prices you pay don't necessarily reflect the impact of that decision. The technology will allow consumers to make choices on what they want to optimize. Comfort? Saving money? They'll be able to use the loads in their home for that. If they choose to, they'll participate in that market.

SmartPlanet: How does Honeywell fit in?

JE: If I start with really big commercial and industrial sites, they've been subject to variable prices for years. They already have smart meters installed. The big electrical consumers are already doing this because they're already subject to this. In our Honeywell Process Solutions -- which serves refineries, chemical plants, factories -- we have modules that we sell for hundreds of millions of dollars [collectively] to help them manage the tradeoff between shutting down or keeping running.

[Lately] we've been talking to the other end, the residential end. There's a big opportunity in the middle, where electricity isn't a huge part of their bill, but it's not a small number. The program we're running in California, we are seeing a lot of interest from those customers. If you want to participate in a different tariff program, then they fund a certain amount of equipment to participate. We're seeing very strong interest. It gives them another way to manage their P&L [profit and loss statement].

Some of the things they can discover doing demand-response, they translate to energy efficiency. It turns it from a demand-response opportunity to an energy efficiency opportunity, which is dollars [saved] and can be done every day.

There are a lot of people who do energy efficiency and a lot that do demand-response. We're bringing these two together.

We're seeing really strong interest and activity internationally as well.

SmartPlanet: How can we do smart meters better?

JE: As opposed to making it a necessary evil and staggering the infrastructure and bringing the technology and automated controls later, couple those things together. Do it holistically, so that the day they get their smart meter, they also get the other technologies that allow them to do what they want to do.

It's not like we don't need the infrastructure. It will be helpful. I just hope the atmosphere we've created hasn't left a bad taste in people's mouths about smart grid. People are starting to think beyond the smart meter now, and that's a good thing.

If we're going to communicate something, it's communicate that -- that it will require more investment.

SmartPlanet: Won't that anger homeowners even more? They invest in new infrastructure, and it raises their bill?

JE: Well, we can leave them angry with a higher bill, or we can do something about it. It's not the best set of choices, but it's pretty clear to me which one's better.

This post was originally published on Smartplanet.com