Last month the Department of Energy provided an update on the economic impact of stimulus investments in the smart grid. By and large, the results were very positive and well received. After paging through the document here at GTM Research, we see three major findings relating to economic output, jobs and the relative performance of investment.
- Economic Output: The total invested value of $2.96 billion to support smart grid projects generated at least $6.8 billion in total economic output. In that sense, the stimulus, and matching support from utilities and the private sector, generated a significant impact on the U.S. economy.
- Smart Grid Jobs: Overall, about 47,000 full-time equivalent jobs were supported by investments. Among smart grid vendors -- an ecosystem of manufacturers, information technology and technical services providers -- about 12,000 direct jobs were supported, with the remaining jobs being in those companies’ respective supply chains and engendered by the money spent throughout the broader economy. Indeed, the report also highlighted that investment in core smart grid industries supports high-paying jobs.
- Smart Grid Performance Relative to Other Government Investments: The DOE maintains that the smart grid gross domestic product (GDP) multiplier is higher than many forms of government investment. For every $1 million of direct spending, which includes both government ARRA funds and private-sector matching, the GDP increased by $2.5 million to $2.6 million, which compares favorably against other potential government investments in general spending or other types of infrastructure.
This, of course, is all welcome news. However, one major question left unanswered by the report is whether these results will be economically sustainable over the next two to three years.
It depends on how far we have come infrastructure-wise since the stimulus; on whether or not we have an actual growing domestic smart grid market place; and on whether or not utilities, operating on their own without a stimulus, have the appetite to pay for the next round of infrastructure upgrades or to begin their smart grid programs. Without extolling the resiliency, efficiency and beyond-the-meter benefits of investing in a smart grid here, it is worthwhile to discuss if these great initial economic benefits are sustainable in the U.S., particularly in light of some truths that the report omits.
Utilities Need to Be Incentivized to Pay for the Next Round of Upgrades
The utility sector has always been one of the most capital-intensive industries in the U.S. The electrical power sector invested more than $90 billion on enhancements to generation and T&D systems in 2012 alone. But as Dr. Massoud Amin of the University of Minnesota points out, in terms of R&D spending as a percentage of revenue, the U.S. electric power sector is second from bottom of all major industries, surpassing only the pulp and paper business.
This cocktail of capital insensitiveness and low R&D expenditure, coupled with the fact that the largest U.S. utilities are investor-owned (and as such are incentivized to maximize shareholder value in the short term while "maintaining" infrastructure), creates an uncertain market for smart grid investments in the post-stimulus environment. Indeed, in the face of shifting utility business models resulting from factors such as the much-talked-about falling costs of distributed generation, the increased use of demand-side management technologies, and slowing electricity usage trends, we will see that certainty in smart grid investments by utilities on their own, and continuation of the positive economic results outlined in the DOE report, are anything but assured.
Domestic U.S. Smart Grid Firms Will Need a Domestic U.S. Market
If 12,000 direct smart grid jobs were supported by the last stimulus in the U.S., let’s take a look at the largest recipient of smart grid funding, as that is perhaps the best case study.
Itron received over $300 million in smart grid ARRA and matching funds. If we look at the top twenty recipients, it received over 30 percent of the dollars in that group and three times as much as the next company, Trilliant, which received $100 million. However, when we look at Itron’s current performance and its quarterly statement last month, the company reported first-quarter revenue and earnings that fell short of even its reduced expectations for the start of the year. Itron has seen a slowdown in revenues due to the completion of its top post-stimulus projects, including undertakings with CenterPoint Energy, Southern California Edison and San Diego Gas & Electric.
Indeed, while these results can be in part explained by the cyclical nature of the industry, what we are also seeing is weak domestic demand. This weakening demand is leading domestic smart grid firms like Itron to look to overseas markets not just for growth, but for financial sustainability. The same can be said for other metering, communications and infrastructure firms. As China becomes the leading demand-side market for smart grid technologies, and as EU member states approach their looming 2020 targets, U.S. smart grid firms will all benefit from looking for overseas opportunities -- and those 12,000 high-paying smart grid jobs, along with the 35,000 value-chain-related jobs, will do well to grow steadily in that scenario.
There Is Much Smart Grid Growth Yet To Be Realized
In the smart grid areas we track and forecast at GTM Research -- network operations, distribution automation, smart grid communications platforms, advanced metering infrastructure (AMI) initiatives, grid integration and demand-side management -- we can say that this is the very beginning of the smart grid market across the board.
Looking at the very visible segment of AMI infrastructure, GTM Research notes that 30 million meters were deployed in the two years after the stimulus program was passed, which, taken into account nationwide, puts overall meter penetration levels at only at 23 percent. In terms of transmission and distribution upgrades, we are also seeing similar early-stage numbers and growth potential. Indeed, even as this early infrastructure is rolled out, we are seeing that dollars are needed beyond basic grid modernization numbers that were not originally forecast, particularly in the areas of cybersecurity and customer engagement. The overarching verdict here, regardless of the market tracked, is that there is plenty of room for growth over the coming years. However, it remains to be seen whether the correct market forces and structure are in place to realize that growth potential in a post-stimulus environment.
A sustainable smart grid market with significant growth is not assured in the U.S. in the short term, and it will be difficult to induce the numbers cited in the DOE smart grid stimulus status report to grow significantly in the near term without a stakeholder approach to grid modernization. Utilities, government policy, private R&D spending and customers are all part of that approach. While return-on-investment cycles are longer for all parties compared to other industries, the economic benefits are real, as the DOE report outlines. Given that, while Obama’s 2014 budget does contain the right smart grid sentiment, the suggested dollars are low ($200 million) even when compared to other intradepartmental DOE recipients.
If the results put forward by this DOE report are to be maintained and grown, and if the benefits of creating a modern grid are truly believed, perhaps the logical next course of action is to invest -- on a bigger scale and more wisely. We certainly learned and gained a lot from the last round.
David Groarke is a Senior Analyst at GTM Research. You can follow him on Twitter @groarke. You can also learn more about his (and his colleagues') smart grid market research at http://www.greentechmedia.com/research/.