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Global Smart Grid Market to Invest $2 Trillion by 2030, peaking at $155bn in 2018
January 6, 2012
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By 2018 the smart grid business worldwide will need to be running at $155 billion, some 50% larger than the current annual expenditure for all electrical transmission and distribution equipment. This will require major restructuring of both the supply and demand side if a truly "smart" grid is to be realized, according to a new report from Memoori Research.
According to the report, $2 trillion will need to be invested globally by 2030. Sales of smart grid systems in 2010 stood at just $16 billion, clearly showing the business still has a long way to go.
The need to reduce CO2 emissions within the existing electricity production and supply grid will drive the future growth of this business. The grid must be able to incorporate renewable electricity production from a multitude of distributed sources and be capable of matching the supply of electricity with demand at the point of usage and in real time.
In the space of 5 years, mergers and acquisitions have grown from $134 million in 2007 to $10.6 billion in 2011. Both the growth and now scale indicate the supply side is gearing up to meet the requirements of new technology and forecast demand for pure smart grid products and systems. Investment in the market is also on the increase with venture capital companies committing some $1 billion per year in 2010 and 2011 to smart grid suppliers.
Vast Sums of Money will need to be invested - Will it be Available?
According to Memoori, there is no question about demand for smart grid -- in the long term it is inevitable. However, the firm believes that investment funds are the weakest link in the chain and could cause a slowing down in
growth. This can be overcome if utilities are allowed to recoup the investment over time by
increasing their charges for electricity. This will be the solution in Europe but is unlikely to be politically
acceptable in North America, despite the fact that prices there are less than half that of most European
countries.
In the US according to figures published by the Edison Electric Institute, the
Electric Utilities in 2010 had revenues of $371 billion producing a net income of
$68 billion and a net after tax profit of $27 billion, whilst retained profit after
dividend payments was $10 billion. Of this transmission and distribution is
unlikely to have contributed more than 30%. Pure Smart Grid average annual
expenditure in the US will need to run at $22 billion and should peak at around
$35 billion in 2021. According to Memoori, this simply cannot be achieved without a significant hike in
the tariff rate which the regulators will be reluctant to authorize.
"Utility companies are not the most profitable operations and they are going to need significant help with
financing the development of the smart grid," says analyst Jim McHale. "In most countries the electricity grid needs refurbishing in
any case, so additional expenditure will have to be found, or the basic requirement of electricity supply
and reliability will not be satisfied; let alone the pressing need to reduce CO2 levels."
Government Funding Will Be Required
Smart grid is part of the "Clean Tech" business, and so far it has only received a relatively small sum of
investment from private and public sources; compared with the largess heaped on other parts of the
business. However, under government programs in the USA alone some $4.5 billion has been awarded
for investment in smart grid projects in the electrical utilities business. In addition, at least 27 American
Recovery and Reinvestment Act (ARRA) projects are being funded from the almost $5 billion allocated to
the U.S. Department of Energy (DOE) for grid modernization projects.
Market sizing figures from Memoori show that the United States is currently the global leader in investment in
smart grid. In view of the size of its generating capacity and electrical transmission system this should
not be a surprise, but the smart grid stimulus programs have pump primed investment and played a
major part in taking the US forward.
In Europe, finance has been made available through EU programs and some demonstration projects are
being financed within member state initiatives -- but nothing on the scale of that provided in the US. In
China, the state has orchestrated the program for the nationalized utilities to carry out a major program
of investment, directly and indirectly they will finance it.
"This industry will still need stimulus funds for some years if it is to continue developing at a fast pace and
play its proper role in assisting with the delivery of a comprehensive green energy solution," says McHale. "But with so
many countries around the world now looking to reduce public expenditure, government funding for
smart grid is unlikely to go unscathed." He adds that IT & communications companies would almost certainly be
interested in joint collaboration with the utility industry on all aspects of the Internet of Things (IoT), and
they have the funds to invest.
Much Improved ROI Will Stimulate Investment
Smart grid will deliver a better return on investment than is currently realized in the utility industry; but
this has yet to be proven in most sectors of the business because full scale tests and demonstrations
have not yet been completed. The exception to this is smart meters. In the UK, a typical smart sub
metering installation in the commercial / industrial market will provide a return on investment in 10 to
14 months subject to enhanced capital allowances, allowing offset of the total cost of installation
against corporation tax in year one.
In most countries smart meter installations in the residential market are being financed directly and
indirectly by the building owners / occupiers without so far placing too much burden on the utility
companies. In the US Smart Meters save consumers $60 to $180 per year, according to the Energy
Information Administration for an outlay of $500. A recent DOE study showed that when consumers can
track their energy usage through smart meters, their usage declines by as much as 15%. For the utilities
smart meters provide value through automatic billing reducing costs and better management of cash
flow. Full AMI will provide real time data to help balance out supply and demand and reduce wastage.
Every unit of electricity saved at the point of usage will save 3 units at the generator set. As the volume
of equipment rises, prices will fall and ROI will increase, conversely energy prices are almost certain to
rise.
For more information about the report, "The Smart Grid Business 2011 to 2016", visit Memoori Research's website.
Source: Memoori Research
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