Deregulation and the smart grid

The sting of the California electricity crisis and the Enron disaster is now more than a decade behind us as the slow push to deregulate U.S. utility markets continues with states like Texas leading the way. The issue of deregulating utility markets is complicated and contains risk. But I’d just like to look at the potential for further deregulation to support business models in smart grid analytics and some areas of renewable energy generation.

The core premise of deregulation benefiting startups is that if retail electricity providers are split from transmission and generation, and are required to compete against one another, they’ll start providing better service and value to retail customers. In order to provide said value, retail providers will have to innovate with new products like smart thermostats, guaranteed sources of renewable energy and home energy management applications.

Smart grid analytics

Smart grid analytics software startup Bidgely uses disaggregation algorithms to crunch smart meter data and show consumers the breakdown of the energy use of each appliance, from the washing machine to the HVAC. It’s innovative technology that could shift behavior around energy usage. And it would be an impressive application for utilities to offer customers in the form of a smartphone app. But utilities require a reason to differentiate themselves in a market, particularly when many utilities have regulated profit margins and every expense must be justified.

When I asked Bidgely’s head of business development Prateek Chakravarty whether he felt deregulation would make his life easier, he was emphatic.

“Absolutely. It’s a much more open plain in deregulated markets. There’s a clear value proposition. Either they [retail utilities] are trying to save operational dollars, enhancing their marketing function or offering that product to consumers. In our experience, it’s been much easier to interest the deregulated utilities in a discussion, than even the most progressive traditional utilities. Another factor is the PUCs (public utility commissions). The retailers are not burdened by the jurisdiction of the PUCs. They are more of a regular company spending their money to attract consumers.”

Deregulation and renewable energy

In terms of renewable energy, many renewable energy generators believe that deregulated markets create a system where consumers can show preference for renewable energy. Retail utilities can give consumers the option to buy only wind or solar power, for example.

The American Wind Energy Association has been vocal in its support of deregulation. Michale Goggin of the association said last year, “A disproportionate amount of the wind that been built in the U.S. has been built in those places that have market structures. Markets provide a uniform fair-price signal for all of the energy sources.”

Deregulation was introduced in Texas just over a decade ago and in that period renewable energy has grown from one percent of Texas’s energy portfolio in 2002 to almost 10 percent today. That’s still a long ways behind states like California, which will have a third renewable energy by 2020, and given that Texas has a roughly 10 percent by 2015 target anyways, it’s not clear that we have deregulated markets to thank.

But it does create a system where renewables can be marketed to consumers. And interestingly, Texas has been an early market where smart thermostat maker Nest has partnered with Reliant to provide smart thermostats free to Reliant customers if they sign an electricity purchase contract.

While most of the European market is deregulated, it’s taking a long time here in the U.S. Bidgely’s Chakravarty expects at least five to ten years before we see any significant further deregulation. But there’s a reasonable argument here that as cleantech investment goes through a challenging patch, one bright spot appears to be the data end of energy efficiency, which includes smart grid analytics. And if something like deregulation could further catalyze that market, it could be a nice surprise for investors.

Relevant Analyst
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Adam Lesser

Cleantech Curator Gigaom Research

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