In an article for the Renewable Energy Focus website, Lauren Callaway, a research analyst at Navigant Research, delves into the smart city market and discusses what it means for the renewable energy and energy efficiency sectors.
Comment: Smart cities; the future of sustainable living
It’s a no brainer at this point: Improving sustainability in urban environments has a positive impact on regional carbon dependency and supports community adaptation to climate change. As the Intergovernmental Panel on Climate Change’s (IPCC) 2014 Mitigation of Climate Change report indicated, cities consume somewhere between two-thirds and three-quarters of total global energy and generate 75 percent of global carbon emissions. As a result, city leaders worldwide are increasingly championing the movement toward more sustainable communities and using technology as a vehicle to do so.
For cities that cooperate with area utilities, an effective cross-agency smart energy / smart city strategy has a number of additional benefits, including improved grid resiliency and improved quality of life for citizens. The optimal use of citizen and city-owned energy resources has a positive economic effect via less redundant infrastructure investment, which leads to lower taxes. City-utility cooperation promotes customer engagement, thus improving satisfaction and helping utilities expand the services offered to residential, public, and commercial energy users.
Despite all of these potential benefits, a number of institutional barriers are limiting the extent to which the energy sector can integrate smart city planning. The alignment required is restricted by varying business and regulatory models of cities, utilities, and private businesses in the energy ecosystem. As a result, projects have historically been limited in scope, and / or organized in more of a one-off manner, as opposed to being part of a longer-term strategy.
Organizational silos hinder collaboration
A large number of cities and utilities are organized in operational silos, which affects their ability to coordinate integrated planning efforts. Both cities and utilities have long recognized this issue and have embarked on restructuring efforts. These typically result in leaner, more agile and adaptive enterprises—but much work remains to be done
When building, transportation, and utility planners develop smart city plans collaboratively, not only are redundant infrastructure investments avoided, but new streams of project financing may also open up. At the same time, they become more prepared to tackle ambitious climate change and decarbonization goals by gaining buy-in and participation across city and public services organizations.
Where does the funding come from?
Establishing a sound financial model is probably the most significant barrier to smart city / smart energy projects globally. Many city governments were hit hard by the financial crisis of 2008, and still lack adequate capital to pursue large new projects. As such, private investment is often required.
However, in terms of attracting private investment for smart energy, not all projects and technologies are created equal. The financial payback for energy efficiency, demand-side management, and renewables projects varies significantly across regions, and depends on ownership structure, business models, and market compensation provisions. Not surprisingly, the return on investment (ROI) on clean energy projects is the single most important factor in attracting investors (though many of us would like to think it’s environmental consciousness). If a solid return can’t be guaranteed, very little is likely to happen.
And then there is the infrastructure necessary to support all of these new, clean forms of distributed energy—the utility electric grid. Fortunately, it is becoming more widely understood by the public that in order to facilitate clean energy, the grid itself also requires a fair bit of upgrading. But most utilities are heavily regulated in terms of what they can charge for service. This presents a challenge for regulators to restructure the ratemaking process such that utilities can afford the improvements needed to reliably run the grid, integrate renewables, cooperate with smart city initiatives, and also maintain affordable energy rates.
Are regulators on board?
In terms of mandating efficiency and the adoption of renewables, most cities lack the authority to impose standards upon utilities, which are often regulated by national, regional, or state governing bodies. For municipally owned utilities, this is not the case, but those numbers are much smaller relative to investor-owned utilities.
Globally, energy regulators are investigating ways to modify policies so that they correspond better with climate change initiatives. One significant component of this is fostering adoption of new business models that support the integration of renewables, distributed energy resources (DER), and energy efficiency.
In the United States, New York is spearheading the development of integrated public policy across sectors to support clean energy. Under its Reforming the Energy Vision (REV) initiative, state regulatory bureaus, utilities, and city planners are among over 200 stakeholders investigating ways in which energy markets can be restructured to include more DER, including community solar and microgrids.
Interestingly, some smart city solution vendors have stated that regulated markets may present fewer barriers for projects, as fewer agencies are responsible for managing energy markets and operating the electric grid. In deregulated markets, projects must pass through multiple levels of approval across city, state/national, and regional authorities, which can limit the scope of projects, cause delays, and increase the business risk of investment.
Smart grid: the glue
Smart grid infrastructure is a baseline requirement for the high penetration of smart energy technologies that many cities would like to see expand in support of sustainability goals. Globally, many utilities have installed smart metering as the jumping off point for their smart grid, providing communications and visibility at the edge of their distribution networks.
More recently, investments in advanced technologies within the distribution network such as automated and networked devices and sensors and big data analytics have increased significantly. These investments come at a time where both electric customers and regulators desire a more dynamic, customer-centered electricity market which is supportive of high DER penetrations. This has positive implications for cities, which are eager to provide the testbed for smart city technology study and testing.
Smart cities offer strong opportunities for utilities to experiment with new technologies in a relatively insulated environment. Aside from fostering additional avenues to promote buy in from both regulators and citizens, and access to alternative streams of funding (e.g., public-private agreements), cities can also offer physical spaces such as government buildings and low-income housing for the purpose of testing new technologies.
No time like the present
The logic of city / utility cooperation is easy to see — but the devil often lies in the details. Regulatory constraints in far too many markets not only slow progress but also hamper financing options, even when area regulators are on board. The mood is shifting, and as states like New York and California implement new policies, other parts of the country — and the rest of the world—will be able to watch as new projects and, potentially, coopetition between cities and utilities emerge. A new economic paradigm — Navigant calls it the Energy Cloud — is poised to emerge and both cities and utilities will have an important role to play. Hopefully regulators in less progressive markets won’t wait for the entire process to play out before initiating change in their own regions.