Jump Start the Smart Grid,

Accelerate the Nation

Savannah Duby, Chelsea Pestana

19 May 2011

PST220: Foundations of Policy Analysis

Grinnell College
Introduction

In 2009, American consumers consumed about 3,741 billion kilowatt-hours (kWh) (EIA) of

electricity. Every light switch and appliance that drew a current depended on the utilities in charge

of generating, transmitting, and distributing that power. Additionally, state and national regulatory

standards are responsible for assuring quality service. The relative involvement of utilities and

government, at the state and national level, has changed over time in response to shifting

perspectives on electricity as a good and to increasing demand for energy. The North American

Electric Reliability Corporation (NERC) has been involved in monitoring the reliability of electricity

on a national level since 1968, but it has not been until 2007 that the federal government has had

the authority to regulate generation, transmission and distribution of energy on a national scale. In

this new appropriation of power, the U.S. Federal Energy Regulatory Commission (FERC) granted

NERC the legal authority to enforce reliability standards with all users, owners and operators of the

bulk power system in the United States and made compliance with those standards mandatory and

enforceable. Throughout the last decade, policy makers have scrutinized the existing grid system, as

alternative energy supply options have exposed some of its weaknesses. The current energy grid is

inefficient, insecure, and unreliable, and market incentives are insufficient for utilities or private

actors to drive innovation for upgrading the grid.

Problem Background

The inefficiency of the current grid primarily stems from ignorance in supply and demand

that hurts both consumers and producers of energy. It costs producers more to provide energy
during “peak load” when demand is highest because they have to invest in reserve energy sources.

Consumers, even if they are knowledgeable about daily fluctuations in price, cannot choose to use

energy that would bring them a better price, since they are charged a flat rate for use. The second

inefficiency is in the current system’s dependency on carbon-emitting fuels, including 23.3% on

natural gas and 44.5% on coal generation in 2009 (EIA, 2009). Although during that year renewable

sources (excluding hydroelectric) accounted for 3.6%, natural gas is still the fastest growing energy

generation sector (EIA 2009). The environmental externalities of impaired air quality and

contribution to global warming could be mitigated if the grid were more receptive to integration of

renewable energies.

The grid system is also insecure and unreliable. It is still vulnerable to cyber attacks, a

concern brought to congress’s attention in 2008 with a hearing reviewing the weakness of the electric

power infrastructure, and then again as recently as 1 February 2011 with a joint initiative

spearheaded by the Office of Electricity Delivery and Energy Reliability, NERC, and the National

Institute of Standards and Technology (NIST).

In addition to this threat, international instability in countries that provide our petroleum

can threaten both the oil supply and price, fluctuations which are felt by both utilities and

consumers. Although petroleum currently accounts for roughly only one percent of electricity

generation within the United States (EIA 2009), it is the fuel of choice par excellence of the nation's

transportation sector. Dependence on a volatile foreign petroleum market places the U.S. electricity

generation and delivery infrastructure at risk by endangering the transportation system necessary for

delivery of other fuels to power plants. Power outages in the U.S. currently range between a low of
92 minutes to a high of 214 minutes, numbers that are astonishingly high in comparison with those

of other developed nations, such as Japan, which averages only four minutes of total interrupted

service each year (Patterson, 2010). These power outages have been estimated to run an annual cost

of $150 billion for Americans (DOE, 2008). The reliability of the grid will become more of a public

concern as utilities feel the pressure of energy demand increasing by about 17.7% in the next ten

years (NERC). With every year, the current system appears less sustainable.

The federal government has come to recognize inefficiencies in the grid and has begun to

incentivize utilities to develop a more interconnected, flexible, communicative grid. One model the

government has deemed a feasible solution to the electricity grid woes of the new millennium is a

“smart grid.” In brief, the smart grid may be described as “an automated electricity system that

improves the reliability, security and efficiency of electric power. It more easily connects with new

energy sources, such as wind and solar, and is designed to charge electric vehicles and control home

appliances via [sic] 'smart' devices” (Patterson, 2010). This would involve creating a more nationally

interconnected network with fluid interstate transmission of energy, as well as incorporating

technologies designed to provide better information about real-time supply and demand.

The physical network, enabling integration of a variety of energy sources, would improve

reliability and security. If one particular kind of energy production were to fail, the system would

have others to fall back on. Additionally, alternative energy sources could reduce dependency on

international fuel sources, thus insulating the system from fluctuations in fuel pricing overseas. These

alternative energy sources also offer greater efficiency through potential carbon emission reduction,

both by bringing more renewable energy online. The Electric Power Research Institute (EPRI)
estimates that a national smart grid could reduce annual greenhouse gas emissions by 60-211 million

metric tons of CO2 by 2030. Accompanying the physical grid would be technologies that give the

smart grid its intelligence. Programs, such as Advanced Metering Infrastructure (AMI), will enable

communication between energy suppliers and consumers, as well as improvements in repair response

time after outages. The responsiveness of the system could save as much as $49 billion in outage

costs per year (Massoud, 2011). The smart grid offers improvements to a suite of problems existing

in the electricity sector.

Market Failures

The financial environment for spurring smart grid innovation and growth currently suffers

from the following market failures: the current business model adopted by utilities and government

regulators guaranteeing a rate of return based on kWhs sold, the system of rate-setting, and the

natural advantages held by monopolistic companies in a sector where sizable initial capital costs serve

as barriers to entry. The current rate-based system of pricing has guaranteed a certain rate of return

for utilities, which in turn disincentivizes investment in new technologies and innovative business

models. Instead, this guaranteed rate of return has lead to a tendency for utilities to favor traditional

baseload power from coal and nuclear plants, rather than renewable energy sources, programs

promoting energy efficiency, and demand response programs to more effectively balance energy

production with energy needs. The necessity of large amounts of starting capital creates high barriers

to entry that give existing energy producers and distributors a strong advantage as natural

monopolies largely immune to the effects of competition. Without competition, the electricity
industry is bereft of the primary driving force behind continued innovation. Table 1 and Figure 1

both illustrate the dwindling interest in energy infrastructure innovation.

1995 1996

Electricity Industry 0.2% 0.3%

Business Services 10.1% 10.2%

Drugs & Medicines 10.1% 10.5%

Table 1: Percentage of sales revenue directed toward R&D. Moynihan.

Figure 1: Declining energy R&D investment by public and private sectors – Since 1980, energy

R&D as a percentage of total U.S. R&D investment has fallen from ten percent to two percent.
Figure 2: Comparison of federal outlays for Energy and Education, Training, Employment

and Social Services; Source: PolicyAgendas.org

Beginning in the 1960s, we see a steady widening of the gap between public investment in the

energy sector (as represented by government outlays) and the budget for Education, Training,

Employment and Social Services, even though the nation depends heavily upon a stable and secure

energy supply industry in order to function. The abrupt spikes in the energy budget reflect

international affairs of the time, most notably the formation of OPEC in the 1970s and the ensuing

squeeze put upon U.S. access to oil supplies. This historical moment demonstrates the need for

greater U.S. energy independence, which will be further strengthened by upgrading the current

energy transmission grid to a smart grid capable of handling new energy needs securely and

efficiently.
Current Programs

The government, recognizing that there is room for improvement, has begun a series of

attempts to incentivize revision of the traditional energy system. American federal energy policy

framework currently relies on two primary programs for transitioning the U.S. energy grid to the

smart grid model: The Renewable Energy and Electric Power Transmission Loan Guarantee

Program and the Smart Grid Investment Grant Program (hereafter referred to as the Loan

Guarantee Program and SGIG, respectively). Two subsidiary programs, the ARRA Section 1603

Treasury cash grant program for renewable energy generation, and the DOE’s recent alterations to

the licensure process for patent applications, provide additional support for developing the

infrastructure changes necessary for America’s energy future.

The Loan Guarantee Program was originally established under the Energy Policy Act of

2005, and then substantially modified for the better under Section 406 of the ARRA legislation of

2009. Its creation allowed for the leverage of federal dollars by guaranteeing the loans of private

companies working within the burgeoning smart grid technology sector. This Loan Guarantee

Program is analogous to the federal government’s guarantee of college student loans. The Loan

Guarantee Program has a deadline set for 30 September 2011. By providing a level of financial

security for these companies with promises of repayment to the lending institutions, the U.S. federal

government injects greater stability into the market for smart grid technologies. Between the

program’s inception in 2005 and its alteration in 2009, “only three Department of Energy project

solicitations have been issued and not a single renewable energy project has received a loan

guarantee” (Bastier, et al, 2009). This program failure has been attributed to the original program’s
credit subsidy fee charged to the borrower for the guarantee, a fee which has since been eliminated.

Loan guarantee programs have the advantage of leveraging federal funds without relying on direct

investment. This leverage structure enables the government to guarantee between $40 billion and

$120 billion in loans using only $6 billion in original funds (Caperton, 2011). Unfortunately, since

the Loan Guarantee Program’s 2009 modification, the original $6 billion fund has been raided

repeatedly, first for an extension in July 2009 of the “Cash for Clunkers” program, and then again to

help pay for the federal medical assistance (FMAP) legislation of August 2010, for a total reduction

of $3.5 billion. This cutback is estimated to cost $35 billion in possible loans, a roughly 30%

minimum downgrade of the program’s original effectiveness. The 2009 ARRA legislation also

allocated $4.5 billion for “electric grid modernization,” with $3.5 billion of those funds reserved for

the Smart Grid Investment Grant Program (SGIG). The SGIG program has been authorized to

provide grants of up to 50% of qualifying smart grid investments (DOE, 2009). Direct cash grants

have been proven to have a large, immediate impact on promoting industry growth (Bipartisan

Policy Center, 2011) in comparison with the delayed effects of tax credit programs. Although the

Bipartisan Policy Center’s study was strictly concerned with the renewable energy generation

industry, the principle applies equally well to the smart grid technology sector. The increased

effectiveness of cash grants over tax credits may be ascribed to the difficulty of finding initial funding

capital from private sources who are often wary of the possibility of reimbursement under the highly

unstable tax credit system, as well as the reliance on tax equity providers1 for project financing, a

1
The online journal EcoSeed best clarifies tax equity providers with the following description: “Tax equity providers are
large tax-paying financial entities that can use the tax incentives to offset future tax liabilities. These clean energy
developers then participate in a partnership structure that “flips” ownership of the project from the tax equity investor to
dependence which hinders project flexibility as well as limits the scope of possible projects. Tax-

based incentives limit the industry’s capital financing access to a small group of corporate investors,

whose numbers have further dwindled as a result of the credit crunch of the recent economic

downturn. Table 2 illustrates the reduction in this investor market. Sasha Mackler, energy research

director at the Bipartisan Policy Center, has stated that “one dollar in cash has nearly double the

value of a dollar in tax credits to a project developer” (Valdez, 2011). At the program’s

commencement, 570 applications from utilities were received, requesting a total of $14.6 billion,

nearly six times the program’s 100-project capacity as defined by its $3.5 billion cap. The huge

disparity between the number of applications and the number of approvals indicates that the SGIG

program has a large amount of untapped potential for spurring growth within the smart grid sector.

Other government policies with significant though as yet unexplored implications for

accelerating smart grid technology innovation and growth are the ARRA 1603 Treasury cash grant

program (“1603 cash grant”) and recent changes to the DOE’s licensure process for patent

applications. The 1603 cash grant, allows renewable energy projects to receive 30% of qualified costs

as a cash grant directly from the Treasury rather than as a tax credit. The program benefits from all

of the advantages already outlined for cash grants compared to tax-based incentives. The 1603 cash

grant has been heralded as “the star of ARRA,” (Umanoff, 2011) with 7,597 projects funded as of 6

April 2011, using $6.9 billion in federal funding as part of a total of $23.2 billion in private and

federal investment. The program was originally set to expire on 30 September 2010, though it has

been extended to 31 December 2011 as part of the Tax Relief, Unemployment Reauthorization, and

the developer-owner once the tax benefits are realized. However, the transfer of the clean energy project would only take
place after the project developers pay a premium to the tax equity providers.” (28 March 2011)
Job Creation Act of 2010. Currently the program cannot be applied to tax-exempt entities, such as

many institutions of higher learning, municipal utilities and electric cooperatives. Yet the 1603 cash

grant program only applies to renewable energy generation projects, thus cutting out the other smart

grid projects which are also concerned with energy transmission and distribution. The 1603 cash

grant program provides valuable insight into the possibilities of an extended, uncapped cash grant

program.

Table 2: Tax Tax Equity Investors Tax Equity Investors Tax Equity Investors
Motivated in 2007 in 2008 in 2009
Investor Market
Sources: U.S. • JP Morgan • JP Morgan • JP Morgan
Partnership for • Union Bank of California • Union Bank of • Union Bank of
Renewable • Wells Fargo California California
Energy Finance • New York Life • Wells Fargo • Bank of America
(PREF) • Bank of America • New York Life • GE Capital
*Departed tax • GE Capital • GE Capital • Credit Suisse
equity base • Morgan Stanley • Sempra Energy • Morgan Stanley
during 2008- • HSH Nordbank‡ • Morgan Stanley • Citi
2009 due to • Key • Bank of America‡ • Wells Fargo‡
insufficient • Northern Trust‡ • U.S. Bank‡ • U.S. Bank‡
taxable income or • HSH Nordbank‡ • Key‡
• John Hancock*
bankruptcy
• Prudential* • Key‡ • Northern Trust‡
†Permanent
• NorthWestern Mutual* • Northern Trust‡
departure
• Citi* • Sun Trust‡
‡These firms
• ABN Amro*†
only participate
in small-scale • Fortis*†
solar financings • Lehman Brothers*†
• Wachovia*†
• AIG*†
• Merill Lynch*†

Renewables Tax Equity Market $6.1 billion $3.4 billion $1.2 billion
 The final major financial element of federal U.S. smart grid policy is the latest collection of

adjustments to the DOE’s process for private companies to license DOE patents. Beginning 2 May

2011 and ending 15 December 2011, the “America’s Next Top Energy Innovator Challenge” will

reduce the total upfront cost of licensure to a $1,000 fee, a savings of between $10,000 and $50,000

on average for companies. Furthermore, the licensure process itself will be simplified, with a

standardized set of terms for start-ups, thus enabling the DOE to process more licenses in a shorter

time period while also curtailing costs for companies lacking the resources or expertise to negotiate

individual licensing agreements per the older licensing framework. Accompanying these changes is a

new regulation regarding company access to national laboratories, stating that companies need only

make an advance payment covering the first 60 days of research work rather than the first 90 days.

The Proposal

In response to the inadequate funding programs thus far, we propose to restructure and

refund current smart-grid research and development grant programs. By incentivizing utilities to

invest in innovative energy technology, the U.S. may achieve greater integration of increased

efficiency, security and reliability into the electricity system. To address the current market failures

preventing utilities from investing in smart grid technological innovation and commercialization as a

step toward the deployment and installation of smart grid products, we propose the following steps

be taken:

• Extend the Loan Guarantee Program and SGIG program

• Restore the full $6 billion of the Loan Guarantee Program

 • Expand the scope of the 1603 cash grant program to apply to smart grid technology

and end the ban against project ownership by tax-exempt entities

• Establish a Revolving Loan Fund (RLF) for smart grid projects

• Appoint a Portfolio & Oversight Commission

The extension of the Loan Guarantee and SGIG programs combined with the establishment

of a national smart grid RLF will signal a paradigm shift that emphasizes long-term rather than

short-term planning. The installation of smart grid infrastructure technologies is a continual process,

with most estimates of the implementation timeline extending to at least 2030, as with the Electric

Power Research Institute’s (EPRI) preliminary estimate of the cost-benefit analysis of a fully

functioning smart grid (EPRI, 2011). A transition to a long-term financing plan will assure utilities

of the benefits and financial security of switching to a smart grid model. The restoration of the full

$6 billion for the Loan Guarantee Program will increase the program’s effectiveness to the projected

$120 billion worth of leverage of private funding for smart grid projects.

Expanding the 1603 cash grant program to apply to smart grid technology will provide

additional avenues for smart grid technology and manufacturing companies to receive appropriate

funding for RD&D projects. Ending the ban against project ownership by tax-exempt entities will

permit experienced power players, such as municipal utilities and electric cooperatives, to increase

“knowledge capital” by injecting a higher degree of knowledge of the industry into the system,

thereby promoting smoother application of technological innovation to the transition process. This

regulatory change would also encourage utilities to enter the renewable energy industry, thus

functioning as an indirect incentive for utilities to invest in smart grid technologies which would
promote the use of renewable energy sources and assisting both the renewable energy industry and

initiatives within the smart grid sector.

Establishing a revolving loan fund (RLF) for smart grid projects will reduce direct the

amount of necessary direct federal financing while ensuring a steady stream of public investment

capital. Rather than constantly needing to approve outlays for federal financing programs in yearly

budgets, such financing would come from a one-time financial appropriation. RLFs function

operated based on the principle of constant fund recycling and reinvestment. The process begins

with a conventional loan situation, with a minimal interest charge used to cover operating costs.

Once the loan is repaid, the money is then immediately reinvested in another project. Readers may

find it helpful to draw an analogy between our proposed smart grid RLF and the activities of the

non-profit organization Kiva Microfunds. Figure 4 illustrates the RLF process. The DOE already has

familiarity with setting up RLF programs, and indeed the Department has guidelines for states to

create RLFs using ARRA funds as a means of extending their impact. An RLF at the national level

will ensure that companies whose projects would cross state borders will not be overlooked by state

RLFs with specific geographic and jurisdictional limitations.

In order to fund any additional costs incurred by the initial establishment and maintenance

of these programs, we propose two cost allocation measures. First, we advocate the elimination of

certain tax breaks for oil companies. These tax breaks, specifically the tertiary injectants deductions,

percentage depletion allowance, passive investments allowing oil and gas properties to become tax

shelters, and the foreign tax credit, all of which would create a $18.75 billion in total additional

revenue for the federal government (Gandhi, 2010). Ending these artificial economic structural
supports for the oil industry will induce a shift in the U.S. away from dependence on a volatile

foreign energy market while simultaneously buttressing the growing American renewable energy and

energy efficiency markets vital to the implementation of the smart grid. We also recognize the

potential necessity of an additional surcharge levied on the raet at which electricity consumers are

charged for their consumption. This additional surcharge would only apply in some cases – for

instance, consumers who use below a defined level of electricity in a month, or those who live below

a specified income level, would be exempt. In this way, we hope to limit the instrument's regressive

nature as well as putting in place a pilot program for incentivizing energy conservation at the

consumer level.

Figure 4: Flow diagram of the process of a revolving loan fund (RLF).

Oversight Commission

Although making more money available to more utilities will increase funding for research,

development, and deployment of smart grid innovations, this does not necessarily guarantee the

successful fulfillment of the policy goals of energy reliability, security and efficiency. An Oversight

Commission, housed within the Department of Energy to expedite intra-governmental

communication, will provide assurance that the money invested by the government will be used

constructively. The Commission will set standards for utility grant requests and monitor the progress

of the project. The Commission will ensure that only deserving grant proposals will be funded by

requiring that utilities submit a portfolio that details the short and long-term project proposal,

references for existing and potential energy entrepreneur connections, the financial situation of the

utilities and their entrepreneurs, and finally a rationale for why they have confidence that their use of

funds will be constructive. Setting specific requirements for the portfolio will facilitate the grant

award process for bureaucrats and will ensure utilities identify necessary steps toward successful

smart grid development, as traditional utilities may learn from the examples of others already

transitioning to the smart grid model.

These requirements must also retain a degree of flexibility in light of the variety of energy

needs and challenges facing each region of the United States. For instance, projects which target

innovation regarding the installation and connection of renewable portfolio standards (RPS)

according to the specific profile of potential renewable energy supply of different regions. Utilities in

the Southwest would most likely prefer a project proposal with a strong emphasis on photovoltaic
solar arrays, whereas utilities located along the coasts might prefer ocean wave energy, or utilities in

the Northern Midwest may favor projects comprised largely of wind power.

The Commission will also monitor the progress of the utility’s proposed project, mainly

through frequent and random inspections. Such oversight would ensure projects remain on track,

that funds are used appropriately, and that a high level of detail si documented on the progress of the

project, so as to provide data for future evaluations of projects and feedback on best practices as well

as practices to avoid.

By personally connecting the utilities with the Commission review board, project monitors

will provide a useful source of information necessary for policy learning. Yet the actions of this

bureaucrat and others within the Commission will need to be regulated in order to avoid such

problems as moral hazard and shirking. Although the use of discretion may empower the monitoring

agents and give them a sense of engagement with and ownership over the policy implementation

process such that they would be less likely to fall prey to moral hazard, the question of shirking still

remains. To combat this possible principal-agent problem, the Commission will establish a

minimum number of inspections to be completed for each approved project and to be reported to

the Commission. This minimum will ensure that agents will conduct a comprehensive review of the

projects while still maintaining the element of surprise not permitted within a rigid, scheduled

system of administering project reviews. To mitigate the risk of moral hazard on the part of

Commission members, a conflict of interest policy will be adopted, modeled on that of NERC

(NERC, 2008). The potential for principal-agent problems will also be considered during the

selection of members to serve on the Commission. Individuals may not have specific ties to any
particular energy companies or manufacturers. That is, no board member could recently (within the

past two years) have been employed with any company in which it could be said they have a conflict

of interest. Another tool would be to require board members to give an extended advance notice of

leave, such as six months, to avoid a “revolving door” situation, in which board members enact

policies favorable to a specific entity and then immediately leave in order to work for that same

entity. With a longer period of time between when a board member can give notice of leave and

when he or she can actually end duties with the board, the risk of industry capture may be lowered.

When deciding which project proposals should receive grants, the commissioners will also have to

consider diversity among the projects. This will prevent bureaucrats from either intentionally

favoring a certain energy domain or from disproportionately awarding finds to more utilities that are

more well established. It is necessary to be flexible and optimistic in some innovative proposals in

order to preserve the diversity of the smart grid that contributes to its reliability, security, and

efficiency.

Perspectives of Policy Stakeholders

This policy will be reviewed by the U.S. congress, as transmission and distribution lines are

already across state boundaries and goals of the policy include creation of a national scale energy

market. Congress’s support of the policy depends on how the representatives perceive it will be

received by the target population (utilities), its feasibility of implementation, and the benefits. The

president has veto power over the policy, but support from President Obama is likely in light of his
highlighting the smart grid as an issue for consideration on the agenda and has generally been in

favor of research and development.

Other official actors which may directly influence the passage of legislation for our proposal

are those which have a role in regulating the energy industry and providing funding for the research

and development in the energy sector. The DOE and FERC are both involved in reviewing energy

generation, transmission, and distribution and may prefer a policy which preserves their

authority. The U.S. Treasury is already funding some grant programs for renewable energy

generation and could be receptive to reworking their investment to a program that may have greater

payoffs. These groups will likely express their judgment about the feasibility of policy

implementation.

Utilities, the target population, will likely influence the passage of legislation as unofficial

actors, since they have the greatest immediate stake in the policy. Utilities will have to weigh the

benefit of immediate funds with the costs of initiating a smart grid system trajectory, just as they do

when approaching the existing grant programs. Our policy, which will make grant programs a more

lasting option, may incite disapproval of state governments, unofficial actors which are still highly

influential in localized electricity markets (Moynihan, 2010). This policy would include a shift in

power from states to utilities, since providing more long-term grant programs will give utilities more

autonomy in their generation, transmission, and distribution.

In opening up the market, energy entrepreneurs will become unofficial actors that will bring

strong support for the policy. This group, along with energy think tanks, has already been highly

visible and proactive in their support of funding for smart grid innovations (SmartGridNews.com,
2009; ClimateProtect.org, 2011). Though the policy requests some upfront increased funding from

the government, adoption of a smart grid would also help relieve outage burdens on the national

budget.

Congress will also consider the response of consumer-voters. As the program involves some

up-front transition costs to individual consumers and long-term benefits through strategic energy

management, Congress will not likely approve such legislation based solely on benefits to

consumers. The impact on society as a whole will need to be considered, including dispersed benefits

such as improved reliability and security. A more persuasive benefit would likely be the short-term

increase in employment. According to the American Solar Energy Society (ASES) and Management

Information Services, Inc. (MISI), “aggressive development of the renewable energy and energy

efficiency industries could generate up to $4.5 trillion in revenue and create 40 million jobs by the

year 2030” (Bezdek, 2007).

Alternative Approaches

Alternative approaches to addressing the current problem of the impending obsolescence of

America’s electricity grid may include the opinion that “Consumers are the barrier to effective smart

grid RD&D,” or that “Smart grid initiatives should be led by the states rather than the federal

government.” The first alternative approach relies on assumptions of the centrality of the “consumer

interest” to affect the nature of utilities’ operation models and on the notion that consumers are

overwhelmed by the information increase inherent to the operation of customer-end smart grid

technologies (e.g., smart meters) such that they are antagonistic toward the entire model. These
assumptions are faulty. Research conducted by Energy Insights in 2007 indicates that consumers are

interested in opportunities afforded them by the smart grid, with 95% of Americans reporting

interest in receiving information on their energy consumption and 69% saying that they would

review “real-time” usage data if it were available (Oracle, 2009). Furthermore, this emphasis on the

consumer is misguided in light of the fact that utilities lie at the heart of the process of implementing

the smart grid, and they “are unique positioned to set the tone for deployments, which in turn will

influence the total value realized as well as who captures it” (Booth et al, 2010).

The second alternative approach implicitly emphasizes the need for flexibility in responding

to the variegated needs and strengths of different utilities and regional electricity grids. This concern

has been incorporated into our policy proposal for a national plan. Moreover, a state-centered plan

for the smart grid overlooks the fact that the electricity grid crosses state borders, so that it extends

beyond the jurisdiction of any single state. This demands inter-state interoperability standards which

can be set only by a higher authority, such as the federal government. Additionally, the states lack

the broader financial resources of the federal government, resources which are necessary to achieve

the smart grid implementation given its high estimated cost (EPRI, 2011).

Policy Evaluation

To evaluate our policy, we stress the importance of financial sustainability, deployment

efficiency and cost effectiveness. We use the following definitions for these terms:

• Financial sustainability: the notion that our proposed financial programs will endure

beyond the yearly battles over the government budget so that an environment of
 long-term stability may provide fertile ground for the growth of the smart grid

industry.

• Deployment efficiency: program efficacy of pairing the target populations of utilities

and energy entrepreneurs with the funds necessary for the commencement and

completion of projects contributing to innovation and commercialization of smart

grid technologies and products.

• Cost effectiveness: programs which produce optimum results for the expenditure.

We are prioritizing the goal of achieving energy efficiency with the smart grid in our policy

proposal, given that other significant legislation has been proposed regarding achievement of the

goals of security and reliability, namely with the recent Grid Reliability and Infrastructure Defense

(GRID) Act, which passed a vote in the U.S. House of Representatives on 10 June 2010, but it was

not included for consideration by the Senate (GovTrack.us). Despite its failure in the Senate, its

success in the House indicates that GRID is a strong piece of legislation. Thus, we rest assured that

the goals of energy security and reliability are being appropriately addressed by other actors within

the U.S. government.

The RLF component of our policy proposal has been designed specifically to address the

interest in financial sustainability. Its structural requirement of financial reinvestment in new

projects guarantees that the starting lump sum will provide for an ever-larger number of projects

over the life of the program. The Loan Guarantee Program will adjoin an additional dimension of

financial sustainability, given its high ratio of financial leverage between public funds and private

investment capital.
 The interest in deployment efficiency has been included in our program’s strong emphasis

on cash grant programs rather than tax-based incentives. Cash grant programs have the benefit of

providing immediate funds for project use, so that both a wider variety of projects may be

undertaken (given the elimination of the need for a tax equity investor, entities that have become

increasingly rare since 2007) and project start times may be moved up to earlier dates, since project

owners and managers will already have cash in hand and will no longer need to spend time searching

for more capital investors.

Finally, our proposed Oversight Commission will ensure a high level of cost effectiveness.

The processes of project analysis and review, both pre- and post-implementation, make certain that

the funds for such RD&D proposals are deployed in a manner that minimizes waste and assures

citizens that their tax dollars are doing the most good for America’s energy future.
 Glossary of Acronyms

AMI: Advanced Metering Infrastructure

ARRA: American Recovery and Reinvestment Act (2009)

DOE: Department of Energy

EISA: Energy Independence and Security Act (2007)

EPRI: Electric Power Research Institute

FERC: Federal Energy Regulatory Commission

GRID Act: Grid Reliability and Infrastructure Defense Act (2010)

NERC: North American Electric Reliability Corporation

NIST: National Institute of Standards and Technology

RD&D: Research, development and deployment

RLF: Revolving Loan Fund

RPS: Renewable Portfolio Standards

SGIP: Smart Grid Investment Program

References
“Advocacy and Education.” SmartGridNews.com. 12 May 2009. Web.
http://www.smartgridnews.com/artman/publish/Key_Players_Associations/Advocacy_and_E
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