MoSG Full Book Smart Grid VF

McKinsey on Smart Grid
Number 1,
Summer 2010
18
33
45
U.S. smart grid

value at stake:
the $130 billion
question
Evolution of
the smart grid
in China
Maximizing value
from smart grids
The smart grid

opportunity for
solutions providers
12
24
38
53
How Europe is
approaching the
smart grid
Best practices in
the deployment
of smart grid
technologies
The smart grid

and the promise
of demand-side
management
Perspectives on
smart grid from
leading solutions
providers
McKinsey on Smart Grid is written
Editorial Board: Anjan Asthana, David
Copyright 2010 McKinsey &
by experts and practitioners in
Mark, Ken Ostrowski, Roger Roberts,
Company. All rights reserved.
McKinsey & Companys Electric
Leonardo Senni, Humayun Tai, Robert
Power and Natural Gas Practice and
Uhlaner, Antonio Volpin, Michael Wang,
This publication is not intended to
Business Technology Office.
David Xu
be used as the basis for any transaction.
Managing Editor: Sally Lindsay
Nothing herein shall be construed as
To send comments or
Editorial Team: Richard Bucci, Richard
legal, financial, accounting, investment,
request copies, e-mail us:
Hornik, Thomas Shaw
or other type of professional advice. If
smartgrid@mckinsey.com
Art Direction and Design:
any such advice is required, the services
Therese Khoury
of appropriate advisers should be

sought. No part of this publication may
Illustrations by David Angel
be copied or redistributed in any

form without the prior written permission
of McKinsey & Company.

Number 1, Summer 2010
18
Introduction
Evolution of the
smart grid in China
Development of this
enormous market
could shape the
future of the smart
grid globally.
24
U.S. smart grid value at Best practices in the

stake: the $130 billion
deployment of smart
question
grid technologies
38
53
The smart grid

and the promise
of demand-side
management
Perspectives on
smart grid from
leading solutions
providers
The next generation of

DSM technologies will
enable customers to
make more informed
decisions about their
energy consumption,
adjusting both when
they use electricity and
how much they use.
Top managers from

leading equipment
vendors and solutions
providers discuss the
future of the smart grid
industry.
The strategic stance that

utilities adopt during
the development of
the smart grid in the
United States will help
determine how much
value is captured and
who captures it.
To reap the expected

benefits from the smart
grid, U.S. utilities face
steep organizational
hurdles, significant
process complexities,
and difficult
governance issues.
12
33
45
How Europe is
approaching the
smart grid
Maximizing value
from smart grids
The smart grid

opportunity for
solutions providers
Uncertainty about
standards and
support is slowing
progress, though smart
meters have passed
50-percent penetration
in some markets.
Utilities must
actively reshape
processes, systems and
organizational models
to capture the most
benefits from smart
grid deployment.
By 2014, the global

market for smart
grid technology and
services will run into
tens of billions of
dollars annually.
Introduction
David Mark,
Ken Ostrowski, and
Humayun Tai
The smart gridan electricity grid that uses
created a platform for utilities to add intelligence
two-way digital technology to optimize supply and
to the grid. The prospect of a global framework to
demandhas intrigued energy experts for years.
address greenhouse gas emissions, the
Its advent promises improved reliability by enabling
presence of ample global stimulus funds for
quicker and more effective response to outages,
energy infrastructure and smart grids in
greater customer awareness of energy usage and
particular, the heightening interest in renewable
costs, and facilitation of the adoption of
energy, and the promise of electric vehicles are
technologies such as renewable generation
all building additional momentum for the smart
sources and electric vehicles. In this inaugural
grid project.
issue of McKinsey on Smart Grid, we have

marshaled insights developed through our work
The course of smart grid adoption, however, is
with leading utilities and other players on the future
yet far from clear. The underlying technologies
of this landscape-changing approach to power
remain expensive; their business cases rely on
distribution. Here we consider how the smart grid
assumptions of significant changes in customer
will affect utilities, equipment and systems
behavior; and cost-effective integration of
providers, and policy-makers, and how these
existing systems and emerging technologies is
actors should respond to the daunting challenges
not yet proven. The business model is still
that can also harbor enormous opportunities.
emerging, especially for customer applications,

as regulators, utilities, and third-party service
The stakes are substantial. In the United States
providers define their roles and set technology
alone successful deployment of smart grid
standards. Many core systems remain unproven
technologies could yield savings to society of
and as we go to press, not a single full-feature
$130 billion annually by the end of this decade.
AMI system has been stably and fully deployed in
Customer applications, such as dynamic
the United States at scale.
pricing programs, in-home displays and

direct-load controls could save society
The forces of change
$59 billion. Advanced metering infrastructure
Despite the challenges, smart grid technologies
(AMI) can save $9 billion and grid applications
promise to have a profound impact on the
a staggering $63 billion by improving
electric power industry. The articles in this
transmission efficiency and reliability.
collection discuss the key themes that we believe

will define the future of the industry, particularly
The accelerating adoption of advanced
as they affect utilities, technology vendors and
metering infrastructure, which could soon be
policy-makersthe forces that will determine the
deployed in nearly 40 million locations, has
pace of development and deployment.
Utilities
Policy-makers
Utilities stand to gain the most from the smart
The smart grid can advance major societal
grid, but it also presents them with significant
goals such as greenhouse gas abatement, a
risks. Some will see bottom-line benefits from
more reliable electricity supply and lower
enormous capital deployment, and all could
energy costs. Achieving those goals will require
achieve increased operational efficiency. New
shifting the existing regulatory regime from
technology will also help utilities make the
being supply-focused to one that gives added
transition from an aging workforcenearly 25 to
weight to demand-side opportunities.
35 percent of the utility technical workforce is
Policy-makers will have to focus on facilitating
likely to retire over the next 5 years.
development of standards as well as gauging

the technical feasibility of large capital
Smart grid technologies will reduce outages
projects in the near term. They will increasingly
and improve power quality, while also offering
need to evaluate social benefits as part
a wide range of new products and services.
of regulatory rate cases, and be open to
The challenge will come in the form of
supporting more innovative pricing and pro-
increased complexity in operations and
grams to influence customer behavior.
business models. Without careful analysis and
Policy-makers will have to ensure appropriate
planning, billions of dollars could be wasted on
supply and demand resources across a
automated systems. Similarly, unless the
much wider range of assetstraditional genera-
impact on front-line employees is handled
tion, distributed generation, electric
intelligently, the expected operational benefits
vehicles, demand response programswhile
may not materialize.
guaranteeing customer service.
Technology vendors
Smart grid deployment by utilities will create $15
billion to $31 billion annually by 2014 in potential
As is true for any truly transformative
sales for telecommunications companies,
technology, the long-term benefits will often be
semiconductor producers, IT and grid hardware
obscured by the near-term disruptions. While
providers, software firms, and systems
plotting a course in such an uncertain realm is
integrators. These companies will, however, have
daunting and the likelihood of early missteps is
to exploit partnerships and add expertise in order
high, smart grid momentum is growing and its
to adapt to the long and consultative sales cycles,
ultimate arrival is certain. For the actors in the
regulatory requirements and organizational
electric power industry, then, the biggest risk
consensus that marks utility procurement
would be in waiting to see how others prepare
processes. The wave of infrastructure investment
to surmount the attending challenges.
will benefit traditional grid equipment players by

spurring demand for legacy products as well as
smart grid-enabled equipment.
David Mark is a director in the Silicon Valley office and a leader of McKinseys Business Technology Office.
Ken Ostrowski is a director and Humayun Tai a principal in McKinseys Atlanta office. Both are members of the
leadership team for the Americas Electric Power and Natural Gas Practice. Copyright 2010 McKinsey & Company.
All rights reserved.
U.S. smart grid value at stake:

The $130 billion question
The strategic stance that utilities adopt during the development of the smart
grid in the United States will help determine how much value is captured and who
captures it.
Adrian Booth,
Mike Greene, and
Humayun Tai
The development path for the smart grid has
customers, utilities, technology providers, service
reached an inflection point in the United States.
providers, and society at large will each receive a
More than 50 million smart meters are slated to
share in the form of improved utility operations,
be installed by 2015 and deployment of new grid
improved utilization of the electric grid, reduced
and customer applications is accelerating, driven
power consumption, improved ability for
in part by an infusion of federal government
customers to manage electricity, and reduced
stimulus funds. Before these technologies mature
economic losses from power interruptions.
and their benefits become clear, however, utilities

will have to develop estimates of the evolution of
A large and new set of opportunitiesworth some
the smart grid and strategies to address its overall
$59 billionis in customer applications, which
value proposition.
comprises packages of pricing, in-home displays,

smart appliances, and information portals, all
The stakes will be enormous, with the total
aimed at encouraging customers to smooth and
potential value generated in the United States
reduce consumption. Taken together, these
from a fully deployed smart grid reaching as high
demand-management programs should lead to
as $130 billion annually by 2019. Electricity
improved ability to manage electricity and
Article title here
substantially lower energy consumption. Grid
operate distribution assets, are at the center of the
applications and advanced metering could yield
debate. They have important strategic choices to
an additional $63 billion and $9 billion
make, which will determine the total value
respectively, mostly in the form of improved grid
realized as well as who captures it.
efficiency and reliability.

Value of smart grid applications
The estimated value at stake includes hard cost
Smart grid applications can be grouped into three
savings such as reduced operational expenses
broad categories: advanced metering, grid
and reduced power consumption for utilities and
applications, and customer applications. Exhibit 1
soft cost savings like deferred capital
on the following page shows the relative value of
expenditures and societal benefits such as
these categories and the discrete value levers that
improved reliability and lower greenhouse gas
make up the $131 billion in estimated annual
emissions. In addition to the value at stake
value in 2019.
estimated here, there are other future

opportunities that are hard to value at this time
Customer applications$59 billion
(e.g., the value of data) or are in adjacent value
Smart grid customer applications can enable
pools that are potentially influenced by smart
demand response (DR) programs that shift
grid (e.g., energy efficiency, renewable
demand from peak to off-peak times based on
generation, electric vehicles). The estimates in
voluntary customer behavior. In addition to peak
this article are based on the total surplus the
shifting, a second advantage of DR is the
technological and policy innovations in question
opportunity to reduce overall energy consumption
are expected to generate. No assumptions are
by increasing information to customers and
being made about which customers, utilities, and
customer awareness thereby. Broadly defined,
smart grid providers shall actually capture the
these programs use technology, education,
value. Furthermore, only the gross annual
and tariffs to manage demand. As with other
benefits available are calculated here, without
high-tech products that influence consumer
taking account of the cost to capture. In order to
behavior, attributing the appeal and effectiveness
realize the value, substantial investment will be
of energy management solutions to specific
required in equipment, software, installation,
components or design features can be difficult.
management, and other services. Given the rapid
It is therefore more useful to talk about the
evolution of technology and standards, the costs
effectiveness of whole customer application
are expected to decline although it is not yet
packages, rather than individual applications
clear how fast and by how much.
such as TOU (time-of-use) pricing or in-home

displays. These packages could include:
Development of the smart grid and its potential

value remain uncertain. Will customers want it?
Tariffs and rate structures, such as time-of-use
How much value will be captured, and by whom?
pricing, critical-peak pricing, real-time pricing,
What role will utilities play in unlocking the
and other financial incentives
value? What regulatory framework will optimize

the roles of key stakeholders? One thing is certain:
utilities, and particularly those that own and
Technology, such as in-home displays that provide
pricing, consumption, environmental and billing
McKinsey on Smart Grid Summer 2010

US Value at stake
Exhibit 1 of 1
Glance: The US smart grid value at stake is over $100 billion annually.
Exhibit title: The $100 billion dollar question
Exhibit 1
The $130 billion

question
Smart grid benefits by 2019

$ Billions annually, 2009 dollars
Customer
applications
Shift peak
16
17
26
Total
AMI
Grid
applications
59
Meter data
7
over network
Advanced
meter functions
Total
Shifting demand away from the peak lowers

peak prices
Demand-side management programs aim to reduce
energy consumption by customers and
the number of KWh that need to be generated
Decrease in peak and energy consumption
reduces need for new power plants in the
future, resulting in an avoided cost of capacity
Energy
conservation
Avoided cost
of capacity
The U.S. smart grid value

at stake is over $130 billion
annually.
Description of benefits
Automated meters eliminate the need for manual

meter reading and meter reading equipment
Operational and billing benefits from remote
disconnection/connection
Volt-VAR
43
10
FDIR
M&D
WAM
Total
Volt-VAR increases energy efficiency through

conservation voltage reduction (CVR)
Fault detection, isolation and restoration (FDIR)
reduces outage time throughautomated switching
Monitoring and diagnostics (M&D) reduces
inspection and maintenancecosts;
provides early warning of potential failures
Wide area measurement (WAM) increases
transmission throughput
2
63
information, as well as load-control devices and
Customer applications could provide $59 billion
programmable communicating thermostats that
in annual benefits by 2019:
allow a utility to shift peak demand without

significant impact to customers
Energy conservation$17 billion. Pilots

suggest that providing customers with
Analytics, such as current load vs. average or
current load vs. a neighbors
detailed, up-to-date information about their

energy use and its cost results in an overall
reduction in electricity consumption for two
Education and marketing about the new
packages and ways to use energy more efficiently.
reasons. First, customers can make effective

trade-offs in how they use energy, given
information about what devices use energy and
Future customer applications will also likely
the price of energy. Second, the information
integrate distributed generation, electric vehicles,
they receive allows them to make targeted
and more sophisticated energy management
energy efficiency investmentsfor example, a
systems. Effective combinations will provide
residential customer could use granular
customers with the transparency, tools, and
energy usage data to better understand the
incentives needed to reduce the burden they place
return on investment resulting from upgrad-
on their finances, the grid, and the environment.
ing an old refrigerator.
U.S. smart grid value at stake: The $130 billion question
Smoothing daily demand profiles$16 billion.
customers needs (see accompanying article,
Electricity grids typically have prominent
The Smart Grid and the Promise of Demand-
daily peaks that carry strong ramifications for
Side Management, pp. 3844).
the required generation types and capacity,

boosting wholesale prices during peaks.
Advanced metering$9 billion
Persuading customers to shift some peak-time
Advanced metering infrastructure (AMI),
consumption to off-peak hours by waiting to
sometimes referred to as smart metering,
run energy-intensive appliances or, in years to
consists of digital electricity meters equipped
come, charging of electric vehicles, would
with bi-directional communication capabilities
cause the average cost of generationand the
that will enable utility operational benefits
overall average price of energy to customers
estimated at $9 billion by 2019. As of 2005,
to decline.
fewer than 2 million of an estimated 150 million

meters in the United States were smart meters.
Smoothing critical peaks$26 billion. Grids
As of 2009, numerous large-scale projects had
experience critical peaks several times per year,
been initiated that will upgrade 50 million
typically during heat waves in areas and times
meters within next 5 years. Smart meters will
of high air-conditioner use. These peaks of just
generate $9 billion in direct benefits by
a dozen or so critical hours a year set the
eliminating the need for manual meter reading,
capacity requirements of the entire distribution
but they will also enable many new customer
grid. If demand reduction measures such as the
applications that will generate indirect benefits
application of higher prices or the cycling of
(discussed later in the article). The direct benefit
selected customers air conditioning can be
breaks down as follows:
agreed upon and applied, then total grid

capacity could be significantly lower.
Meter data over network$7 billion.

Automated metering eliminates the need
The willingness of customers to implement
for manual meter reading and meter read-
these solutions or change behavior to capture
ing equipment.
the conservation and efficiency gains is

currently unknown. Many pilots have shown
Advanced meter functions$2 billion.
significant impactfrom 5 to 14 percent
Advanced metering sends more and better
consumption reduction relative to baseline
information directly to the utility. Utilities
consumption. Few if any of these have been
will thereby know almost instantly the location
conducted in a manner that would robustly test
and extent of outages, enabling them to restore
the applicability and scalability of the benefits
power and resume selling electricity more
to a broader population, however. Many of these
quickly. In the absence of smart meters, utilities
pilots, for example, have been criticized for
must rely primarily on contact with customers
allowing biases of self-selection and/or novelty.
for information about outages. Advanced
The real question is what the impact of customer
metering, with its remote disconnection and
applications could be, given the right level of
reconnection capabilities, will also increase
information, pricing, control, user interface,
revenue assurance by reducing theft and
and automation tailored to an individual
enforcing disconnection policies.
power voltage reduces reactive line losses that

would otherwise cause a percentage of power to
Grid applications$63 billion
be lost en route from the generator to the meter.
Grid applications involve monitoring, controlling,
The result is reduced emissions and lower
and automating operation of the distribution and
electricity bills.
transmission networks. The four main

applications that provide the most benefit to the
Fault Detection, Isolation, and Restoration
grid are 1) volt-var optimization (sometimes called
(FDIR)$10 billion. These systems enable the
integrated volt var control or IVVC); 2) fault
utility remotely or automatically to reconfigure
detection, isolation, and restoration (FDIR,
the grid in response to unplanned or planned
sometimes called fault location, isolation and
outages. Smart substation relays are the most
service restoration FLISR); 3) wide-area
prominant example of this reconfiguration,
measurement (WAM); and 4) remote substation
although other components may include fault
and feeder monitoring and diagnostics. Together,
sensors and mid-circuit reclosers and ties.
these applications can provide over $63 billion in
The benefits begin with detection. Depending on
annual value to society by 2019.
the nature of the fault, FDIR systems may be

able to estimate its location and type and auto-
Volt-var optimization (VVO) and conservation
1 The exact ratio between
reductions in voltage and

consumption is a matter of
some debate and will depend
heavily on the mix of endcustomer devices connected
to the grid, as well as on
customer behavior. Hence the
estimates here are
approximate, based on a
middle-of-the-pack value for
this ratio.
2 Other applicable metrics for
reliability include the
System Average
Interruption Duration Index
(SAIFI) and the Customer
Average Interruption
Duration Index (CAIDI).
matically dispatch an appropriately equipped
voltage reduction (CVR)$43 billion. Smart
work crew to the exact location. Careful activa-
technologies such as tap changers and capacitor
tion of reclosers and ties could provide a second
banks that can respond to grid- and meter-based
benefit, by isolating the fault to a smaller section
systems could enable real-time management and
of the grid, potentially including re-routing power
control of the voltage level and power factor
from adjacent feeders to continue service to all
throughout the grid. The majority of the benefit
but those immediately around the fault. The
comes from conservation voltage reduction
primary benefit of this capability is improved
(CVR), an action in which utilities lower the
reliability (often measured using the System
endpoint voltage in order to reduce overall power
Average Interruption Duration Index [SAIDI]2),
consumption.1 (Smart grid technologies permit
but utilities will also benefit from the ability to
significantly more precise voltage control than is
streamline their repair operations.
possible without dynamic, real-time monitoring

of and response to conditions in the grid, making
Wide Area Measurement (WAM)$2 billion.
it possible to achieve this voltage reduction while
WAM provides real-time information about the
staying within regulated power quality
state of the transmission grid using a network
guidelines). This voltage reduction lowers the
of precisely timed monitoring devices variously
need for total electricity deliveredand also
called synchrophasors or phasor measurement
reduces grid capacity needs, all on the order of a
units (PMUs). By aggregating synchronized
few percent. In many jurisdictions, a new or
measurements, a utility can obtain a real-time
modified regulatory framework will be needed to
picture of network conditions, allowing the safe
encourage utilities to capture these benefits, as
operation of the transmission grid closer to its
most utilities currently have little financial
true capacity, thereby reducing congestion costs.
incentive to implement CVR. Additionally, the
As one grid operator explained, You can stand
ability of VVO systems dynamically to correct
closer to the edge of a table if you know where
the edge of the table is. By alerting utilities
Infrastructure provider
quickly to developing conditions on the grid,
The role of infrastructure provider is one option
WAM also reduces the likelihood of major
for utilities anticipating an evolutionary path for
cascading blackouts, such as the one
the industry, albeit it may limit total potential
experienced in the U.S. Northeast in 2003.
value capture. In this approach, the utility would

remain more supply-oriented and focus on
Substation and Feeder Monitoring and
building or assuring enough generation and grid
Diagnostics (M&D)$8 billion. Smart
capacity to meet demand. For infrastructure
technologies can provide utilities with a wealth
providers, grid-side applications offer a valuable
of nearly real-time operational data about
way to continue investing capital in the grid,
substation and feeder equipment. This data can
while streamlining operations and improving
be used quickly to address impending failures,
asset management.
optimize inspection and maintenance

schedules, and generally improve asset lifetimes
Infrastructure providers will be primarily
and utilization. The majority of this benefit is
concerned with supporting the power
due to transformer monitoring systems, which
infrastructure to ensure reliable service and
can warn of an impending failure, allowing
generate operational benefits through enhanced
preventive rather than corrective maintenance
visibility into grid conditions, better controls,
and avoiding collateral damage.
and improved meter functionality. An

infrastructure provider will typically roll out
Implications for utilities
advanced metering first, capitalizing on the
The magnitude of the value at stake raises strategic
trend toward smart metering and achieving an
questions for all interested parties, but particularly
effective trade-off between capital and
for utilities. While ratepayers, regulators,
operating expenses.
technology providers and service providers stand

to capture portions of the value, utilities
Grid applications may leverage AMI
specifically those that own and operate distribution
communications and/or IT assets. They are a
assetslie at the center of smart grid deployments.
natural next step for the improvement of overall
They are uniquely positioned to set the tone for
reliability and realization of operational savings.
deployments, which in turn will influence the total
An infrastructure provider is likely to evaluate its
value realized as well as who captures it.
investments in a traditional way, looking at the

net present value of the resulting savings.
For a distribution operator, for example, the most

significant strategic determinations are which pools
The implied business model of an infrastructure
of value to pursue, under what business model. The
provider resembles that of utilities today: a rate of
answers depend on the scope of operations the
return related to the amount of prudently invested
operator decides to target and the range of customer
capital that is used and useful. While some
services it decides to offer. At one end of a spectrum
regulatory changes will be needed fully to deploy
of choices, a utility might focus on being an
grid applications, the regulatory challenges will
infrastructure provider. At the other end, it might
be relatively familiar in nature. As for capabilities,
operate as an energy services provider.
infrastructure providers will need to make

significant organizational investments to ensure
10
A greater share of the value created through customer applications

will be available for a utility that adopts a stance more akin to an
energy services provider
successful deployment and management of such
electricity used. In parallel, public emphasis on
grid applications as next-generation distribution
green infrastructure will reward and possibly even
management systems. Power and IT engineers
mandate reductions in consumption for
will need to work more closely together and be
complementary non-financial reasons. Utilities
cross-trained. Many core business processes, such
acting as ESPs will be uniquely positioned to enable
as outage management, field force management
demand management, and will tend to pursue the
and asset management, will ultimately be
supporting capabilities and incentives. As a result,
completely redefined.
the ESP utility will begin to reach behind the meter

and inside the customer premises.
The role of infrastructure provider may be a more

attractive one for many utilities concerned with
The ESP stance presents bigger challenges but
managing their exposure to technological and
also higher potential rewards. It will face all the
market risks. However, this approach will limit
same obligations and objectives of an
value-creation opportunities from customer
infrastructure provider, but will also have to build
applications, which otherwise could account for
new customer-facing capabilities and develop new
more than half the total potential value from the
business lines, some of which may be fast-
smart grid. An added drawback to the choice of
growing, unregulated, and inclined to reward
infrastructure provision is that the customer
marketing and design more than pure operations.
applications which are on the horizon could
Like the infrastructure provider, the ESP will
threaten the traditional utility business model by
deploy smart meters as a first step, but it will view
lowering overall energy consumption (or reducing
metering as a foundation on which to build future
the rate of increase that would otherwise occur).
customer applications, whose benefits will

furthermore help defray the costs.
Energy services provider

A greater share of the value created through
For an ESP, the design of a metering system will
customer applications will be available for a utility
emphasize strategy and flexibility rather than
that adopts a stance more akin to an energy services
operations and cost effectiveness. As a result, the
provider (ESP). The ESP position involves a more
investment in smart meter capabilities for an ESP
holistic view of the value chain and considers
will likely be higher and more sophisticated than
demand-side management a core capability. The
that of an infrastructure provider. As smart
orientation of the ESP is one that sees the industry
meters are deployed, the utility will need
making a strategic shift toward delivering more
dramatic new capabilities to design, build, deploy,
services than simply reliable, low-cost energy. ESPs
test, and manage customer applications, while
also expect that per-unit energy prices will continue
ensuring a regulatory strategy that allows
to rise in the future, causing customers and public
monetization of the unlocked value.
utility commissions (PUCs) increasingly to demand

more effective tools to allow customers to manage
Customer applications will require a new set of
their electric bills by managing the amount of
institutional capabilities resembling those in
consumer marketing industries. To succeed,
11
Microsoft, both of which have launched products
ESP-style utilities will need to provide greater
in this space. An ESP utility must quickly decide
control, comfort, and convenience to customers
with whom to partner and with whom to compete.
through the right combination of customer

segmentation and insights, design innovation and
The risks of pursuing an ESP posture are real. The
user-friendly technologies, meaningful marketing
revenue base could decline, utilities could lose
and messaging, and suitable interaction methods.
their focus on the core business of providing a
They will also need to produce results in the form
reliable supply of energy, and customer
of reduced bills.
applications may not catch on. Although the

execution risks for an ESP are higher than those
Todays utilities have few of these capabilities
of an infrastructure provider, the latter may
in-house and will need to start building or
ultimately face a greater strategic risk. If customer
acquiring them quickly. The credit card industry
applications and demand-side management
offers an instructive analogy: over the past 20
become mainstream in the utility industry, the
years, card providers have moved from being
infrastructure provider may face disinter-
financial engines offering a single credit card
mediation and confinement to a smaller market,
product with homogenous messaging to
with limited access to the value at stake in the
sophisticated marketing agents offering a range of
deployment of smart grid technologies.
highly customized products with meticulously

refined messaging. The organizational changes
that facilitated the credit card industrys
transition closely parallel those that may be
Opinions diverge on how smart grid deployment
required for utilities to succeed as ESPs.
will play out longer term, but its emerging

dynamic poses fundamental questions for the
The ESP business model will demand innovation.
evolution of the utilities industry. Will there be
ESPs will require a regulatory framework that
multiple sustainable business models for the
allows for monetization of the benefits of
utility of the future? Will some emerging models
demand-side management programs. The
dominate while others die out? The strategic
shareholder-incentive mechanism in place for
choices facing utilities would be difficult under
energy efficiency programs in California is one
any circumstances, but these choices must be
example of this approach, although many
made before smart grid technologies are mature
potential alternatives exist.
and their benefits become clear. Utilities are

uniquely positioned to set the tone for
Even so, many players other than utilities will
deployments, which in turn will influence the
likely pursue the same value pools: energy service
total value realized as well as who captures it.
companies (ESCOs), technology vendors, start-
With $130 billion at stake, it will be important to
ups, and non-traditional players like Google and
make a sound decision.
Adrian Booth an associate principal San Francisco, and Humayun Tai is a principal in McKinseys Atlanta office.
Together they co-lead McKinseys Smart Grid Service Line. Mike Greene is an engagement manager in the
Chicago office. Copyright 2010 McKinsey & Company. All rights reserved.
12
How Europe is approaching

the smart grid
Uncertainty about standards and support is slowing progress, though
smart meters have passed 50-percent penetration in some market.
Enrico Giglioli,
Cosma Panzacchi, and
Leonardo Senni
1 The 80 percent target is
described as binding wherever

a positive long-term business
case for deployment has been
made, or where no business
case at all has been developed
by 2012. While these caveats
are present in the language of
the agreement, most EU
politicians and regulators
(CRE, Ofgem, NVE, et al.) are
generally interpreting it as
binding.
Public awareness of smart grid technology has
More comprehensive adoption has been slowed by
expanded in Europe, especially as a result of
several factors: the lack of clear technology
the adoption by the European Union of the
standards for smart meters and home-area
Third European Energy Liberalization Package.
network (HAN) communications; uncertainty
The main goal of this agreement is the
about the level of regulatory support for necessary
installation of intelligent metering systems in
investments; and disappointing demand for smart
80 percent of households by 2020.1 New
grid-enabled services by consumers, who do not
services by pioneering utilities such as
perceive a strong value proposition for bringing
Germanys Yello Strom have also helped raise
this technology into their homes. The evolution of
the profile of this new technology. Yet while
the smart grid landscape in the EU will depend on
almost all consumers in Italy now have smart
how national regulators and governments decide
meters, investment and development activity
to support investments and how these decisions
vary widely across the region and among smart
influence the investment behavior of leading
grid segments.
European utilities.
13
In order to understand this evolving context,
Smart meters: increasing market penetration
three key aspects of the European smart grid
Within the European Union, country-level
must be examined:
deployment of smart meters falls into four

categories (Exhibit 1).
The status of key segments

Challenges slowing investment
The outlook for growth.
In early adopters, rollouts have been completed

or are well under way. In Italy the Progetto
Telegestore initiative begun in 2002 has
Status of key segments
resulted in installation of over 30 million smart
Although some governments and utilities have
meter points covering close to 100 percent
made significant investments in the introduction of
of Italian households. In Norway, Sweden,
smart meter technology, medium- and low-voltage
Finland, and Denmark, penetration rates have
network automation, local network management,
risen above 50 percent, with continued
McKinsey
SmartinGrid
and HAN on
remain
early stages of development.
Europe SG
Exhibit 1 of 2
Glance:
Exhibit title: EU progress
increases expected.
Exhibit 1
EU progress
Smart meter deployment by EU member states

Early adopters
Mandated rollouts and limited pilots
No mandated rollouts and limited pilots
Inactive countries
Nonmember countries
14
In countries with mandated rollouts, but
to all forecast consumption. Second, smart meters
limited deployment, national regulators and
are seen as a tool to foster competition among
governments have imposed strict timelines for
utilities by increasing the transparency of energy
full deployment of smart meters: 2016 in
costs while allowing more precise pricing
France, 2018 in Spain, and 2020 in the U.K. As
segmentation by utilities, both of which would
a result, utilities have launched or are launching
encourage switching between operators.
pilot projects, some as large as 300,000 meter

points, in preparation for subsequent
Network automation and local network
nationwide rollouts.
management: limited new investments

In most major EU countries, automation of
In countries with active pilot projects, but no
medium- and low-voltage networks remains at a
mandated rollout, such as Germany and the
low level of development. In all but one of the
Netherlands, thousands of smart meters have
largest European countries, fewer than 20
been installed in experiments led by local
percent of the medium-voltage and low-voltage
utilities. This activity comes in the absence of
stations are remotely monitored and controlled
specific implementation deadlines for new
and fewer than 25 percent of the medium-voltage
metering systems. The Netherlands, for instance,
lines are equipped with automatic fault detection.
has made deployment voluntary.
The exception is Italy, where significant

investments have been made to improve grid
In inactive countries, primarily the former
Eastern Bloc states, despite the significant
reliability and quality of service. To date, the

only change to the status quo has been Maltas
potential benefits attributable to reductions in
pledge in February 2009 to spend up to 85
electricity theft and losses, budget constraints
million to automate its network fully as part of
have discouraged the launching even of small
its smart grid plan. The growing importance of
pilot projects.
distributed generation and the greater

penetration of renewable energy sources,
Adoption rates of smart meters will be pushed
however, have led several large utilities to study
higher in the next decade by elements of Third
the technical and economic feasibility of local
European Energy Liberalization Package,
network management.
promulgated in September 2009 to help the EU

achieve two overarching energy goals. First,
HAN: early development but increased interest
member states are trying to foster a decrease
Interest in home-area network applications is
inor optimization ofenergy consumption by
rising rapidly in Europe, and many utilities are
their citizens, in order to reach EU energy targets
piloting new applications. Yello Strom in Germany,
for 2020. The 20/20/20 Directive (December 17,
for example, has partnered with Digital Strom,
2008) established several goals for 2020 related to
Google, and others to offer some customers the
energy use by EU member states: cut greenhouse
ability to monitor and control their electrical
gas emissions by 20 percent from 1990 levels;
consumption in real time, enabling them to
source 20 percent of total energy (heat, transport,
remotely dim lights or alter the status of
electricity) from renewables like wind and solar;
appliances. Another sign of increased interest
and make efficiency savings of 20 percent relative
came at the Cleantech Conference in Copenhagen
How Europe is approaching the smart grid
15
in April 2009, where discussions about the smart
would be needed. Although the Third European
grid focused mainly on HAN (two out of three
Energy Liberalization Package represents a
invitees in the smart grid panel operate in this
step forward, three important uncertainties
space). Development of HAN solutions, however,
remain. First, the Package refers explicitly
is still in an early stage, even in countries like the
only to meters; reference to the other segments
United Kingdom, where public attention to the
is not specific, but generally encourages the
smart grid has been more pronounced.
modernization of distribution networks, such

as by introducing smart grids. Second, the
Barriers to greater smart grid investment
directives need to be localized and then
Despite much discussion about the smart grid,
adopted by each member statecreating the
development has been slower than expected, with
potential for country-by-country differences in
deployment of smart meters generally falling
the required capabilities of smart meters. 2
below expectations, and investment in other
Third, the Package does not address whether
smart grid segments limited in size. Three factors
(and how) member states will financially
are slowing the pace of development:
support investments made by utilities in smart

grid technologies.
L ack of a clear regulatory framework
and incentives
In the short term, full development of the smart
Absence of significant consumer demand
grid within the European Union will continue to
Segment-specific issues.
be impeded by these uncertainties. It will also be

hampered by the limited availability of incentives
2 The Energy Liberalization
Package defines smart meters

as intelligent metering
systems that shall assist the
active participation of
consumers in the gas and
electricity supply markets.
Lack of clear regulatory framework
due to dire budgetary conditions in most EU
and incentives
states and by the weakened financial condition of
Member states have neither shared definitions
many large European utilities. Several of these
for the functions that make up the various
utilities have reduced investments in renewables
segments of the smart grid, nor provided a
by 20 percent or more despite strong public
clear description of what investment incentives
incentives for investment.
16
Lack of customer demand for smart grid-
3 The

survey was conducted in
August 2009 and had 2,014

adult respondents; it was
commissioned by the Energy
Retail Association, which
represents the major
electricity and gas suppliers
in the U.K. domestic market.
Segment-specific issues
enabled services
Smart meters and HAN applications have been
While development of the smart grid has been
hurt by EU-mandated unbundling of distribution
slowed in part by a lack of clear, publicly
and retailing of electric power, which has created
supported incentives, weak demand from
uncertainty about whether the distributor or
customers has also contributed to the delay. The
the retailer should make these investments. In
lack of customer interest stems not only from
addition, these two segments have been negatively
the generally low level of awareness among
affected by the lack of EU-wide technical
European customers about the size of their
standards. In the case of meters, for example, dif-
electricity bills, but also from the still limited
ferent meter manufacturers and utilities are using
understanding of what the smart grid is and
different communication solutions (Exhibit 2)
how its implementation could create value. A
and protocols such as Lontalk and DLMS (device
recent survey carried out in the United
language message specification) creating a risk that
Kingdom showed that, despite a lively political
utilities will be locked into suboptimal technologies
debate
over
issue
in the second and third
McKinsey
onthe
Smart
Grid
and limited economies of scale in sourcing.
quarters
Europe SGof 2009 (extensively covered by the
media),
Exhibit 2only
of 2 32 percent of British citizens
understand
what smart meters
Glance:
are.3
Investments in network automation and local

network management have also been held back by
Exhibit title: EU standards vary
Exhibit 2
EU standards vary
Varying technology standards are emerging for smart meters in key EU countries.
Germany
Mix of PLC (power line communication)
and GPRS (general packet radio service) in
pilots will continue into full rollouts;
PLC preferred due to lower cost but
bandwidth a concern for one of the big 4
France
PLC currently being tested in pilot,
but other solutions being analyzed for full
roll-outs
Netherlands
Prefer PLC for cost, reliability and
control
Spain
Major players have identified PLC as the
preferred technology; unclear level
of sophistication OFDM (orthogonal frequencydivision multiplexing) vs traditional spread
spectrum
Sweden, Denmark, Finland

Mix of PLC/GPRS with PLC preferred
due to lower cost; however pressure to
improve PLC outage management features
United Kingdom
GPRS used during pilots (and interest
for PLC), for full rollouts technology will
be either GPRS or RF (radio frequency)
Uncertainty persists on technological preferences in the long run
Source: McKinsey analysis, utilities interviews
How Europe is approaching the smart grid
17
While some of the segment-specific issues will continue to slow

smart grid development, the good news is that definition of
EU-wide technical standards for smart meters and HAN should
soon be in sight
a combination of causes. With service and
Unfortunately, the fiscal difficulties facing EU
reliability of the medium-voltage and low-voltage
members create a real risk that the lack of
networks at levels considered generally
proper regulatory incentives will persist. The
satisfactory, automation appears to be relatively
absence of incentives could lead utilities to opt
costly, particularly in the absence of significant
for solutions designed solely to minimize their
amounts of distributed generation and with
investments, thus foregoing the societal
limited expectations for the penetration of electric
benefits of smart grid implementation.
vehicles in the short and medium terms.

Outlook for the future
Consumer demand for smart grid-based services
To avoid that outcome, regulators and utilities will
will likely increase slowly, unless targeted
need to work together to find an optimal solution
marketing campaigns heighten customer
that develops both a societal business case for
awareness of the economic benefits. While some
investment in the smart grid and coherent
of the segment-specific issues, such as those
regulatory measures and incentives that can
around network automation, will continue to slow
maximize the societal benefit.
smart grid development, the good news is that

definition of EU-wide technical standards for
smart meters and HAN should soon be in sight.
Major utilities and key equipment makers in this
space have launched the Open Meter project and
the PRIME Alliance with the aim of defining
these standards by 2010 or 2011. It is still unclear
which standard will be proposed by German
utilities, while an upgraded version of the current
solution is likely in Italy.
Enrico Giglioli and Leonardo Senni are principals in the Milan office, and Cosma Panzacchi is an engagement
manager in the Rome office. Copyright 2010 McKinsey & Company. All rights reserved.
18
Evolution of the
smart grid in China
Development of this enormous market could shape the future

of the smart grid globally.
David Xu,
Michael Wang,
Claudia Wu, and
Kevin Chan
China has become the worlds largest market for
lead to a tremendous need for smart grid
power transmission and distribution (T&D) and is
technologies. Second, China has a unique
poised to become a major consumer of smart grid
structural context that could enable it to leap
technology. Commitments by Chinas political
ahead in the development of the smart grid:
leaders to reduce the carbon intensity of its GDP
government ownership of the T&D sector, the
by 40 to 45 percent by 2020 relative to 2005 and
markets ability to drive down equipment costs,
to increase the use of renewable power promise a
and the central role that government can play in
massive transformation of the nations energy
the economy make this possible.
landscape. The ambitious plans have attracted top

equipment makers, communication device
China may not, however, fully exploit this
players, and integrated solutions providers from
opportunity. Government regulators will have to
around the world.
create a suitable vision for the nations smart
Chinas smart grid market will be large and
policies and incentives. State Grid and Southern
influential for two reasons. First, Chinas
Grid, which own 80 and 20 percent of the grid
increasing commitment to green development will
system respectively, will need to establish
grid and provide appropriately supportive
19
effective standards and build systems and
greater attention. In particular, CHP could grow
capabilities that focus on demand and supply in
from less than 100 GW in 2009 to 400 GW by
a balanced way.
2020, if it proceeds on an aggressive

development path.
Equipment makers can facilitate the process

and profit from development of this market:
On the demand side, the continuing urbanization
global players will need to bring their best
of Chinas population and the potential for
technologies and solutions to bear in order to
distributed power together create tremendous
earn a share in what will be one of the
opportunities for the smart grid. McKinsey
most important and competitive smart grid
estimates that Chinas urban population will grow
markets. Local players will need to upgrade
from 640 million in 2010 to 840 million in 2020.
their technologies and help China move
The increasing share of residential demand within
down the cost curve. The next 12 to 24 months
total power consumption could accentuate peaks
will reveal just how fast Chinas smart grid
and troughs in the load profile.
will actually develop.

Urbanization is also speeding introduction of
Chinas tremendous need for
electric vehicle (EVs), which China is aggressively
the smart grid
promoting; projections indicate that 5 million EVs
As China increasingly embraces energy efficiency
could be on Chinese roads by 2020. These
and clean energy, it will need smart grid
vehicles will add significant load to the electricity
capabilities to transform the demand and supply
grid, which will need to be managed carefully.
sides of the nations power industry.

As is true with many demand-side energy
On the supply side, a massive build-out of
efficiency measures, the net present value of many
renewable energy sources will increase the need
smart grid opportunities is positive. Our
for grid connections and management systems
experience suggests that a pilot focusing on smart
to handle the intermittency of these sources. As
meters and home-area networks in a Chinese city
of 2009, less than one-third of wind power
could pay for itself in 6 to 7 years, and create
plants were connected to the grid, due to
significant environmental benefits through energy
limitations in the transmission network and the
savings and emissions reductions.
difficulty of dispatching intermittent power,

1 Chinas

own definition of
smart grid as characterized

by State Grids Strong smart
grid includes a broader range
of applications than the
definitions used in
accompanying articles; the
market estimate here includes
some components of grid
transmission excluded
elsewhere, especially
ultra-high voltage (UHV)
transmission.
among other reasons. By 2020, China is forecast
Working from Chinas definition of a strong
to have more than 100 gigawatts (GW) of
and robust1 smart grid, we estimate that
installed wind capacity. Solar power presents
Chinas smart grid market could total $20
similar challenges, though China is targeting an
billion annually by 2015. While more than 60
installed capacity of only 20 GW by 2020.
percent of that investment is expected to be

associated with the rollout of the UHV
China is furthermore expecting a significant
transmission system, by 2015 the markets for
increase in combined heat and power (CHP)
smart meters and wind power connectivity, for
capacity, while building-integrated photovoltaics
example, could reach $2 billion and $800
(BIPV) and rooftop solar PV are also receiving
million respectively on an annual basis.
20
If the smart grid grows in line with its potential, the government
could accomplish two goals at the same timedriving economic
development and increasing environmental protection
Chinas unique structural context
and renewable energy connectivity with the
Beyond the sheer scale of demand that this
expectation that these standards will be
market will generate for smart grid technologies
piloted in 2010. Replication of these standards
over the next 5 years, a number of other factors
will allow China to leverage its massive
present in China will contribute to its global
production capacity fully and utilize intense
smart grid impact.
internal competition further to reduce costs of

the smart grid rollout.
Worlds Largest T&D market. In 2008, capital
expenditures by State Grid and Southern Grid
Local governments focus on economic
combined reached $43 billion, a figure expected
development. Many local governments are
to grow at an annual rate of 15 to 20 percent over
restructuring their economies through
the next 10 years. This scale of spending will
investments in the smart grid. Yangzhou, for
permit China rapidly to incorporate the latest
example, plans to develop a smart grid-
technology into its system, set its own standards,
technology cluster together with photovoltaic
and even lead standard-setting efforts globally.
and new materials industries. Wuhan is

seeking to distinguish itself as the EV city
Potential to drive down costs and grow
with a strong interest in developing a smart
equipment supply. Due to cost advantages across
grid cluster.
the value chain, power generation equipment

from China can be 30 to 50 percent cheaper than
Centralization of political leadership. Chinas
comparable products manufactured in developed
central government can expedite policy setting
markets. China has already become the original
and coordination across multiple departments
equipment manufacturer for smart meters
and jurisdictions, and with key industry
offered by leading global utilities. The net effect
players. In its drive for greater energy efficiency,
of this ultra-competitive equipment sector
the central government has adopted key
is that China has ready access to cost-
performance indicators that have been rapidly
competitive equipment, and its utilities will be
cascaded to provinces, cities and towns.
able to build out their infrastructure faster

than anywhere else.
Crucial role of key stakeholders

Chinas success in becoming a global leader in the
Ability to standardize and replicate. Integrated
development of the smart grid depends, however,
ownership of utilities and the T&D system will
on all stakeholders playing their parts, including
enable China to drive unparalleled consistency of
leading grid companies and domestic and global
standards across the nation at lightning speed.
equipment and service providers, with the
State Grid is drafting standards for smart meters
government taking a critical leadership role.
Evolution of the smart grid in China
21
Government: Provide critical enabling leadership
tariffs, and collaboration models to facilitate
If the smart grid grows in line with its potential,
the testing and implementation of smart
the government could accomplish two goals at
grid technologies.
the same timedriving economic development

and increasing environmental protection. The
3. Supporting the development of industrial
State of California offers a useful illustration of
clusters. A leading metropolitan area is
how regulators can provide the support needed
considering creating a special industry fund
for smart grid efforts to thrive. To clear away
and 20 city-level incubation platforms to
some of the disincentives preventing utilities
transform itself into a smart grid valley.
from pursuing demand-side management
Funding and assistance with talent
benefits through demand response or energy
development will be central to this effort.
conservation programs, California has sought to

decouple utility revenues from the number of
4. P
ush for holistic city-level solutions by
kWh sold. As a result of these efforts, Californias
integrating energy services. Energy
leading utility, PG&E, was able to begin
management services that help building owners
deploying advanced smart meters in 2006. By
and occupants reduce their energy
the end of 2009, the company had installed
consumption can generate sufficient energy
almost 3 million meters, creating the largest
savings to reduce energy bills and pay back
installed base in North America.
investments made by the energy management

provider. Although these services represent a
To realize the full potential of the smart grid
somewhat unconventional business model, they
opportunity, Chinas government will need to play
are financially viable, and pilots are being set
a vital and visionary role. This role could involve
up in several cities.
four market-shaping actions.

Power grid companies: Set standards and adapt
1. C
reating a vision for the smart energy
system. Chinas emphasis on a supply
operating systems
Development of the smart grid offers Chinas
dispatch paradigm reflected an urgent need
power grid companies a remarkable opportunity
to expand generation capacity in the early
to transform their performance and develop new
2000s, but rapid urbanization combined with
businesses. They could significantly reduce capital
increases in distributed power will
expenditures associated with smart grid
necessitate shifting to an emphasis on
deployment through economies of scale, in much
demand-supply balancing. Such a smart
the same manner that China completed the
energy system will require the government to
worlds largest build-out of power generation and
create incentives to support demand-side
grid infrastructure cheaper and faster than would
applications for the smart grid, in parallel
have been possible anywhere else in the world.
with supply-side developments.

The smart grid could also enable grid companies
2. D riving pilots and implementation with
to handle the intermittency of renewable energy
supportive policies. Cities could actively
sources more effectively, as well as facilitate
participate by piloting special financing,
peak-shifting, reducing the need for additional
22
generation capacity by as much as 25 percent.
used elsewhere, and establishing an
Finally, the smart grid could enable Chinas grid
advantageous cost position to compete globally.
companies to build a new platform for
Chinas power equipment sector is, however,
globalization in the same manner as Korea
already one of the most competitive in the world.
Electric Power Company (KEPCO) did, which
The challenge will be to maintain a distinctive
used its experience in smart grid technologies to
offering and position at a time when active local
create advantageous international partnerships.
competition on similar technology is driving the

market toward commoditization.
To realize the full potential of this opportunity,

grid companies would need to address three
Global players will have to be aggressive but smart
core areas.
about how they compete. Success will likely

require tailoring product offerings, introducing
1. Standards. Grid companies could help
first-class technology that can be localized for
prioritize and establish standards by
Chinas needs and expectations about the total
systematically leveraging pilots to test the
cost of ownership. In the smart meter space, for
latest technology and verify the business case
example, China is looking at a cost of $100 or less
for deployment. State Grid, for example, is
per smart meter versus an expected $200 to $400
beginning to set standards for grid connection
in the United States, based on lower expected
of renewable energy sources and information
functionality and shorter expected lifespan (7 to
transmission. Local utilities can play a similar
10 years versus 10 to 25 years or more).
role by running pilots of smart meters and

home-area networks.
Local equipment and service providers: Upgrade

technology and drive down the cost curve
2. S
ystems. Given the transformative potential of
the smart grid, utilities will be expected to go
For Chinese firms, the smart grid is a major

opportunity that could provide a platform for
beyond making incremental improvements to
global leadership. In the T&D sector, local players
establish a vision of service for the future, and
have been increasing their market share in recent
then work backward to develop a transition
years, though they are not yet seen as technology
plan to that future state.
leaders. For them, missing this wave of smart grid

development would mean the loss of an important
3. Capabilities. The smart grid will create demand
opportunity to break through the existing
for new or highly enhanced capabilities in such
structure of the T&D industry and seize a true
areas as data management, charging
leadership position.
infrastructure for EVs, and customer service

that can support new smart grid applications.
The crucial breakthrough for local players will be

to upgrade and build core technological
Global equipment and service providers:
capabilities through a skillful combination of
Compete for a place in the largest market by
in-house development and global partnerships.
bringing the best solutions
In step with these technology upgrades, local
For a global equipment maker, success in China
players should leverage local relationships to
means capturing a share of the largest T&D
scale up production and help China move down
market of the world, testing technology not yet
the cost curve.
Evolution of the smart grid in China
23
China could soon become the most significant
Proactive equipment and service providers will
market in the smart grid arena, in the same way
take this period of uncertainty as an
that it has emerged as the worlds most important
opportunity to shape the landscape, working
T&D market. Despite Chinas advantages, however,
with government and key utilities to
nothing guarantees that it will achieve that level
co-develop standards and support pilots. Given
of global impact. Much will depend on the degree
the significance of the potential prize, there is
to which the key stakeholdersthe government,
tremendous value at stake for all players in
Chinas two giant grid companies, as well as local
this market.
and global equipment makersseize this

momentous opportunity.
One indicator of Chinas resolve could be the
speed with which it starts piloting customer
applications (especially HAN applications), in
parallel with the testing of more flexible
time-of-use electricity tariff schemes. Another
possible indicator would be the testing of
advanced smart meters capable of supporting
two-way electricity flows, a necessary first step
for integration of distributed power sources,
including many renewables.
David Xu is a director, Michael Wang a principal, and Claudia Wu and Kevin Chan are associate principals, and
in McKinseys Shanghai office. Copyright 2010 McKinsey & Company. All rights reserved.
24
Best practices in the deployment

of smart grid technologies
To reap the expected benefits from the smart grid, U.S. utilities face
steep organizational hurdles, significant process complexities, and difficult
governance issues.
Anjan Asthana,
Adrian Booth, and
Jason Green
U.S. utilities plan to install more than 40 million
significant investments in information
two-way smart meters in homes and businesses
technology, an area generally outside their core
over the next 5 years and other smart grid
competence. The smart grid will be as integral to
projects are not far behind, spurred by
core systems as enterprise resource planning
$4.5 billion of federal stimulus funding and
(ERP) is to the manufacturing industry; it will
rapidly maturing technology. To varying degrees,
be as geographically diverse as a new telecom-
the electric utility industry around the world is
munications network. Successful deployment will
joining in. In an industry where the pace of
require strong coordination across customary
technology adoption has been measured
organizational boundaries, significant process
historically not in months or years but decades,
change, and rigorous governance.
this surge in activity is a challenge of

unprecedented scope and scale, one that would
test the managerial capability of any industry.
The first stage of a smart grid rollout is generally

in the deployment of smart meter technology.
Here the record of utility companies has been
The complexity of smart grid projects will add to
mixedunsurprising given the level of complexity
that challenge, as utilities will have to make
involved. Some utilities have had to interrupt
25
their rollout of smart meters to reassess the
Vision and business case
technology selected, and some have switched
1. Define the smart grid vision and develop the
vendors. Still others have incurred hundreds of
road map to get there
millions of dollars in cost overruns due to
Smart grid applications have many potential
systems integration issues. And some utilities
benefits, and it is important for utilities to
have failed to realize the expected benefits from
determine which of them they will seek to
smart meter projects because of change-
maximize: reduction in operational cost?
management issues.
improved reliability? reduction in greenhouse

gas (GHGs) emissions? When all these objectives
These false starts, cost overruns, and sub-par
are important, relative prioritization becomes a
resultsas well as the many successeshave been
critical step, a process which should take account
highly instructive. Based on these experiences, a
of the strength of their connection to overall
set of best practices is emerging that can improve
corporate strategy. If, for example, a utilitys
the odds of success. McKinseys experience in
focus is on operational benefits and reliability, it
supporting utilities has led to ten emerging best
should align its smart grid vision by focusing on
practices across three major categories which
grid-side benefits as opposed to customer-facing
together define successful smart grid deployment.
applications. (More detail on these factors

McKinsey on
Deployment
Exhibit X of X
Glance:
Exhibit title: 10 best practices for successful smart grid deployment
Exhibit 1
The dos and

donts of smart grid
deployment
Where to do it
What to do 10 best practices
What not to do
Vision and
business case
1 Define a smart grid vision and the road map

to get there
2 Build a compelling business case tailored to
technology maturity and the regulatory environment
3 Develop a capability-driven regulatory case
articulating stakeholder costs and benefits,
and addressing technology obsolescence and
security concerns
Implementation
4 Set up program architecture that considers risk

and industry maturity
5 Select technologies for the long term and use
pilots strategically
6 Pursue true strategic sourcing to optimize providers
capabilities while minimizing risk
7 Maintain significant business focus on IT integration
activities
Operations and
8 Employ lean operations techniques to accelerate
change management
cost-effective technology deployment
9 Actively define end-state business processes
and change required to deliver
10 Set up cross-functional governance across all key
business units
Pursue stand-alone projects when each becomes

a positive business case
Assume technology is a static choice and business-case
framework of one service area will work in another
Translate internal business case into a regulatory
filing and assume regulators and stakeholders will
understand it
Assume a narrow approach to systems integration
will succeed
Map technology to current needs or fail to test
technology marketing claims
Use a procurement-led process that fits other categories
of spend where functionality is well known
Assume clear business requirements will lead to
successful IT integration
Scale up current capabilities and assume an unrealistic
learning curve
Plan on capturing the benefits in the business case
without significant change management
Lead the project from either an IT or single business
unit perspective
26
can be found in the accompanying article,
Treat the vision as a living document that needs
U.S. Smart Grid Value at Stake: The $130 Bil-
to be periodically updated and refined based on
lion Question, pp. 4-11). Emerging best
experience and learning. With all the
practices include:
uncertainties, it is as important to be flexible in

approach while incorporating key lessons.
Create a vision and road map that incorporates
all available information even though significant
2. Build a compelling business case tailored
uncertainties exist. The most effective utilities
to technology maturity and the regulatory
pull together thought leaders from across the
environment
organization to develop a comprehensive
The road map will indicate the stages of smart
inventory of smart grid opportunities. This
grid deployment. First wave applications are
inventory is then prioritized by calculating the
often AMI/smart meter, grid applications,
value at stake from each application according to
and demand-side management programs. To
financial metrics (both capital and operating
deploy these applications, utilities use an
expense), reliability, customer satisfaction, safety,
iterative process. First a business case for each
and the environment. This opportunity
is built which defines the impact of the
assessment can then be combined with an
application. The business cases can then be
analysis of the technical and change-management
used to gain the support of relevant stake-
measures that each opportunity will require to be
holders, including company leadership,
realized. The result of this multi-step analysis is
regulators, and ratepayer advocates. The goal
the smart grid road map, which specifically
is an optimal balance between benefits, costs,
connects the goals in the smart grid vision with
f lexibility, and risks management.
the investments needed to get there. The road

map should enable management to communicate
Each business case is unique. The business case
clearly its smart grid vision to employees,
for each utility will vary according to the
customers, regulators, shareholders, and vendors.
regulatory regime, company goals, and design of

the existing grid. One utility, for example, found
Develop a capability to assess new technologies
as a key input into the vision. Smart grid
that demand-side management benefits

generated 40 percent of the value in the business
technologies evolve far more rapidly than
case through rates and behavior change, while
traditional utility assets, so a best practice for
for other utilities it was under 20 percent. The
smart grid deployment is a regular assessment of
business case must demonstrate how financial
the enabling technology. The increased bandwidth
and non-financial benefits will be realized across
now standard for AMI deployments, for example,
the value chain through grid efficiency,
has created an opportunity for grid-focused
operational efficiency, customer satisfaction,
applications to run on the same AMI network,
environmental impact, and the ability to support
offering the potential for broad coverage at
future technologies and applications. These
incremental cost. Companies must track
determinations will have substantial impact,
technological and economic developments and
most notably on the regulatory strategy and
continually re-evaluate their technology strategy.
benefit-realization approach.
Best practices in the deployment of smart grid technologies
The business case should materially shape the
27
well understood by the time the filing
smart grid program. The benefits defined in the
is submitted.
business case should guide subsequent decisions

about technology vendors, functionality, and
D efine capabilities, not technologies, by
changes to utility operations (i.e., business
collaborating with the regulator. For example,
process redesign). Investments can be prioritized
the regulator and the company might agree
according to the relative size of the benefits, the
that the filing will require that customers have
investment required, risks, and technical
access to timely usage and pricing information,
dependencies involved.
but leave the choice of the specific technology

to the utility.
1 The most commonly used
technique of probabilistic
modeling, the Monte Carlo
simulation was named for
the casino at Monte Carlo to
indicate the random
sampling element of the
method. The approach
involves taking an
underlying deterministic
model and running it several
thousand times, with
different values for the input
assumptions fed into the
model for each iteration.
The software for the Monte
Carlo simulation is easy to
use, and with proper upfront
structuring, even a complex
business model requires
only a few minutes of
computation time.
3. Develop a clear, capability-driven

regulatory case
Communicate the uncertainties by identifying
Regulators view smart meter and smart grid
for regulators their potential size and the steps
initiatives as tools to drive efficiency and
being taken to reduce the associated risk. In
environmental and customer benefits, while
demand-side management (DSM), for instance,
minimizing rate impact. We have seen regulators
the size of the benefit is difficult to predict
respond positively to filings that:
precisely, but utilities can cite results from

similar deployments. Regulator concerns can be
Explain the benefits and timeline by
assuaged by conducting a Monte Carlo
organizing them into categories which
simulation1 to show that the business case is
allow commissioners and advocates to
positive even under conservative assumptions
understand the value created and how benefits
for DSM benefits.
will accrue over time. Engaging stakeholders

early ensures that the final scope, selected
technologies and plan for realizing benefits are
Actively address risks like security and
technology obsolescence that regulators might
28
Finally, utilities should communicate the results of the pilot to

regulators to set expectations around actual value to be captured
through full deployment
target by addressing them and describing
Clear roles and responsibilities of the parties
mitigation tactics.
involved. Although simple in concept, many

programs kick off without clear roles as a result
Implementation
of the inherent complexities and unknowns.
4. Set up a program architecture that considers

risk and industry maturity
A smooth transfer from project deployment to
Will the utility act as the prime contractor and
business operations. Many smart grid projects
assume all the implementation risk? Is a build-
last more than 4 years. As a result, the project
operate-transfer process an option? How many
itself takes on many business operations
vendor contracts will a project require? And how
without a clear cut-over to a business-as-
much risk will remain for the utility to manage?
usual, so the project approach to business
The right program structure and operating model
operations is inefficient.
can dramatically reduce the risk of the overall

project, as long as key considerations are
5. Select technologies for the long term and use
addressed, including the maturity of business
pilots strategically
processes, the number of reference examples of
Given the rapid evolution in smart grid
similar projects, and the maturity of the
technology, utilities should consider the
technology itself. Key components of the program
following questions when choosing their
architecture include:
technology partners:
A clear and simple description of who is taking
Is the technology proven? Distinguishing
what risk. Given a relative lack of experience
between vaporware and tested functionality
with smart grid technologies and projects,
is difficult when few reference cases exist.
utilities may find it tempting to transfer project
Utilities should canvas early adopters on the true
risk to a third party, such as a technology vendor
capabilities of specific products, the time
or a systems integrator. Smart grid projects will
required for system readiness and longer-term
ultimately affect many of the core business
reliability. Along with successful integration
processes within the utility, however, and
into their core systems, utilities should evaluate
third-party re-designs can be difficult. In
how technologies comply with existing and
addition, few reference cases and few industry
emerging standards.
standards are available to define an appropriate

agreement with a third party. The result is that
What is the risk of technical obsolescence? How
the price of shifting risk from utilities to a third
well does the vendor conform to industry
party is steep and therefore utilities end up
standards? Does the vendor employ open access
bearing more risk than initially desired.
as opposed to proprietary access? The NIST
smart grid working group has not yet established
29
should their AMI network support their grid
all the needed standards for smart meters and
applications as well? Utilities must consider the
other smart grid programs. Utilities can directly
incremental cost to deploy and maintain a
affect the standard-setting process by forming
separate network for grid applications against
alliances with vendors or standards groups,
the potential for increased latency, lower
many of which already exist.
bandwidth, and security issues raised by

operating a single network.
Do technology choices take into account the
long-term priorities set out in the road map?
Pilots can be used both to demonstrate the
Just as streaming video necessitated significant
technical feasibility of vendor systems and to
upgrades to communication networks, future
validate assumptions about costs and benefits in
smart grid applications will require greater
the business case. Demonstrations of technical
capabilities, such as low latency for critical grid
feasibility best begin with a process of identifying
applications or high bandwidth for interactive
the questions the pilot will address and defining
customer applications. Utilities must build the
the metrics and evaluation criteria for the
capacity for such applications into their systems.
technology. Estimated costs in a pilot, such as

installation per device, immediate failure rates,
Can the new technology be integrated with
systems integration, and O&M, can be checked
other utility systems? Smart grid applications
against real-world experience. Perhaps more
must mesh with utilities critical legacy
importantly, the pilot should test the most
systems, such as customer information and
significant and uncertain components of the
outage management, as well as with new
business case. Finally, utilities should
grid and customer applications. If a vendor has
communicate the results of the pilot to regulators
had difficulty integrating with back-office
to set expectations around actual value to be
systems, it could signal a risk of IT cost overruns
captured through full deployment.
in the future.
6. Pursue true strategic sourcing to optimize
What is the ecosystem of providers? Smart
grid deployments require a variety of partners
providers capabilities while minimizing risk

How smart grid technology is purchased is nearly
like systems integrators, hardware providers,
as important as what is purchased. General
and hosting companies. To avoid being locked
procurement best practices can ensure that
into vendor-supplied support or paying for a
vendors deliver the expected functionality, meet
system integrators on-the-job training, it is
utility timelines, and understand the price-
important to verify the existence of a broad
performance trade-offs the utility will accept.
ecosystem of companies behind the vendor and
Utilities can also work with suppliers on pricing,
the proposed technology.
which may be more fluid in a rapidly evolving area

like smart grid technology than in a mature
What is the total cost of ownership? Ongoing
costs can dwarf upfront investments. As utilities
market. Because many applications are unproven,

best practice must include supplier capability
consider expanding beyond advanced meters
assessments to determine whether selected
into grid applications, a fundamental
vendors can deliver what they contract in the
architectural question will have to be decided:
volumes and timelines required.
30
Utilities have adopted a number of best practices
Set up regular workshops with other utilities
to build true partnerships with their vendors
deploying similar technology to share best
while ensuring high levels of performance.
practices, discuss potential pitfalls, and jointly

develop solutions.
Optimize the contract structure by building
off-ramps with AMI vendors, allowing for the
7. Maintain significant business focus on IT
re-evaluation of technology providers at defined
integration activities
milestones (for example, 100,000 meters
Three critical factors must be weighed as part of
installed or a certain geography covered). In
IT systems integration:
systems integration contracts, many utilities

have found that fixed-price contracts with
P roject management focus on critical-path
well-defined metrics for quality and schedule
activities. A smart grid program schedule
compliance control costs better than time-
typically contains thousands of activities, but
and-materials contracts.
only a subset of them define the critical path.

Once a technology has been selected, the
Consider managed services as a way of
program team needs to manage the elements
outsourcing functions that had been regarded as
that could have the largest negative impact on
core, such as managing network operations. At a
cost and schedule time. Focusing the attention
minimum, allowing the vendor to stabilize the
of the program team and management on
systems at the start of a deployment minimizes
the most crucial tasks can assure that budgets
risk and creates a bridge for the utility to build
and dates are met.
its internal capabilities. Budgeting annual cost

reductions in contracts ensures that utilities and
Iterative deployment versus a big-bang
their vendors benefit from the service providers
approach. Unlike a traditional waterfall release
operational improvements.
strategy, this test-and-learn mindset shortens

the time to launch and creates greater alignment
Set performance expectations through service-
with the business by allowing more chances for
level agreements (SLAs), with metrics such as
course corrections as functionality is released
up-time, valid meter reads and valid bills.
and adopted by the frontline. To prevent the

fire-fighting mentality that many utility IT
Develop a performance dialog with vendors
organizations have developed during AMI or
by evaluating performance on a quarterly
smart grid deploymentsand the inevitable cost
basismore often during the initial stages of
overruns that are its by-productutilities should
a deployment.
target a greater number of simpler releases that
can be transitioned easily to lower the cost of
31
Lean operations help reduce the cost and risk
O&M support. Additional features can be
associated with a broad deployment of smart
layered on top of a functioning base, minimizing
grid technology. For example, lean inventory
ongoing front-line change and accelerating the
management reduces holding costs while
realization of benefits.
ensuring sufficient safety stock. To improve

productivity in the field, companies have
Business requirements designed to support new
separated complex work reserved for specialists
processes. The designs must be detailed enough
from more routine installations. These utilities
for the technology providersoftware vendor,
also follow best practices of front-line
systems integrator, or in-house IT staffto use as
managementrigorously measuring and
a foundation for detailed technical design. As part
communicating performance through
of this process, the business and IT groups must
scorecards and metrics.
map functionality for each step of the process flow

and identify the degree of automation appropriate
Root-cause analysis can reduce failed
for each step. Following an agile software
installations by as much as 20 percent. In a
development approach might, for example, lead to
smart meter project a typical cost driver, for
a select few of the process steps being manual at
example, is meter not installed: situations
the onset to minimize the risk, complexity and cost
where a meter was not installed as expected,
of the initial deployment.
typically as a result of an inaccessible location.

Really digging into the root cause oftentimes
Business operations and change
reveals problems that can be easily remedied.
management
These easy wins can be encouraged with
8. Employ lean operations techniques to
measures such as the linking of a bonus or
accelerate cost-effective deployment
compensation of a meter installer to an expected
Deploying smart grid technology will affect nearly
success rate.
all customer premises and much of the grid over a

short period. Some utilities have deployed more
9. Actively define end-state business processes
than 15,000 smart meters a day across their
and change required to deliver
service territories. To achieve that scale, utilities
Many utilities embark on smart grid programs
have looked at three factors.
without enough preparation, assuming that they

will figure things out as they go along. This
Geographic sequencing involves balancing
approach will often result in an inordinate
initial benefit capture with operational
expenditure of time and resources on problem
efficiency and risk mitigation. For example,
and issue resolution.
PG&E chose the warm Central Valley in

California to capture near-term demand-
S et up change management as a core
response benefits from a region with high peak
capability. Progressive utilities recognize that
demand, while reducing risk by avoiding the
the smart grid will bring the biggest change in
more challenging topography and aging
concentrated time to customer care and
infrastructure in coastal areas.
distribution operations in 30 years. This
32
requires concerted change management to
C ross-functional steering committee. It is of
ensure success. Once the benefits have been
critical importance to include all key
identified, utilities should communicate to
stakeholders across lines of business and
everyone involved which of them they are
functions. Of particular importance to smart
committed to capturing, while defining the
meter projects is having the heads of
changes needed to achieve those benefits. (For
customer care, distribution, and IT on the
more on change management during smart
steering committee.
grid deployment, please see the accompanying

article, Maximizing Value from Smart Grids
pp. 3337).
Good project governance. Smart grid programs
often involve a wide array of capabilities and

functions. And many resources will be involved
Define target state business processes early. The
part-time. All too often, the project can drift or
best way to gain early buy-in and momentum is
fail to utilize its resources fully as a result of
to initiate a cross-functional business process
inadequate project governance.
redesign effort early in the process. Including a

broad representation of stakeholders and
starting the process early allows the organization
time to build awareness and prepare for the
The electric utility industry is on the verge of
resulting change.
revolutionary change. Fully realizing the smart

grid visionsmart meters, enhanced consumer
10. Set up cross-functional governance across
energy management systems, automation in the
all key business units
T&D system, and integration of renewable energy
One of the unique aspects of smart grid projects
will require years of work and billions of dollars of
is the cross-functional nature of the work
investment. Utilities can leverage their
required to be successful. The typical smart
considerable experience managing capital-
grid project cuts across customer care,
intensive projects to ensure that these efforts
distribution operations, engineering, IT, supply
deliver the benefits regulators, customers, and
chain, and other organizations. In one situation,
investors expect. Following the best practices
a cross-functional project team was set up but
identified here will improve their odds of
with unclear decision rights. The result was a
achieving project goals, vaulting the industry into
project that drifted for several years as the
a new era in a timely and cost-effective way.
project could not incorporate competing

demands successfully. Key elements of good
cross-functional governance include:
Anjan Asthana is a director in McKinseys Chicago office, Adrian Booth is an associate principal in the San
Francisco office and Jason Green an associate principal in the Calgary office. Copyright 2010 McKinsey & Company.
33
Maximizing value
from smart grids
Utilities must actively reshape processes, systems and organizational models to

capture the most benefits from smart grid deployment.
Andre Christensen
Jason Green, and
Roger Roberts
Smart grid deployments worldwide are expected
deployment. A utilitys approach to capturing the
to produce significant economic benefits through
benefit from smart grid technologies will need to
improved grid efficiency, operational cost
be grounded in a thorough understanding of how
savings, demand-side management, and the
these technologies will change the way it operates.
integration of distributed generation sources.

Utilities able to adapt their processes, systems,
Three steps to success
and organizations will be better positioned to
For utilities to capture the business benefits
realize the full value of smart grid technologies;
inherent in a deployed smart grid, they will have
those that do not change their operating models
to master three critical steps: 1) identify the
will run the risk of hundreds of millions of
business process changes needed to maximize the
dollars in cost overruns and failure of their
value potential of smart grid deployment; 2)
smart grid projects.
ensure that new systems are in place to support

those processes; and 3) manage the impact on
Smart grid applications will be deployed in waves
people while building new skills in the
over the next 10 to 15 years, typically starting
organization. By demonstrating mastery through
with an advanced metering infrastructure (AMI)
those three steps, utilities will also increase the
34
likelihood of securing regulatory approval for
This evaluation process helped the utility focus
subsequent waves of technology deployment.
its organizational planning on defining how

core processes would evolve to deliver the
1. Identify the business process changes needed
remote connection capabilities, including
to maximize smart grid value
changes to the processes for customer moves,
What new business processes will be required?
customer-generated or utility-generated
What changes are required to existing
disconnections, restorations of service, and
business processes?
new connections. Each of these processes was
Utility leaders driving a smart grid program will
redesigned in light of the additional
need to be business process architects as well as
information and functionality available
technical engineers. Each benefit identified in the
through smart meter technology.
smart grid business case will demand business

process changes. The utility will have to define
The planning revealed that the utility had
specifically how existing processes will be altered
overestimated the net benefits from the smart
or replaced to capture the opportunities to which
meter implementation because it had not
it aspires. We have seen a number of utilities
anticipated how automated disconnection would
insufficiently define how their future operations
affect customer experience. Like many utilities,
will work with smart grid technology, leading
the company had previously used a threshold
them to underestimate the investment,
measured in months for maintaining service
overestimate the benefit, or leave themselves
after a move request to avoid the cost of a service
unprepared to capture the full value.
truck deployment. With remote disconnection,
To avoid these pitfalls, utilities should adopt the
analysis revealed that customers reacted
service could be shut off immediately, but

best practice of systematically definining the
negatively, and so the utility decided to
future-state processes that will deliver the
reinstitute a threshold of several weeks to allow
expected impact. One utility for example
for new occupants to move in.
identified three major benefits during its

evaluation of an AMI system that would enable
2. Ensure that new systems support future-
remote connection and disconnection of service.
state processes
What new business requirements must systems
Reduced unbilled energy, by narrowing
now fulfill? How will the company manage the
the gap between a move-out request and
transition to new systems?
actual disconnection
Business requirements must be designed to

support new processes. Those designs in turn
Fewer costly service truck deployments
must be detailed enough for the technology

providersoftware vendor, systems integrator,
L ower costs in the call center, through
or in-house IT staffto use as a foundation for
provision of more self-service options and fewer
detailed technical design. As part of this process,
billing errors.
the business and IT groups must map
Maximizing value from smart grids
35
The optimal software development approach might leave a few

process steps without automation at the outset to minimize the
risk, complexity, and cost of the initial deployment
functionality for each step of the process flow
3. Manage the impact on people and build new
and identify the degree of automation
skills in the organization
appropriate for each step. The optimal software
What will be the impact on employees? What
development approach might leave a few process
additional skills will be required? How should the
steps without automation at the outset to
change be communicated and prepared for?
minimize the risk, complexity, and cost of the
Smart grid technology will have a dramatic
initial deployment.
impact on how employees perform their jobs and

how customers interact with the utility. To
In general, utilities should define transition
capture maximum benefit, utilities will need to
states that allow for increasing automation
change the mindsets and behaviors as well as the
over time. An ideal future state might, for
skill mix of their workforce.
example, include a remote disconnection

system, whereby customer service
To address this step utilities must first identify
representatives could disconnect service from
every group affected by smart grid technologies
their terminals. As a low-risk interim step
and the magnitude and pace of the change.
toward this ideal state, however, the utility
Then it should charter a group of change
might enable disconnections from a smart
leaderswell-respected individuals from
meter operations center. Such a step would
across the organization, who will support the
capture the majority of the benefit (by
adoption of the new technology and processes.
eliminating a truck roll), while giving the utility
These leaders should be responsible for
a chance to test the technology without
explaining how the deployment of smart grid
incurring the cost of integrating the
technologies will change different roles as well
functionality into call center software.
as for the training and mentoring needed to

help employees adapt.
Discipline will be needed to assure that a utility

does not become stuck in a transitional stage,
One utility, for example, concluded that its
but overall the need for risk mitigation in such a
future-state process would require fewer field
large and inherently complex combination of
employees because smart metering would
technology and process changes demands a
automate meter reading, prevent common billing
staged approach.
errors, enable remote service connection, and
36
The smart grid

call center
A number of utilities have tested the impact of smart meter and
required more highly skilled call center representatives. Taking
other smart grid technologies on call center operations. One utility
into account the new call mix and call volumes, an increase of 12
piloted time-of-use rates coupled with an energy conservation
to 15 percent in call minutes over the baseline was estimated for
program and in-home displays with residential customers. The
at least the first 3 to 5 years of the program.
pilot yielded significant energy savings and capacity reductions,

but it also caused a reappraisal of the expected call center
Some utilities will also have to change the cost center mindset
benefits of an AMI program, as well as the skills required from
towards managing call centers. The telecom industry offers a
their staff.
useful analogy. High-performing telecom call centers segment

calls by potential value and often set up dedicated move queues
Deployment of smart meters should reduce bill-inquiry calls, as
and save desks staffed by specialists to address high-value
well as customer-initiated outage notifications and connection
calls such as moves to a new residence and requests to terminate
and disconnection calls. At the same time, new rate structures,
contracts. These specialists are highly trained in the techniques of
energy conservation programs and support of in-home
product up-selling and cross-selling, and are given greater latitude
technologies will result in new call types, such as rate enrollment,
to provide discounts to retain customers who are considering
in-home display support, and conservation coaching, all of which
service cancellation. With the rollout of AMI and time-of-use
are typically more complex than bill-inquiry calls and have higher
pricing programs and the increasing importance of energy
per-call handle times. In the pilot described in the previous
efficiency and energy conservation programs, utilities will need to
paragraph, conservation-coaching calls on how to reduce energy
evolve their call center operations in a similar fashion to ensure
consumption had average handle times of 8 to 15 minutes and
capture of all the benefits that will be out there.
more precisely detect the location of outages. The
Finally, the utility launched a broad-based
same company, however, saw that it would have to
communications and training program
increase the number of call center employees and
to inform employees and customers about how
invest in upgrading their skills and training (see
smart metering would affect them. For
the box above, The Smart Grid Call Center).
employees, this program involved a mix of

town-hall style meetings, quarterly newsletters,
As a result, the utility planned for the transition of
and targeted training to ease the transition
field staff into other roles within the company.
to the new operating model. For customers, the
This required close collaboration with the union
utility launched a broad education campaign
and clear communication with front-line
to inform them about the installation process
employees about how their jobs would be affected,
and how it will affect them, and also to
what alternative roles would be available, and
give detailed information about the benefits of
when the shift would occur.
smart meters.
Maximizing value from smart grids
37
Deploying smart grid technologies requires a major
Utilities that orchestrate this well will truly
investment of resources, but one that should yield
transform their operating models and prepare
significant returns. Those returns, however, will
their organization and customers for an informed
not meet expectations without careful planning
and interactive future.
and complete understanding of how the utility will

redesign its business processes building on the
capabilities of the new technology. The realization
of the benefits and the changes for field and
back-office personnel must be phased in to ensure
a smooth transition to the future state.
Andre Christensen and Roger Roberts are partners with McKinseys Business Technology Offices in Toronto and
Silicon Valley; Jason Green is an associate principal in McKinseys Calgary office. Copyright 2010 McKinsey &
Company. All rights reserved.
38
The smart grid and the promise of

demand-side management
The next generation of DSM technologies will enable customers to make more
informed decisions about their energy consumption, adjusting both when they use
electricity and how much they use.
Brandon Davito,
Humayun Tai, and
Robert Uhlaner
The next evolution of smart grid technology will
demand for electricity during peak periods, and
allow customers to make more informed decisions
reducing their energy consumption overall. DSM
about their energy consumption, adjusting both
programs comprise two principal activities,
the timing and quantity of their electricity use.
demand response programs or load shifting, on
This ability to control usage is called demand-side
the one hand, and energy efficiency and
management (DSM), and it could translate into as
conservation programs on the other (see Exhibit 1
much as $59 billion in societal benefit by 2019. It
on the following page).
offers the promise of cutting costs for commercial

customers, saving money for households, and
Load shifting. Demand response (DR) programs
helping utilities operate more efficiently, in turn
transfer customer load during periods of high
reducing emissions of greenhouse gases.
demand to off-peak periods and can reduce

critical peak demand (the 20-50 hours of
Demand-side management: What is it?
greatest demand throughout the year) or daily
Demand-side management is a set of
peak demand (the maximum demand during a
interconnected and flexible programs which allow
24-hour period). Shifting daily peak demand
customers a greater role in shifting their own
flattens the load curve, allowing more electricity
39
to be provided by less expensive base load
provide targeted education or real-time
generation. DR programs can also save the cost
verification of customer demand reduction.
of building additional generation capacity to

meet future critical peak demand.
Demand-side management programs have existed

across the globe since the 1970s. California
Energy efficiency and conservation. Energy
utilities have used such programs (in tandem with
conservation programs encourage customers to
a changing customer mix) to hold per-capita
give up some energy use in return for saving
energy consumption nearly constant over the past
money, such as turning up the thermostat a few
30 years. McKinsey research has found that
degrees in summer to reduce air conditioning.
successful DSM programs incorporate some or all
Energy efficiency programs allow customers to
of the following six levers: rates, incentives, access
use less energy while receiving the same level of
to information, utility controls, education and
end service, such as when they replace an old
marketing, and customer insight and verification
refrigerator with a more energy efficient model.
(see the box on the following pages, The Six
Pilots have shown that real-time access to
Levers of Effective Demand-Side Management).
information
McKinsey
on provided
Smart Gridthrough smart grid
networks
can
cut energy consumption by up to
The first wave of DSM programs were limited by
DSM
18 percent.
the technology available measurement and
Exhibit
1 of 3Additional gains in energy efficiency
are
possible
through
technologies
that
can
verification
efforts were time-consuming and
Glance: DSM means load shifting, energy efficiency, and energy conservation.
Exhibit title: How it works
Exhibit 1
How it works
DSM means load shifting,
energy efficiency, and energy
conservation
The major impact areas of demand-side management

Impact area
Description
Shifting customer demand during the ~20 hours per year
with the highest demand for electricity
Critical peak shift
Daily peak shift
Shifting customer demand during the ~1 hour per day

with the highest demand for electricity
Energy conservation
Reducing overall demand for electricity by reducing the

amount of utility the customer receives
Energy efficiency
Reducing overall demand for electricity while maintaining

the amount of utility the customer receives
Load shifting
Energy efficiency
and conservation
(load reduction)
Increased customer satisfaction through an

easy-to-use, more controllable energy offering
40
The six levers

of effective
demand-side
management
Based on our work with major utilities, we have identified six key
then provide recommendations on how to reduce energy use.
levers of successful DSM initiatives: rates, incentives, access to
This software has been piloted by the Sacramento
information, technology and controls, education and marketing,
Municipal Utility District (SMUD) and has produced energy
and customer insight and verification. Each lever has a distinct
savings of 3 percent.
impact on customer behavior, and, depending on the circumstance

of the particular utility, such as its customer base and geography,
U
tility controls. Direct load control programs are used to curb
certain combinations of actions within and across levers will
demand, such as air conditioning, during critical peak periods.
produce greater results.
The smart grid will enable customers to manage their own

demand (and distributed generation resources) based on price or
Rates. Utility tariffs are already designed to achieve a range of
other signals from the utility. These controls could be integrated
objectives, from making electricity more affordable for lower-
with programmable communicating thermostats, home energy
income customers to making electricity prices better reflect the
controllers, or other automation tools to match customer
cost of generation. Fully 60 percent of the benefit from demand
preferences. Increasing levels of control by utilities will enable
response predicted by FERC for 2019 will come from altered
automated demand response programs, ensuring load shed and
pricing programs. Utilities will need carefully to tailor their tariff
enabling utilities to bid this capacity into markets as a resource.
designs, including opt-in or opt-out participation, to yield the

desired behavior. Utilities (and their regulatory partners) must
E ducation and marketing. Customer education on the
also account for the winners and losers in any rate design and
benefits and the technology of DSM programs can be targeted
ensure that particular segments, such as socio-economic
to different market segments, different education goals, or
classes, do not bear unnecessary costs.
different channels.
Incentives. To encourage participation in demand-side
C
ustomer insight and verification. To drive improvements, it is
management programs, utilities have found that rebate checks,
essential to verify DSM program results and collect feedback,
compensation for participating in a pilot, or free technology such
regardless of whether the targets are broad or narrow. A
as an in-home display can increase customer adoption.
powerful benefit of the smart grid is that it enables verification of

the impact of DSM programs over different time horizons.
A
ccess to information. When consumers have access to
real-time information they become much more aggressive
A sample of design options for each of the levers is summarized in
about managing their usage. In a series of pilots conducted by
Exhibit 2.
Hydro One in Canada, customers reduced their electricity

consumption by 6.5 percent based on information provided
Successful pilots indicate complementary effects interact across
through an in-home display. OPower, a smart grid information
the levers and design options. Providing both in-home displays
services company, has developed software that analyzes a
(IHDs) and pre-pay options, for example, resulted in energy
customers bill and compares usage to other customers in the
conservation benefits of 13 to 15 percent, while IHDs alone yielded
area with similar attributes such as house size. The utility can
a median impact of 7 percent.
The smart grid and the promise of demand-side management
41

DSM
Exhibit 3 of 3
Glance: DSM applies pertinent design options in every realm.
Exhibit title: Putting it all together
Successful DSM optimizes multiple design options across 6 levers.

Exhibit 2
Successful
demand-side
management
Successful DSM optimizes
multiple design options
across 6 levers
DSM lever
Rates
Incentives
Information
Controls
Education
Customer Insight
and verification
Description
Design options
Flat rate
Critical peak pricing (CPP)
Time of use (TOU)
Real-time pricing (RTP)
Interverted block pricing
No incentives
Provide rebates on bill
Provide cash compensation
None
Event notification
Real time usage
Historical usage
Comparative usage
Device-specific usage
Billing usage
None
Programmable communicating
thermostats (PCTs)
Smart appliances/plugs
Home energy controller
PHEV smart chargers
DG/S control devices
No education
Educate by segment
Educate by channel
Educate by positioning
None
Verification of benefits capture
Same rate at all times

Extremely high rates during critical peaks
Variable pricing for prescheduled blocks of time
Variable pricing at all times, informed close to instantaneously
Increase rate for higher use customers
Base case
Debit bill based on degree of behavior change
Provide separate check to encourage behavior change
Monthly paper bills and consumption information
Notification of DR events under way
Consumption at a given moment (e.g., kW, light bulb equivalents)
Consumption compared to previous period of time
Consumption compared against last months or peers
Individual device usage in real time; can be paired with above
Real-time billing information
No automation of devices to reduce energy consumption
Automated AC control
Automated appliance on/off

Centralized control & automation of major home appliances
Optimized charging of PHEVs
Optimized usage, storage, and later discharging of energy
Base case
Vary by income, consumption behavior, attitudes
Use various means: e-mail, bill inserts, newspaper, etc.
Emphasize different HAN benefits (reduced energy costs
and carbon emissions, increased competition with neighbors, etc.)
Base case
Verify DSM (EE, EC, and DR) and economic utility captured
by customers
42
McKinsey on
DSM
Exhibit 2 of 3
Glance: Customer demand response can reduce US peak demand by 20 percent.
Exhibit title: Reducing demand
Exhibit 3
Reducing demand
Customer demand response
can reduce U.S. peak demand
by 20 percent
Impact of demand response (DR) on U.S. peak load

Gigawatts of peak load
Description
Peak load 2009 (w/o DR)
810
Expected growth to 2019
140
Peak load 2019 (w/o DR)
950
Business as usual (BAU)

DR (baseline)
38
Existing programs
4%
Expanded BAU DR
92
10%
Achievable penetration DR
138
Existing programs expanded to all states

Opt-in dynamic pricing;
full advanced metering infrastructure (AMI)
15%
Full participation DR
Peak load with full
participation DR
188
Opt-out dynamic pricing; full AMI
20%
762
Source: Federal Energy Regulatory Commission (FERC), A National Assessment of Demand Response Potential
expensive, causing programs often to be focused
ubiquitous data networks; and an intelligent
on only the largest customers. The next wave of
grid that gives utilities visibility into real-time
DSM programs promise to change the face of
supply and demand balancing. These
energy savings throughout the global economy.
technologies give the DSM programs now being
McKinsey estimates that by 2020 the United
designed by utilities a number of crucial
States could cut end-use energy consumption by
advantages over those of the past.
9.1 quadrillion BTUs, over one-fifth of its total

projected demand.1 FERC estimates that demand
Real time information. U.S. utilities alone have
response programs could cut peak demand by up
committed to the purchase of over 40 million
to 20 percent within 10 years (Exhibit 3).
smart meters over the next 5 years. The
The growing role for smart grid
utilities to collect and analyze usage
Smart grid provides the scale and scalability
information at intervals as narrow as 1 hour or
to make demand-side management cost-
even 15 minutes, rather than relying on a
inevitable prevalence of smart meters will allow
1 Unlocking Energy Efficiency
in the U.S. Economy,

McKinsey Global Energy and
Materials, July 2009.
effective and convenient. The pieces are falling
manual monthly reading. This data can be
into place: the increasing penetration of smart
transmitted to consumers in their homes via a
meters, which may allow homes to connect to
home-area network (HAN), allowing real-time
data on usage and price; the promise of
feedback on consumption.
The smart grid and the promise of demand-side management
Two-way networks. Smart grid networks allow
43
opportunities, and may improve the efficiency
utilities to collect usage data and verify reduced
of the market as a whole.
demand (load shed), as well as send time-of-use

rates and other information to the customer.
Capabilities required
Network costs are low enough to justify near-
While smart grid technologies will make these
ubiquitous deployment, allowing utilities to
savings possible, utilities will have to build new
communicate in near real time with their entire
capabilities to capture the potential benefits
customer base.
fully. A primary focus will be on augmenting

program design functions to enable the micro-
Integration of utility information systems.
targeting of customers.
The smart grid is driving utilities to stitch

together many disparate information
Increase the number of products and programs.
technology solutions into highly capable
Smart grid technology will slash the cost of
decision engines. By communicating the
developing, managing, and refining DSM
underlying cost of electricity, utilities can
programs. Smart meter networks provide
begin to develop a comprehensive view of
near-ubiquitous connectivity to electric meters,
their customer base, and build targeted
which increases the ability to verify impact, and
programs to appeal to specific segments
makes it easier to test and refine different design
of customers.
options. Lowering the cost of deploying DSM

programs not only will make it cost effective to
Shifts in customer behavior. The availability
provide offerings to the mass market, but it will
of real-time data on energy costs and
also enable utilities to use the demographic data
consumption comes at a time when customers
they gather to target micro-segments of their
are increasingly aware of the cost and
customer base with tailored programs.
environmental impact of their energy usage,

and have begun to expect price fluctuations
Manage a partner ecosystem. Many utilities and
and an ability to respond to price.
regulators predict smart grid networks will

become open platforms that allow third-party
Regulatory changes. Some states, including
development of energy management applications.
California, have enacted decoupling regulations
In this world view, utilities will need to develop
that allow utilities to recover revenues lost due
the capability to manage and coordinate a wide
to DSM programs. Utilities and regulators have
variety of complementary partners, and will
also explored opportunities to use demand
need to clearly define their role in the ecosystem.
response as another source of generation

through negawatts, or the ability to reduce
Accelerate the pace of testing. The two-way
load upon request. Some states and regional
reach of smart grids will allow utilities to speed
grid operators, such as the New England ISOs
and widen the testing cycle for new products.
Ancillary Services Market Project, allow
They will be able to test and learn to
utilities to bid demand response capacity into
understand which program features are most
the wholesale market as if it were generation.
effective for specific segments, thereby reducing
This encourages utilities to pursue DSM
the time to market for new ideas. Some day,
44
utilities may be more like Capital One Bank,
Even with these new capabilities being brought
whose rigorous analytics and iterative
to market as part of the smart grid, two hurdles
marketing strategy measure the relative impact
remain for DSM to become a reality: the right
of hundreds of thousands of different offers
blend of technology and program design must be
(rates, card designs, promotional materials), to
adopted to optimize results; and, importantly,
determine which ones have the greatest effect
regulatory reforms that will allow utilities to
on customer behavior.
capture value from demand-side management

need to be established.
Build account management capabilities. The
Federal Energy Regulatory Commission

estimates that two-fifths of the DSM opportunity
in the U.S. lies in about 262,000 large
Utilities have every reason to be skeptical about
commercial and industrial customers. While
projections of demand-side management
many of these customers participate in fledgling
results. Since the 1970s, they have tried to capture
DSM programs such as curtailment and direct
load shifting and load reduction benefits, with
load control, some have never been directly
mixed results. These efforts, however, were
affected by these programs. Utilities will need to
limited in scope and relied on costly, proprietary
develop full-service support for customers to
technology solutions.
navigate and manage what will likely be

increasingly complicated DSM programs.
The good news is that there has been significant

progress in areas vital to the success of DSM.
Educate residential customers. Almost half of
Utilities are using federal stimulus funding
the demand reduction potential for 2019 comes
opportunities to deploy statistically significant
from the highly fragmented residential market.
pilots to measure the impact of various DSM
To reach this market, utilities will have to
program designs. And regulators are considering
develop easy to understand programs that give
reforms that credit utilities for demand-side
customers the tools (and the incentives) to better
reductions. Still, much work at all levels remains
manage their energy use.
to be done if the economic and social promise of

DSM is to be fully realized in the next decade.
Robert Uhlaner is a director in McKinseys San Francisco office, Humayun Tai is a principal in Atlanta, and
Brandon Davito is an alumnus of McKinsey. Copyright 2010 McKinsey & Company. All rights reserved.
45
The smart grid opportunity

for solutions providers
By 2014, the global market for smart grid technology and services will run into
tens of billions of dollars annually.
Adrian Booth,
Nuri Demirdoven, and
Humayun Tai
Deployment of smart grid technologies is
various product and service segments, the
accelerating, particularly in the United States.
potential in geographic markets, and the drivers
Smart meters, often the first application
of growth and profitability. We estimate that the
deployed, should triple by 2014, reaching 50 mil-
global market potential for smart grid equipment
lion deployed meters. Despite such momen-
manufacturers and solutions providers will total
tum, the size of the smart grid opportunity for
anywhere between $15 billion and $31 billion
solutions providers is still unclear. Research
annually by 2014, with the value split among the
reports and forecasts abound. What is missing is
three main business segments: customer
a comprehensive overview of the developing
applications, advanced metering infrastructure/
applications and their interaction with the
smart meters, and grid applications. Just how big
evolving market. What are the critical smart grid
that market will be will depend on a wide range of
applications? How fast will the different
variables, all of which smart grid players in this
applications develop? How will the maturing
field will have to monitor carefully.
market alter that development?

Across business segments, growth and value will
To answer these questions, we analyzed the global
be determined by the technology, the level of
smart grid market, assessing the development of
competition, and emerging regulation and policy.
46
Growth will likely be slower where existing energy
and telecommunications companies,
infrastructure is highly developed, such as in
semiconductor manufacturers, and systems
Europe. Growth on a percentage basis in China
integratorswill benefit from major technology
and other areas where the transmission and
investments. Capturing these opportunities,
distribution (T&D) infrastructure is still
however, will not be easy. Competition will be
developing, will be faster as smart grid
stiff, and solutions providers will need to develop
technologies will be used to leapfrog traditional
a market-entry approach that reflects the long
infrastructure investments.
sales cycles, technology obsolescence concerns

and regulatory constraints that characterize
Development of the smart grid will create
utility procurement processes.
opportunities for traditional energy

infrastructure vendors while opening the market
Estimate of the smart grid market in 2014
to new players. Traditional vendors will benefit
We began by defining three main business
from large-scale renewal of utility assets as
segments for smart grid technologies: customer
customer and grid applications are deployed and
applications, AMI/smart meters, and grid
will be able to differentiate their product lines
applications (Exhibit 1). We did not include in this
McKinsey
on Smartfunctionality
Grid
through
increased
and integration
analysis a fourth and more distant opportunity
Assessing
SG opportunities
with
other smart
technologies. New playersIT
that includes enablement of renewable generation,
Exhibit 1 of
3
hardware
providers,
software firms, networking
plug-in electric vehicle (PHEV) integration, and
Glance: The smart grid can be broken into key segments that have different drivers and potential
profit pools.
Exhibit title: Smart Grid segments
Exhibit 1
Smart Grid
segments
Transmission and distribution environment

Key Smart Grid components
The smart grid can be broken

into key segments that have
different drivers and potential
profit pools
Customer applications
support:
In-home display with
real-time usage
and pricing statistics
Usage aware appliances
Home automation
AMI allows:
Report usage by
time and outages in
real time
Remote disconnect
Operational
improvements for
distribution/retail
companies
G rid applications
drive:
Automation of the grid
Reduction in losses
Remote monitoring
More accurate balancing
Integration of
renewables and
distributed energy
facilitate:
Integration of back-up
generators, storage,
distributed solar
Disconnection in case
of network overload
Data, IT systems
integration and back
office allow:
Integration of front-end
engineering, middleware
and back office systems
Data collection and
decision analytics
The smart grid opportunity for solutions providers
47
energy storage. This fourth category was excluded
The costs associated with updating these
due to the current absence of actual defined
components for a smart grid system are included
solutions combined with the likelihood that the
in our market-sizing analysis. Implementing
market for these solutions will hit an inflection
these components will also require utilities to
point after the assessed time period to 2014. A
change their business processes, as the added
fifth categorydata collection, processing and
level of technology will require new management
back-office integrationwas also excluded from
and oversight procedures.
this analysis due to the overlap with technologies

in other segments (e.g., AMI). Also many of the
Our estimates for the annual global revenue
new opportunities arising from data mining and
opportunity for 2014 in each of the three
more sophisticated applications are longer-term
applications areas are given and discussed below.
opportunities that will mature post 2014.

Customer applications: $3 billion to $10 billion
These applications require a range of com-
The level of functionality can vary from a simple
ponents across the value chaintransmission
in-home display (IHD) that shows energy
and distribution
a communiconsumption to a fully automated home with
McKinsey
on Smartinfrastructure,
Grid
cation
network,
and
a
computing
platform.
smart appliances and a centralized energyAsessing SG opportunity
These components
are the foundation that will
management system. Even the basic functionality
Exhibit
2 of 3
enable
smart
grid
applications
(Exhibit
2).
option across
would the
receive
usage and pricing
Glance: Smart grid business applications have common components
grid system.
Exhibit title: Common elements
Exhibit 2
Common elements
Business
applications
and projects
Computing
platform
Customer
applications
Demand-Side
Management (DR/EE/EC)
AMI head
end system
Outage
Information
System (OIS)
WAM
WiMax
Cellular
Communication
network
Energy T&D
infrastructure
Distribution
Mgmt System
(DMS)
Smart Meter
Advanced Meter
Infrastructure (AMI)
HAN infrastructure
for the meter
Remote disconnect
Cap banks
Reclosers
Substation
Grid apps
Integrated Volt/Var
M&D FDIR
Substation automation
Wide area measurement
Geographic
Information
System (GIS)
Meter Data
Mgmt System
(MDMS)
LAN
RF Mesh
PLC
Switches
Sensors
Wires
Integration
Solar monitoring and
dispatch
Storage/EV integration
Supply/demand
balancing and load
forecasting
Asset Mgmt
(AM)
Customer
Information
System (CIS)
Home-Area Network (HAN)

Zigbee, Home Plug
Transformers
Meters
Customers
Storage
Security
Smart grid business

applications have common
components across grid
systems
48
information and data readouts through a home-
to the magnitude and location of outages and can
area network (HAN), enabling customers to adjust
help detect theft.
energy consumption to fit their price sensitivity

and usage patterns.
The AMI market is the most developed segment

of the smart grid value chain, with an estimated
The wide range in the projected market size for
value in 2009 of $3 billion to $4 billion. Our
customer applications reflects the range in our
estimate for 2014 assumes strong growth in the
assumptions about adoption rates for home,
United States and China, which will provide
commercial, and industrial energy-management
sufficient scale to continue to drive down
tools and the types of devices used. Our analysis
production costs. AMI costs range from $200 to
assumes per-customer costs range from $120 to
$400 per endpoint in the United States. The
$340 for residential solutions, inclusive of
factors accounting for this wide cost range
hardware, communication network systems,
include the types of communications technology,
installation, and program costs, such as customer
the ratio between gas and electric meters, and
education. Some regions, such as Asia-Pacific, will
functionality such as whether it has remote
have lower prices and penetration rates.
disconnect/reconnect capability. Cost will also

vary across regions. Estimates suggest that
The speed of penetration will depend on the nature
systems deployed in China will cost on the order
of the customer application technology and whether
of 50 percent less than those deployed in the
the regulatory framework supports demand-side
United States.
management programs. Customer applications will

likely be adopted more rapidly in North America
Grid applications: $5 billion to $8 billion
and Europe, while in markets like China the focus
These are applications that automate the grid to
will be almost exclusively on meters and the grid.
make its infrastructure more efficient and flexible.
Some utilities in developed countries may be able to
They include the following elements.
recover the cost of basic IHDs or programmable

communicating thermostats (PCTs) through
Volt-VAR optimization (VVO) and conservation
rate-base mechanisms, driving up adoption and
voltage reduction (CVR), which use capacitor
reducing the per-unit price.
banks and sensors with communication
Smart meters and advanced metering
lines and reduce load by operating the
capabilities to reduce reactive losses on power

infrastructure (AMI): $7 billion to $13 billion
distribution network within a narrower and
These meters support two-way communication
lower voltage band.
between the meter on the customer premises and

the utility and between the meter and the HAN.
Monitoring and diagnostics (M&D), which use
AMI systems use a variety of communication
sensors with advanced communication
technologies to connect with the utility, including
capabilities to monitor grid performance and
radio frequency mesh, power-line carrier, and
enable condition-based maintenance, resulting
cellular. This technology usually allows utilities to
in reduced maintenance costs and improved
connect or disconnect service remotely, creating
decisions on capital investment.
operational benefits. They can also alert utilities
Fault detection, isolation, and restoration
49
meter deployment has lagged due to Europes
(FDIR), which automates switching and
deregulated market. Fragmentation across the
routing, allowing utilities to reduce the cost of
value chain has reduced the incentive for any
manual switching and improve response times.
single player to invest in smart meter or
The ability to isolate and locate faults more
customer applications. Regulators will have to
quickly improves reliability and outage
align incentives for society and industry, but a
response for customers.
lack of standards has delayed efforts. In the

Netherlands, for example, smart grid efforts
Wide area measurement (WAM), which works at
were suspended in 2008, pending adoption of
the transmission level by using synchrophasors
EU-wide standards, which will not likely come
that measure the electricitys phase to improve
until 2011 at the earliest.
grid reliability and prevent cascading outages.

China
Our projections suggest that the deployment of
State Grid, the larger of Chinas two state-owned
these grid applications will lag behind the
grid companies, has pledged to roll out a smart
installation of advanced metering infrastructure
grid system with AMI and improved grid
(AMI) by approximately 3 to 5 years, because the
applications by 2020. Transmission grid
benefits from AMI are relatively easier for the
applications are getting particular attention in the
utility to capture.1 In addition, many utilities plan
short term, as China seeks to develop an ultra-
to use the AMI network for grid applications as
high voltage transmission system to improve the
well. We estimate that utilities on average will
relay of electricity from energy-rich central and
invest $160 to $300 in incremental capital per
western regions to power-hungry coastal markets.
customer to enable grid-side applications,

depending on the level of functionality deployed.
Current meter models are of relatively

low functionality and quality, with an
Regional differences in market potential
expected lifetime of 7 to 10 years versus 10 to
The growth of the smart grid and the value it
25+ years in other regions. China may allow
creates will considerably vary across geographies,
margins of 10 to 15 percent for smart meters,
depending on a number of factors, including the
as opposed to 5 percent in the past, in
condition of the existing grid, the level of
recognition of the need for future generations
development and wealth of the economy, and the
of meters to have higher functionality and be
makeup of its regulatory regime. The impact of
of higher quality. Nonetheless, the price of
these factors is most visible when contrasting the
smart meters in China is expected to be
likely growth paths of Europe and China relative
about half of what it is in the United States or
to that of the United States (Exhibit 3). What
Europe, on a per-endpoint basis. The lower
follows is a brief overview of key regional
cost is attributable to cheaper labor and
market differences.
installation costs, shorter meter life span, no
1 See the accompanying article
U.S. Smart Grid Value

at Stake: The $130 Billion
Question, pp. 411, for
more details about smart
grid benefits.
import taxes and lower transportation costs,

Europe
and use of power line communications,
Europe has achieved a higher level of grid
which require few changes to existing
automation than the United States, but smart
transmission infrastructure.
50

Assessing SG Opportunity
Exhibit 3 of 3
Glance: The Smart Grid market is growing fast, especially in China.
Exhibit title: A fast-moving market
Exhibit 3
A fast-moving
market
The smart grid market is
growing fast, especially in
China
Annual smart grid market growth in 2007 and 2014

$ Billions
North America
China
3055% p.a.
1.2
United States will remain the

largest market
Europe will experience slower growth

rates as deregulated market
makes it harder for utilities to capture
Smart Grid benefits
China will be a smaller market overall,

but will experience significant growth
rates in next 5 years
616
2040% p.a.
1.5
Europe
2007
513
5070% p.a.
0.2
25
2014
Source: ABI; McKinsey analysis
Other regions
profitable. Solution providers should consider
Other regions are also developing different parts
managed services as an offering.
of the smart grid value chain. India, for example,

is focusing on grid and line loss applications and
Finding attractive opportunities
has a greater issue around electricity theft, which
Identifying the applications that will offer the
a smart grid could help address. Brazil is
greatest profit potential depends on a number
demonstrating increasing interest in grid
of variables.
applications, and Australia is at the forefront of

WiMax technology.2
Who plays? Many new companies have entered
the market. Low-cost suppliers, such as Asian

What it will take to win
OEMs, are beginning to offer low-cost, low-
The smart grid market is in a relatively early state
functionality products, so the ability of established
of development, though broad themes are
players to maintain margins will depend on how
emerging which may affect the growth of profit
well they can differentiate their products. They will
pools for different applications and regions.
need to build breadth by integrating into other

business applications outside of smart meter or
All playersutilities, equipment providers,
2 WiMax, which stands for
worldwide interoperability
for microwave access, is a
telecommunications
technology that provides
wireless transmission of data.
build depth by providing additional products and
service providers, and investorsmust consider
services. Utilities can also adopt more service-
how these trends will affect the market as a whole,
oriented business models, which would allow them
as well as their potential position in that space.
better to match customer needs with a set of
Utilities, for example, need to decide whether or
products and services.
not to expand the number of products and

services they offer customers. Retailers must
evaluate which customers are likely to be the most
Who pays? The main customer segments will be

utilities (and indirectly ratepayers) and
51
industrial and commercial consumers. The
Building the capabilities to win
utility segment is attractive because it can buy
In order to capture the smart grid business
at scale. However, if an end-user market
opportunity, smart grid players must build a
develops for home-area network products such
deep understanding of where the value is in the
as IHDs, smart plugs, and home energy
evolving smart grid, and they must also develop
monitors, market size and margins will likely be
a compelling business model to pursue this
higher than if these products are bought by
value. To win utilities as a customer segment, a
utilities, which will leverage their buying power
number of requirements will have to be met.
to drive down prices. Niche markets for specific

applications are emerging across regional
Deep understanding of full value at stake.
markets. Local customer preferences and
Utilities are demanding more clearly articulated
strategic priorities of regulators and utilities
value propositions, and their direct linking to
will play a critical role.
underlying value drivers (e.g., reduced operating

expenses, increased grid efficiency, improved
W hat will regulators and policy makers
capital productivity).
decide? As governments and regulators

drive adoption of smart grid technologies
C onsultative solutions-selling. Utilities now
through mandates or incentives, the pace and
face the prospect of dealing with dozens of
scale of deployment is increasing, accelerating
providers to implement a single smart grid
market development while driving margins
project. The winners will recognize the need to
lower through greater scale. The nature of
start packaging solutions, which will require a
policy instruments deployed and the timing
more consultative approach to sales and
of specific interventions will vary widely
marketing and coordination across
by region.
traditionally siloed business units within a

utility (e.g., distribution operations and IT).
Where are the margins? Margins have already
begun to shift from smart grid hardware to the
D eep understanding of government and
software and network layers. The value from
regulatory incentives, and impact of
software applications increases as the
legislation. As traditional equipment
information transmitted to the utility becomes
providers in the U.S. know well, the patchwork
more complex, allowing for more detailed
of state-based regulatory frameworks,
analyses and quicker responses to changes on
utility ownership structures, and existing
the grid. It is likely that this trend will continue,
and pending state and federal legislation,
as vendors provide additional functionality and
can create significant complexity in any
integrate multiple devices, reducing the lock-in
providers go-to-market strategy.
effect associated with physical devices. At
Understanding the nuances of government
the regional level, margins are being driven by
policies (stimulus efforts, national road maps
the intersection of global equipment and
and targets) is critical. Developing or
solutions market dynamics and local electric
maintaining a competency here will be a
power industries.
key differentiator.
52
Core architecture principles of standards,
The growth of the smart grid will create
interoperability, security, flexibility, and
opportunities up and down the industry value
scalability. Gone are the days of selling
chain, as well as in related industries. The
proprietary products with minimal security.
potential to help customers manage home energy
Vendors are quickly being categorized as those
use will create opportunities for white goods
that get it and those that are holding onto
manufacturers, consumer software providers, and
legacy products. From the utility perspective,
energy services companies. Companies are
getting secure, future-proofed products has
identifying the complexity of managing meter
become a top priority.
data as an opportunity, and looking at options to

use a software-as-a-service model to reduce the
Seamless capabilities across power engineering
cost and complexity of maintenance.
and information technology. The smart grid

embodies the intersection of power engineering
A compelling business model will be one that
and information technology. Building a culture
aligns with utility goals by creating rate-based
that encourages rich dialog and compelling
opportunities and reducing operating expenses,
solutions across these competencies is difficult,
while also reducing risk. Concerns about risk
but required in order to win. Few companies can
emanate from a number of areas, including
or should develop the full suite of capabilities
uncertainty around standards and interoperability
in-house. The ability to identify, convene and
as well as the capability of utilities to deploy the
manage partnerships, alliances and more
new technologies successfully.
informal consortia is growing in importance.

Willingness to take risk on a forward looking
market. The market is growing rapidly. In a
In the next 5 years, the smart grid market will
rapidly changing environment, utility customers
grow rapidly. This growth will occur across the
are attaching greater importance to flexibility
value chain, from customer-side applications to
offered to incorporate future smart grid
grid-wide automation upgrades and will vary
elements (e.g., distributed generation, electric
regionally around the world. The fundamental
vehicles, distributed storage). Adopting a wait
growth of this market, however, will depend on
and see attitude may be costly, as other players
the building of large, sustainable, and profitable
will begin to get traction.
smart grid business models.
Adrian Booth is an associate principal in the San Francisco office and Nuri Demirdoven is an associate principal in
the Houston office. Humayun Tai is a principal in McKinseys Atlanta office. Copyright 2010 McKinsey & Company.
53
Perspectives on
smart grid from leading
solutions providers
In the following article, top managers from leading equipment vendors and solutions
providers discuss the future of the smart grid industry. The article draws on
interviews with Bob Gilligan, Vice President of Transmission & Distribution for GE;
Laura Ipsen, General Manager and Senior Vice President of the Cisco smart grid
business unit; Cameron OReilly, CEO of Landis+Gyr; and Eric Dresselhuys, Executive
Vice President and Co-Founder of Silver Spring Networks.
How are utilities currently deploying
high concentration in Austin. Think about
smart grid technologies?
mobile users and how the utility will need to
Bob (GE)
interact with them.
One utility that has gotten a lot of press (and

deservedly so) is Austin Energy. They defined
Laura (Cisco)
future services together with customers and
Deployment is occurring today in pieces and in
re-mapped their systems. Doing this let them
pilots. The stimulus funding in the U.S. is creating
understand what will be needed to provide the
more appetite for scale across applications. Prior
services. Utilities have to shift their paradigm
to the stimulus package, there was traction but
theyre not just here to provide energy to
more in a siloed manner. Now the new focus is on
customers. They have to provide energy-related
testing integration across applications and scale,
services. As customers implement solar PV at
as some of these smart grid applications have yet
their homes, for example, how does that change
to attain significant size. The stimulus funding
the services they need from the utility, and how
will have a positive impact, helping to test possible
the grid needs to work and be managed? Think
technologies, current policies, and what works
about PHEVs and the fact that there will be a
and what doesnt.
54
The whole logic around dynamic pricing draws from

the efficiency of markets
Most technology today is deployed in forms
people want to run their air conditioning all day
adapted for specific uses. Cisco has seen this
cooling the cat when no ones at home, fine. If you
story play out before and sees real benefits in
dont have to buy wholesale power at peak times,
converging infrastructure across applications.
however, you can save money.
The good news is that we see utilities beginning

to think more strategically and recognizing the
Bob (GE)
need for convergence, but currently they still act
For grid applications, utilities need an economic
quite tactically.
model that makes sense. Utilities have gotten

comfortable with advanced metering
What will accelerate the adoption of
infrastructure as a solid economic investment.
smart grid technologies?
They want to be sure that additional
Cameron (Landis+Gyr)
infrastructure investments will be as solid, with
The question for me is why has adoption taken so
at least a 10-year horizon. Extending the
long? You could say that our progress has brought
communications network with AMI, enabling
the electricity industry into the 20th century, not
digitized substations and sensoring, so you can
the 21st. Most utilities only find out that their
see the status of the networkwe should start
customers are using their product when they dont
there. Our econometric models describing
call to complain that they have an outage. In most
returns for grid applications depend on defining
other industries, users get real-time feedback and
a price for carbon and a price or penalty for
pricing offers based on usage, which allow them to
reliability. And [they show] a need for time-of-
better manage their consumption and budgets.
use pricing for energy consumers. If we address
The industry is very much in the dark ages on this.
these three things, I think we have a business

case for making the grid smarter. The payback
Yes, we need standards; yes, we need the PUCs
was generally under 4 yearsin a utility
[public utility commissions] to push adoption.
environment, thats good for a return on capital
However, I think ultimately the killer application
deployed.
that will drive innovation is variable pricing. The

ability to save money will drive massive
Laura (Cisco)
innovation. You cant do dynamic pricing without
Regulated mandates help make this market move.
AMI [advanced metering infrastructure]; you
Just look at the European Union with its directive
cant do that without remote management for
related to smart metering deployments. There will
customers. The whole logic around dynamic
need to be new regulations that utilities respond
pricing draws from the efficiency of markets. If
to. Cap and trade is one example that might play
Perspectives on smart grid from leading solutions providers
out in the United States. This will create a
55
based on the standard approach for that task, you
substantial potential for investment. The
end up with a much better solution. In the past,
GreenTech manufacturing bill in California is
utilities went with a single vendor to minimize
another example. It can create a huge export
risk. Theyre finding that picking the best in breed
opportunity. President Obama has named
built on a standard platform is actually lower risk.
CleanTech as a driver of job creation. The
Weve found that accelerating adoption is not just
government investments that are flowing in are an
about selling gear or licensing software, but
accelerant for adoption, and contribute to
providing a solution where we de-risk by offering
establishing the smart grid reference architecture
managed service, a managed network operations
as a blueprint.
center, and the like.
One area that really needs clarification is what I
What do customers want?
call gridonomics, or the intersection of grid
policy, technology, and economics. On the policy
In most markets, more information leads to more
side, regulation, legislation, and standards play
efficiency. Many utilities today dont know who
large roles in influencing the industry and will
their profitable residential customers are. Its hard
have a significant impact on the smart grid. On
to say if demand is based on what we have today.
the technology side, there has been a great deal of
Did we all say we wanted a word processor or
innovation, but it is not yet clear which of these
spreadsheets? No. All we can do is look at
will emerge as winners. And from an economic
analogous situations and ask whether people
point of view, the incentives in the electric power
reacted to more information, such as price signals,
industry are distinct from those of other
and whether they benefitted from it.
industries and can change depending on

geography and ownership structure. The key here
I think there will be big innovation in home
is that utilities and other market players will need
automation, which will not demand much change
to make the smart grid case along all three
in consumer behavior, but will see technology
gridonomics pillars.
doing things seamlessly. A lot of people say that
Eric (Silver Spring Networks)
movement that people will respond to! Without
electricity is not price-elastic, but there is a price

The other factor is risk. In the AMI business, were
automated technology, however, the market for
seeing a massive ramp-up. The industry finally
price elasticity is too small. I dont see people
sees it has an open, two-way Internet protocol-
running around turning lights off or doing
based network that works. Were seeing utilities
laundry at three in the morning, for example.
decide that the risk profile is dropping. They
Within 5 years, I do see houses that have this
believe they have enough bandwidth and overhead
in-home technology. There are business models
that they can hang a thermostat or distribution
that might have a third party between the
automation device off the network and it will
customer and the utility. What were doing today,
work. Standards help to lower the risk. If you
however, is pretty basic stuffbasic switching
break apart the functionality and pick each item
and automation.
56
think there will be one approach that succeeds.
The home and customer-facing applications will
Thats why our strategy has been to be prepared
be the bigger driver for smart grid over time. In a
with either solution depending on how the
macro sense, we have to move customers from
market evolves. For example, we have taken very
being rate payers to being participants. My
different approaches in working with Oncor and
conclusion, from pilots that didnt work, is not
with PG&E.
that customers dont carebecause I think

utilities have been limited by technology that
couldnt provide what they needed. If retailers can
Id characterize the next step as being all about the
only differentiate on price, thats what youll get.
integration of distribution automation, AMI,
However, if you look at an example like Oklahoma
and distributed generation. How will these things
Gas and Electric, where customers have in-home
come together? They used to be separate initiatives,
displays [IHDs], 96 percent customer satisfaction
but now they need to be managed as one. Youll
rates, and 15 percent savings on their billthats
see the normal market evolutionsome big guys
where the market starts to take off. People didnt
will fade away, some newer companies will rise
know they wanted an iPhone, but when they saw
to market leadership. The taxonomy is already
it, they knew it was cool. Electricity probably has
starting to blurproduct definitions are getting
the highest penetration of any commodity or
fuzzy and customers look for something that is
service in the worldwhy do we expect everyone
broader. Well see broader solution sets, and each
to behave in the same way?
player will make up its own mind about the most

effective way to get that breadtheither through
What do you see as the next wave of
partnerships, acquisition, or building the
smart grid applications?
functionality themselves.
I think youll see more integration of AMI and DA
Laura (Cisco)
[distribution automation]. I dont think youll
Telco service providers went through a period in
have people building separate AMI, demand
which their networks started carrying things
response, and distribution automation networks.
that looked really different from what happened
You might have two networksone that is
in the pastvoice, video, rich applications.
general and one that is mission-critical. I think
The same thing could happen in the utility world.
youll see AMI players broadening into
VoIP has, for example, taken the cost of voice
distribution automation and smart grid, and
service down significantly. What will happen in
youll see us broadening into smart grid, with
the utility world when zero-net energy consumers
others coming into the market were playing in.
begin to appear? Will anyone be able to
Some utilities are going with a modular
monetize the new models? Certainly Google and
approach, where they buy a meter from one
Microsoft are making moves in this space. It is
vendor, a network from another and an MDM
still unclear what the revenue model is. We
from a third. In some circumstances, modular
believe that significant innovation will be seen at
may offer more functionality, but there are cost
the top in the application space.
advantages with integration. In general, I dont
Perspectives on smart grid from leading solutions providers
57
How do you see the market evolving
different technologies in the home. In Hawaii,
across the united states and around
they are paying $7 billion to import oil. They need
the world?
high penetration of renewables to reduce their
dependence on foreign oil. If you look at American
The smart grid market is not like the iPod market.
Electric Power, they are concerned about reduc-
Its not like one product will get the market going
ing losses and driving efficiency in their network.
everywhere equally. However, utilities are heavily
If you go to Africa and look at Eskom, there is
influenced by each other. European utilities are
a big mismatch of supply and demand, yet there
looking more and more to the U.S. Two years ago,
are huge losses in their delivery system. They
our people in Europe hadnt really heard about
want to deal with tampering and inefficiency in
smart grid; now smart grid is a global
their network.
phenomenon. Two years ago, people thought AMI

and MDMS [meter data management systems]
China and India have different needs. We see
were only happening in the U.S. Now Europeans
China implementing a smarter grid with
want to know what is going on in the U.S. and how
communications-enabled electric meters, but less
that will affect their plans. If 30 to 40 percent of
concerned with communicating into the residence.
business-case benefits (such as the DSM
That hasnt been something they are focused on
[demand-side management] benefits) are not
todayconsumption by consumers is relatively
delivered, things will be different. If these
small compared to more mature economies.
benefits do arrive, however, youll see behavior in
Though systems can leapfrog, what they are trying
Europe like whats going on in the U.S.
to solve is different.
Bob (GE)
Laura (Cisco)
Different geographies have different needs and
Many economies are facing similar problems. At
priorities. Looking at California, I expect them to
the highest government levels, we see a real
move rather quickly to a demand response
intersection with smart grid and other trends to
solution that engages consumers and tests
develop smart connecting communities. There
58
may even be a leapfrog effect in some economies
clearly need to be proactive here to prevent being
as they have more of a Greenfield opportunity.
disenfranchised. Im not saying there will be a
Look at Jeju island in South Korea as an example
single converged communications infrastructure
where the notion of smart connecting
across all these industries; but the development of
communities will be tested.
the smart grid may not play out purely from an
The idea of connected communities can cut across
to consumers and communities to allow them to
big sectors: energy, healthcare, security. It is not
become more sustainable and interdependent will
clear how it might unfold but the utility will
be important.
energy provider point of view. Providing services
59
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McKinsey on Smart Grid

U.S. smart grid

The smart grid

The smart grid

McKinsey on Smart Grid is written

Editorial Board: Anjan Asthana, David

Copyright 2010 McKinsey &

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McKinsey on Smart Grid

U.S. smart grid value at Best practices in the

The smart grid

The next generation of

Top managers from

The strategic stance that

To reap the expected

The smart grid

By 2014, the global

The smart gridan electricity grid that uses

created a platform for utilities to add intelligence

two-way digital technology to optimize supply and

to the grid. The prospect of a global framework to

demandhas intrigued energy experts for years.

address greenhouse gas emissions, the

Its advent promises improved reliability by enabling

presence of ample global stimulus funds for

quicker and more effective response to outages,

energy infrastructure and smart grids in

greater customer awareness of energy usage and

particular, the heightening interest in renewable

costs, and facilitation of the adoption of

energy, and the promise of electric vehicles are

technologies such as renewable generation

all building additional momentum for the smart

sources and electric vehicles. In this inaugural

issue of McKinsey on Smart Grid, we have

The course of smart grid adoption, however, is

with leading utilities and other players on the future

yet far from clear. The underlying technologies

of this landscape-changing approach to power

remain expensive; their business cases rely on

distribution. Here we consider how the smart grid

assumptions of significant changes in customer

will affect utilities, equipment and systems