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Section 4: Research Design
In this case study, IBM’s shared value approach will be used. IBM, “A century of leadership-Since its founding in 1911, IBM has strived to do more than simply giving back to society. To us, corporate responsibility has always meant expanding the expectations of what companies can and should do for society. Michael E. Porter’s definition of Creating Shared Value approach will also be used: “There are three ways companies can create shared value opportunities: by reconceiving products and markets; by redefining productivity in the value chain; by enabling local cluster development”.
In terms of smart grid, IBM’s definition of smart grid will be used: “A Smart Grid is transparent, accessible, resilient. And optimized from the user on up.16” In addition to that U.S Department of Energy’s definition of smart grid will also be used: “Smart grid” generally refers to a class of technology people are using to bring utility electricity delivery systems into the 21st century, using computer-based remote control and automation. These systems are made possible by two-way communication technology and computer processing that has been used for decades in other industries.”
The sources of data are mainly secondary information of literature, publications and trustful documentations from the government and the industry.
Data are then comparing with the principles of Shared Value to find how relevant is IBM’s CSV approach to that of Michael E. Porter’s CSV in the smart grid landscape.
16 IBM Smart Energy Program
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Chapter Two: Literature Review
Sections 1: Grid Industry
1-1.Traditional Electrical Grid
Electrical grids are used for the transmission and distributions of electrical power generated from the power plants, and are mostly constructed during the early to mid 20th century in most developed countries like United States of America and countries that experienced early industrialization.
New terms emerged as the national boundaries no longer exist when it comes to transmitting electricity. National grid is an anachronism term in most countries as grid often goes beyond borders. The preferred terms for grid today are the transmission grid and the distribution grid. Transmission grid refers to the long-distance transmission of electricity while distribution grid is for local connections. Power is generated at the power plants in all forms ranging from hydro to nuclear. As they move down the stream, higher voltage electricity passed onto power substation through transmission grid. Different kind of adjustment of voltage is taking place at the substation. High and medium voltages are supplied to factories for industrial purposes and commercial buildings for business to function. It continues to move down the line and eventually reduced to low voltage and to be distributed through distribution grid like transformers to households to support electrical functionality at home.
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The conventional electrical grid is hard to monitor flow of electricity.
Electricity can only be tracked in the first ten percent of both the transmission and distribution grid. Imagine that you pour water down the drain; you will only be able to see where the water runs close to the very top of the pipe, everything beyond that became the blind spots. From the point of efficient use of energy, this could not be allowed and definitely needs a fix to increase the transparency of the flow of electrical power.
Restoration of Electricity
When outage takes place, consumers would have to contact their utility to complaint about the power outage. There are no clear signs of the location of the outage due to low visibility of the operations. Current status, age and condition are hard to be determined; more effort would be required for the repair crew to identify the sources of outage. This would result in an increase in operational cost as repair crew cannot prioritize the work order as it often involves the replacement of deteriorated assets. Asset management becomes a hard thing to do as there is no clear information on the asset owned by the power providers in accordance to the condition and performance of assets.
Moreover, procurement is based on inaccurate inventory and asset data and monetary capital are lost respectively.
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1-2.Smart Grid
The deployment of smart grid collaborative is still at its infancy. The rate of deployment depends on the participation of the stakeholders. Problems with the local government’s legislation and regulation as well as the demand response of the consumers together with the attitude of the power companies would determine the effectiveness of the project. Let us first understand the basics of smart grid. Hopefully, it will help to create a clear sense why smart Grid has became the prominent solution for electrical power company to step up to the issue of sustainability. And possibly takes themselves to the place of Creating Shared Values through the deployment of Smart Grid.
Technology advancements and IBM’s ability of system integration have made it feasible for one to talk about making smart grid digitally intelligent.
Sensors, meters, automated tools for analyzing and controlling, monitoring two-way flow of energy between separate entities and control. IBM is about to integrate all the above to create a transparent route of energy and information flow right from the power plant to plugs. It would be able to reduce the risk of having electricity outage, even if outage does take place, the recovery period is expected to be shorter. It will benefit the power companies to optimize the grid performance at the same time to empower individuals to manage energy usage with the appliances in hand.
To expand it further, solar and wind energy can be add onto the smart grid to increase the power supply from renewable energies. Power sources like commercial battery for power storage and electrical vehicles are also
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connected to the smart Grid to further diversify the network to include items depend heavily on electrical power. U.S Department of Energy (DOE) describes the importance of smart Grid as “computerizing” the electric grid, in the notion of giving an electronic nervous system to the electric grid.
1-3.Smart Grid Industry Value Chain
The smart grid industry value chain is generally categorized as shown in figure 2-1. To the most left of the value chain would be the utilities as they are directly responsible for the production, transmission, distribution of the electric power. Then comes the AMI that are considered to be the physical infrastructure parts of the grid for connectivity of the grid. There are also the applications and software sector of the smart grid provide intelligence to the grid. Smart meters refer to those the new generation of electric meters vital to allow utility to establish end-point control and gaining consumer insights on behavior patterns and implementing demand management. Smart home that
Figure 2-1. Smart Grid Industry Value Chain
Source: This Research Summarized
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hosts the smart meters and smart home appliances could participate in the energy reduction program to make energy more efficient on the household level. All the values generated through the smart grid could be deliver to the end user by providing them with more customized electricity rates and securing the supply of energy as well as preventing outages from happening in advance.
IBM ‘s Position in Value Chain
“We're in a position to help our utility clients transform their networks more efficiently," said Guido Bartels, General Manager of IBM's Global Energy &
Utilities industry. "The SAFE framework provides visibility, control and automation across the utility infrastructure as well as IT assets to help provide security and business agility as part of an intelligent network transformation." 17
IBM’s is in the application and software part of the smart Grid industry value chain. With the global market potential of application and software related to smart grid is estimated at the value of between $5-8 billion by the year of 2014; as it is within the area of grid applications. But IBM may also share the market value of customer application, as they are either directly or indirectly involved in this area as well, and the value of that is $3-10 billion by the year of 2014. The revenue of the smart grid managed service is estimated at the number of $4.3 billion by the year of 2015.
17 IBM News Room, http://www-03.ibm.com/press/us/en/pressrelease/28412.wss
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1-4.Smart Grid Market Segmentation
Currently, there are 155 named and known companies that are in the smart grid business according to the GTM Research. It was also suggested that within the Networked 150, 60% of these businesses are private while the other 40% are public. 74% of the operations are based in the U.S while other 26% are international operations. 18
Table 2-1. Smart Grid Market Segments and Most Active Segments
Source: GTM Research (2013). “Top Networked Grid 150: The End-to-End Smart Grid Vendor Ecosystem Report and Rankings"
18 GTM Research, Top Networked Grid 150: The End-to-End Smart Grid Vendor Ecosystem Report and Rankings
Smart Grid Market Segments Most Active Segments
AMI infrastructure Soft Grid 19%
Grid Networking T&D Automation 13%
Transmission and Distribution Automation
Communications 13%
Soft Grid Grid Support 10%
Demand Response AMI Infrastructure 8%
Consumer Engagement Home Area Networks 8%
Building Automation Integration&
Consulting
8%
Smart Enterprise Security 6%
DG Integration Demand response 5%
Storage Building Area
Networks
4%
Renewable Integration MDM 4%
Security Storage 3%
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IBM is involved in two submarkets of Smart Grid, integration and consulting and softgid. Companies like CSC, WIPRO, SAIC, Accenture, IBM, BRIDGE are in the integration and consulting submarket Companies like Rockspace, SAS, Oracle, EcoFactor, CISCO, IBM, TEARDATA, VmWare, EMC, Spacetime are either competing or collaborating with each in the area of softgrid. Softgrid refers to the data storage and analytics and is vital to the creation of platform and analytics.
Top 10 Networked Grid Vendors
Smart Grid is a complex structural system; therefore no single company is able to solve the puzzle. However, GTM Research has ranked 10 outstanding companies that are in this market, as shown in table 2-2
Table 2-2. Top 10 Networked Grid Vendors
Company Submarket
ABB Transmission and Distribution automation S&C Distribution Automation/Grid Support
CISCO Communications
Schneider Electric Distribution Automation
IBM Integration and Consulting
OPOWER Soft Grid
Itron AMI Infrastructure
SILVERSPRING Communications
SIEMENS Transmission and Distribution Automation
TENDRIL Home Energy Management
Source: GTM Research (2013). “Top Networked Grid 150: The End-to-End Smart Grid Vendor Ecosystem Report and Rankings"
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1-5.Value Estimation of Smart Grid
There certainly have been a lot of talks about the promising future of the smart grid deployment as U.S government has issued funds to support the national scale of deployment of smart grid. President Obama has issued the direct investment of $4.519 billion for Smart Grid roll out. In Europe, country like U.K is also pursuing the replacement of electrical meter to smart meter also on the national level. In order to make continent Europe more energy efficient and sustainable, E.U regulation stated more than 80% of the consumers will have to have smart meter installed by the year of 2020. The cost for completing the replacement of meters is estimated around £11 billion.
The number of smart meters for installation in both U.S and U.K is respectively 40 million and 50 million sets20.
21McKinsey further specifies the more distinctive business areas of Smart Grid and has calculated its global market potential. McKinsey has estimated three smart grid submarkets which they consider the values are more apparent and identifiable. These submarkets include the Customer Applications, AMI/Smart Meters, and Grid Applications. McKinsey did not include Plug-in electric vehicle, enable of renewable generation, and storage in their analysis as defined solutions for these areas are still missing. The manufacturers of smart grid equipments definitely can expect a shoot in their financial performance. However, for the Smart Grid solution providers, the estimation of real market value of Smart Grid still remained unclear. This is the reason why
19 U.S Department of Energy(2009)
20 Tweed, Katherine (2012, January 3rd), “100 Million Meters Coming to Europe by 2016”, Greentech Media
21 McKinsey, MoSG_Solution Providers (2010)
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equipments and solutions together.Table 2-3. Global Market Potential for Three Major Smart Grid Submarkets
Source: McKinsey MoSG Solution Provider (2010).“The Smart Grid Opportunity for Solutions providers”,Pg. 45-52
meter $7-13 billion $200-$400 (per end point)
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Table 2-4. Estimated Regional Market Potential of Smart Grid
Source: McKinsey MoSG Solution Provider (2010).“The Smart Grid Opportunity for Solutions providers”,Pg. 45-52
McKinsey has also made market value estimation for three key economies of North America, Europe and China. McKinsey commented that China will be able to experience strong growth between the year of 2007 and 2014. The Chinese government is aiming to upgrade the grid infrastructure. In China, the grid is managed by State Grid Corporation. State Grid Corporation is going to invest a $45 billion USD for smart grid development in China22. The North American market will continue to remain as the biggest market and Europe could expect a relative strong growth due to the strong E.U regulation on the carbon emission.
22 Frost & Sullivan, Mega Trend 2020 Global Smart Grids, slide number 13.
Country
Estimated Market Value
(2007)
Estimated Market Value
(2014)
Growth Rate (2007-2014, p.a.) North America $1.2 billion $6-16 billion 30-55%
Europe $1.5 billion $5-13 billion 20-40%
China $0.2 billion $2-5 billion 50-70%
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