Navigant Research Blog

Smoggy Skies Drive City Innovation

— September 16, 2014

The air pollution caused by rising vehicle numbers and coal-fired power plants in Chinese cities has been well documented.  But these issues are not limited to cities of the developing world.  In March, smog levels in Paris reached levels that forced the city government to limit vehicle access to the city and make public transport free.  Subsequent analysis suggests that this drastic measure had a notable impact on air quality, if only temporarily.

Paris is not alone among European cities in suffering from deteriorating air quality.  London and other U.K. cities, for example, have been under the spotlight for failing to meet European Union (EU) standards on air quality.  A report in July suggested that Oxford Street in London was one of the most polluted roads in the word with regard to nitrogen dioxide (largely produced by diesel buses and cars), with levels 3 times the EU-recommended amount – and higher than Beijing.  London and some other U.K. cities are not expected to meet EU targets for air pollution reduction until 2030.

Fewer Vehicles, Cleaner Air

The World Health Organization estimates that outdoor air pollution causes 3.7 million premature deaths worldwide each year; this mortality is due to exposure to small particulate matter of 10 microns or less in diameter, which cause cardiovascular and respiratory diseases and cancers.  Of particular concern in cities are fine particulate matter below 2.5 microns, referred to as PM2.5, which can lodge deep within the lungs.  This life-threatening type of smog is created by burning vehicle fuel as well as other fuels such as coal and wood.

The need to address air pollution is becoming a significant driver for the adoption of electric vehicles in cities, restrictions on the worst polluting vehicles, and the introduction of technologies that can monitor and improve air quality.  Madrid, for example, is using parking fees to target the worst polluting vehicles, while also introducing an electric bike rental scheme.  Boston is piloting high-tech city benches that can collect information on air quality and provide solar-powered charging for electronic devices.  Other high-tech attempts to improve air quality have been less than successful: a project supported by the Mayor of London that used a form of glue to collect contaminants proved to be largely ineffective in capturing vehicle pollution.  More recently, the Mayor has suggested that diesel vehicles, responsible for much of London’s damaging air pollution, may face additional charges for driving in the capital under the city’s congestion charging scheme.

Looking East

In the future, western cities may look to China as a leader in air quality improvement.  In 2013, the Chinese government launched its Airborne Pollution Prevention and Control Action Plan, which will see it invest $277 billion in an attempt to reduce air pollution by up to 25% in selected provinces and cities (including the municipality of Beijing) by 2017 compared to 2012 levels.  Beijing alone is expected to invest around $160 billion.  Beijing is also working with IBM on a 10-year project called Green Horizon that will employ sensor technologies, big data analytics, weather modelling, and other advanced techniques to help the city monitor and address air pollution.  The project will also integrate renewable energy forecasting and industrial energy management.

In North America and Europe, air pollution is often associated with a previous age of industrialization, but the growing public awareness of the continuing threat to public health is accelerating policy and technology innovation.  Ultimately, air pollution in our cities needs to be addressed through a combination of transportation and energy policies and the general adoption of clean fuel vehicles and other clean technologies.

 

In Slowing Market, Echelon Exits Smart Grids

— September 16, 2014

The market for smart grid technology is still growing — in fact, Navigant Research expects it to grow from $44 billion this year to more than $70 billion in 2023 — but that doesn’t mean it offers easy money for vendors.  In fact, among smart meter vendors in particular, the recent slow-down in demand following the boom years under American Recovery and Reinvestment Act (ARRA) stimulus funding in the United States and several large European deployments is prompting consolidation along with speculation that there is more to come.

San Jose-based Echelon announced on August 21 that it is exiting the smart grid market to focus on its Industrial Internet of Things (IIoT) division.  Linz, Austria-based S&T AG will acquire Echelon’s smart grid division for modest consideration — according to SEC filings from Echelon, it will receive in the neighborhood of $5 million before expenses related to the deal; debts associated with the division will also be assumed by S&T.

From S&T’s point of view, the deal is attractive in both financial and strategic terms.  S&T will form a new company, along with unnamed financial investors, and spend approximately $3.3 million (€2.5 million) for 40% of the company, implying an enterprise value of just more than $8 million, or about 0.3 times run-rate revenue for the division.  That low multiple reflects the 52.7% decline in smart grid revenue that Echelon suffered in 2013 versus 2012, and its reliance upon a small number of customers.

In contrast, publicly traded Itron, which has also been the subject of recent deal speculation, is valued by the market at 1 times run-rate revenue.  Considering typical acquisition premiums for technology businesses (typically 25%-50%), one could argue that Itron’s value in a sale would be north of $2.5 billion, or between 1.3 and 1.5 times revenue.

Head East  

A large IT solutions and services company, S&T has recently expanded its offerings in the smart grid space.  It has a solid presence in Central and Eastern European markets where Echelon’s power line carrier technology is likely to be dominant for smart meter deployments.  Whereas many Western European meter projects are well into the deployment process (or at least in the request for proposal stage), several Central and Eastern European governments have committed to Europe’s 20-20-20 initiative and smart meter deployments, but major utilities have not yet made significant commitments to vendors.

At least one Wall Street analyst expects additional consolidation among smart grid technology vendors.  Louis Basenese of Wall Street Daily reported on August 18 that more than $30 billion in smart grid deals have occurred over the past two years.  Of course, GE’s $17 billion buy of Alstom Grid will add substantially to that sum, but Basenese believes both Itron and Silver Spring Networks are presently attractive, largely because of their patent portfolios.

Unfortunately, Echelon appears to have been forced to sell at what may be a nadir in the market for smart meter business — but considering the growth ahead for smart grid technology deployments, I would agree with Basenese that more deals are likely to emerge.

 

New Study of EcoFactor Home Energy Management Offering Sparks Responses

— September 16, 2014

Cloud-based home energy management (HEM) startup EcoFactor is touting data from a new independent study showing that its system delivers significant energy savings for residential customers enrolled in Nevada utility NV Energy’s mPowered program.  The analysis, conducted by ADM, found that in the summer of 2013, homes with EcoFactor-connected thermostats reduced electricity consumption by an average of 94.68 kWh per month, or 5.5%.

The study also showed that EcoFactor reduced peak load by 2.7 kW per thermostat, more than twice the load shed claimed by Google’s Nest Labs (1.18 kW per device) and 90 times the load shed Opower estimates it can achieve through its behavioral approach (0.044 kW).

It’s important to note that NV Energy’s mPowered program, which at that time had 14,500 participating customers, was (and still is) all EcoFactor – with no other competitors involved.  So there is no head-to-head comparison with Nest devices, for instance, nor with Opower’s approach.

The closest comparison between EcoFactor and a competitor involved a Carrier two-way communicating thermostat for residential customers.  In terms of per-device hourly reduction, EcoFactor’s thermostats came out on top, with a peak reduction of 2.37 kW.  Carrier devices followed closely, at 2.33 kW.

EcoFactor’s approach is not limited to demand response (DR) events and electricity.  By persistently working in the background (similar to Nest), it can also help a homeowner reduce natural gas consumption via the thermostat, as the study points out.  The study’s authors calculated the expected natural gas savings from EcoFactor’s platform during months in Las Vegas when space heating would occur and found that they would amount to 18 therms per year.  When combined with the cooling reductions, about 635 kWh, the expected annual savings for an EcoFactor home was about $98.

The Competition Reacts

In a blog post, Yoky Matsuoka, Nest Labs’ vice president of technology, responded, “If we take a look at the hottest days in Austin, Texas (where we did a study of Nest homes last year) and compare them to similarly hot days for EcoFactor customers in Nevada, Nest customers and EcoFactor customers both reduced their peak energy use by about 1.3 kW of energy.”  This competition is healthy for the HEM sector.

It’s also helpful to contrast the EcoFactor-mPowered results with what Oklahoma Gas and Electric (OG&E) has reported from a similar smart thermostat-DR program called SmartHours.  Using Energate thermostats and the Silver Spring Networks software platform, the average participating OG&E customer saved about $191, or approximately 15%, off an annual bill in 2012.  That program has not undergone an independent study like NV Energy’s, but it shows that results can vary.

What this independent study of NV Energy’s programs shows is the need for common standards on which to evaluate HEM programs and devices, something we’ve pointed out in Navigant Research’s reports, Home Energy Management and Smart Thermostats.  Standardizing the measurement process across more utilities will help eliminate some of the confusion around the data and give key stakeholders – utilities, HEM vendors, and residential customers – more insight into what really lowers energy consumption and costs.

Lauren Callaway co-authored this blog.

 

Unisys Plunges into Smart Grid Security

— September 10, 2014

Unisys recently entered the smart grid cyber security market with a white paper, titled Innovatively Evade Energy and Utility Cyber-Assaults, which introduces its cyber security offering, Unisys Stealth.  Unlike many other mainstream security companies that have attempted to enter utility cyber security, Unisys appears to understand that control systems are different and need to be thought about differently.

The paper lists six threats that smart grids face.  One is modernization – although, without modernization, there is no smart grid.  It is a necessary evil.  This section begins, “Paradoxically, modernization within the industry is also introducing new vulnerabilities.”  Of course.  When you replace an electromechanical device with an IT-enabled device, it’s a given that the IT threat vectors will increase substantially.  As I pointed out in a recent blog, there are indeed new risks, but they are more than offset by new benefits.

The same paragraph continues by explaining that these industrial control systems (ICSs) are “often subject to periodic patches and firmware upgrades.”  There is a common misconception among enterprise IT security practitioners that control systems are patched in the same way as enterprise IT systems – but that’s not the case.  Many control systems have one maintenance window every 2 years, and that’s the only time they will be patched.  We don’t do Black Tuesday in the control system world.

Insecure Legacy

Unisys accurately states that many existing cyber security technologies are reactive and, therefore, are useless against unknown (zero-day) attacks.  However, this is not news to the ICS community, and application whitelisting and behavior-learning security tools that observe anomalous traffic have been in place for some time now.

I would also like to know if Stealth runs on its own hardware, and, if it runs in line with the control network, what kind of latency it adds to communications.

The white paper claims, “The primary reason for maintaining status quo regarding improved security is the concern that any new measure may introduce instability in highly reliable systems.”  I disagree; the primary reason that the status remains quo is lack of funding.  Whether that’s due to utilities being cash-strapped or security officers being unable to create a compelling business case for the funding is an open question.  The second reason for the status quo is that many devices are too old to have any security onboard but still have remaining service life and aren’t going anywhere.

Wide Screen

The strongest point that Unisys makes is that the main obstacle to winning the cyber war is a patchwork strategy.  This is the crux of control system cyber security.  My research in the past 18 months has uncovered a marked increase in the number of utilities asking for security architectures, for a single approach to security for their control systems.  Whether those architectures will translate to implementations is unclear.  But at least utilities are asking to see the big picture.  It would be good if Unisys offered to be part of that large-scale solution, but the conclusion of this white paper seems to say that Stealth is the solution.  All security vendors can be part of the solution.  None of them are the solution.

 

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