Six years ago, Keith Schaefer was reviewing a portfolio of companies for a group of investors headed by Pittsburgh financier Sam Zacharias and Andy Russell, the former Steeler.
Schaefer and his group were scrutinizing a company that used power lines for telecommunication. As he met with utility executives, the conversation veered off topic.
“I realized energy efficiency was more important to them,” says Schaefer, who returned to Pittsburgh to work in venture capital after West-Coast stints in the video-game and film industries. Demand for electricity was outstripping supply, and building new power plants would be economically costly and environmentally unpalatable. Plus, “a new wind,” Schaefer says, was blowing from the west. Led by California, states were forcing utilities to sell less electricity or face stiff fines.
Schaefer saw an opportunity. If someone could help these utilities cut down on electrical demand, they could solve a big problem in an industry worth hundreds of billions of dollars. “I saw a void—we saw a void,” Schaefer says. He wrote a business plan for a company that used technology to monitor the flow of electricity better in an electrical grid. By the end of the year, they launched BPL Global. (“Better Power Lines” is the tagline.)
Schaefer is now CEO, and BPL Global has grown to 155 employees in several countries, including France and China. It makes and installs components and software that allows utilities to manage their distribution networks efficiently. The company has attracted $100 million in investment and last year grew at a rate of over 1,000 percent.
BPL Global is one of many jumping into the growing energy management business, including a large number in Pittsburgh, a city with a long legacy of energy innovation. They are working on “smart grid” technologies that will allow computers to “talk” to refrigerators, thermostats and even cars; they are helping re-engineer buildings to use ambient light, solar power and improved materials to sip, rather than gulp, energy off the grid. All are engaged in a chase for what might prove the single biggest new power source of the 21st century: energy efficiency.
“It reminds me of the personal computer industry at the beginning of the ’80s,” says Stephane Kirkland of Direct Energy Business, which makes sophisticated metering devices for more efficient energy use. “It’s similar right now to when Bill Gates was tinkering around in his garage in Albuquerque. You can kind of see that we’re going to do things fundamentally differently in the future, but you can’t see how that’s going to happen yet. There are lots of ideas out there, but you don’t quite see which ones are going to come out on top.
“There are many reasons why companies in this sector are so busy. The price of electricity is expected to rise 50 percent over the next seven years, according to the U.S. Department of Energy. Concern is widespread over climate change and the environmental effect of burning fossil fuels, which produce the majority of electricity in this country. There are also the geopolitical problems caused by dependence on foreign oil and the natural desires of companies and homeowners to spend less on electricity. The Obama administration announced earlier this year $4.5 billion in stimulus grants toward “smart grid” technology, which uses automation to reduce energy waste and encourage efficiency.
The federal government has also set a target of reducing greenhouse gas emissions by 28 percent by 2020. All of this is means there will be plenty of business for those who know can lop kilowatt hours off an electric bill.
Technology companies such as Canonsburg-based Ansys design modeling software that can help wind-farm operators to determine the size, type and location of a wind turbine. And a stalwart of the field is Eaton Corp., the Cleveland-based industrial manufacturer that bought part of Westinghouse Electric in 1994. Its Americas Region Electrical Division is based in Pittsburgh, with 1,238 local employees. The company makes and sells energy-efficient equipment and software for buildings, transportation and industry and counts the Panama Canal, Airbus, and UPS as clients. Jerry Whitaker, president of Eaton’s Americas Electrical Division, says no matter what system Washington devises for lowering CO2 emissions, his industry stands to gain. “Anything to do with a focus on greenhouse gas emissions, on carbon footprints, I think is going to be good for our business.”For companies like Eaton, it would appear there is a lot of low-hanging fruit. The average American uses 80 percent more energy than the average Frenchman, Japanese or German. Much of this has to do with living patterns and the kinds of cars we drive, but a lot of it has to do with the way we light and run our homes. An obvious example is the light bulb. Normal incandescent bulbs use just 2 percent of the energy harvested from the initial power source. Some 98 percent of the energy gets lost from the lump of coal burned to create the electricity. Much of it—62 percent—is unavoidably lost in the power generation process, but there’s a lot of money to be made out of the remaining 38 percent.
Big and good, but not so smart
In 2009, the National Association of Engineers was asked to name the most impressive invention of the 20th century. Of all the candidates, the one that garnered the most votes was the national electrical grid. The grid carries electrical current from a quiltwork of generators to just about every corner of the country, with surprisingly few interruptions. The fact that few people know much about it is a testament to its reliability. The grid is like a baseball umpire—you only hear about it when something goes wrong.
But the grid as it’s currently constructed has a deep flaw: in an age when machines can sense which coffee shops are close by, what movies you should watch, and whom you should date, the electrical grid remains relatively dumb. The electrical utility that sells you your energy usually doesn’t know how much you’ve used until well after the fact, when it sends an employee to read your meter.
“Most people outside the electrical world would be surprised at how manual and unconnected that grid is,” says Kirkland of Direct Energy Business. “There’s a lot of information, but the information that is gathered is very partial, and that gathering happens long after the events.”
Why is it like this? Part of the reason is the electrical industry’s historic resistance to change. “For good reasons, it’s a conservative industry,” says Greg Reed, director of the University of Pittsburgh’s Power & Energy Initiative, and an associate professor of electrical and computer engineering. “Utilities are in the business of providing the most reliable service possible. Our society today is based on electrification. They certainly don’t want to take unnecessary risks.”
Utilities face the threat of major fines for outages—a Florida utility was fined $25 million last year for a blackout that left 600,000 without power. To avoid the edge of this regulatory cliff, utilities have built a system that ensures more than enough electricity to cover their needs.
“The model would be that, in order to control traffic congestion, you build a 10- or 20-lane highway into Downtown Pittsburgh,” says Mark Rupnik, senior vice president for Business Development North America at BPL Global. “If you did that, there would be no rush-hour traffic to speak of, but most of the lanes would only be used for one hour a day. That’s exactly what utilities have done forever. They just keep building capacity.
”The smart grid would allow utilities to know where their power is going in real time and to allot electricity more efficiently. “What we’re trying to do better,” says Rupnik, “is to manage the grid so you don’t have to have that 20-lane highway coming into the Fort Pitt Tunnels.”
How smart grids work
BPL Global has a pilot project in New Jersey that illustrates how a smart grid might work. Customers agree to have their air conditioners monitored by the utility, and, during times of high demand—say, a hot summer afternoon—they agree to have their air conditioner units turned down via a sophisticated telemetry system that lets the utility monitor individual circuits. Temperatures in the home rise slightly, and the homeowner gets a rebate, from $100 to $200 a year.
Direct Energy Business has a similar project in the Houston area. It installs a device that looks like an iPad inside a home, often on a kitchen counter. Customers can monitor how much electricity they are using and turn down an air conditioner or unplug an unused appliance if they see they are drawing too much electric load.
Kirkland says these types of smart-metering devices will have a much bigger impact when electricity is sold based on “real-time pricing,” a hot topic in the electric industry these days. Distributors pay more for electricity when demand is high. In these high-use hours, generating companies turn on high-cost, inefficient power plants called “peakers” to provide electricity. It’s a little bit like a restaurant owner buying a pint of milk at a convenience store during a lunch rush, rather than a gallon at the supermarket the night before. The price per unit is much higher, but it helps them avoid running out of the product they’re selling without overstocking their fridges with something they won’t use. When demand drops, at night and on weekends, the peakers are shut down, and electricity prices drop three- or four-fold. Despite this fluctuation, electricity customers generally pay a flat price.
This system encourages what is essentially bad behavior, says Kirkland. “What we have is a classic free rider problem. Right now, you as a consumer have no interest in running your dryer when it’s better for the whole system. If you were able to pay less for your electricity at night, you’re probably going to run it at a lower-priced time.
”If customers ran their dryers at night for, say $2, rather than in the afternoon for $8, utilities might not have to start up peaker power plants as often. Better yet, they might not have to build them in the first place. The switch to real-time pricing has already started in some states, and it will be a few years before it becomes standard practice in the U.S. Some form of the practice is already in place for businesses in Pennsylvania. Initial data on these programs show consumers will change their habits, but not by much. Lester Lave, professor of economics and engineering at Carnegie Mellon University, found that when electricity prices doubled, customers trimmed their use by about 10 percent. This may not seem like much, he says, but it has a significant impact on the overall grid.
Currently, about 15 percent of the region’s electrical capacity is maintained for one percent of use. That means there are power plants that sit quietly all year round waiting to be turned on for a total of 100 to 200 hours a year.
Sticking to the energy diet
In 2008, the United States consumed 100 quadrillion British Thermal Units of energy, from sources such as coal, natural gas, nuclear, hydropower, wind, solar, biofuels, geothermal and wood. In 20 years, U.S. energy demand is expected to rise 18 percent. With energy consumption in India and China is growing at a breakneck pace, new energy sources must be found.
Lave, who recently chaired a National Academy of Sciences committee on energy efficiency, says the cheapest new energy source is efficiency. Simply by using technology that already exists or will be available by the end of the decade, the U.S. could reduce demand by 15 percent within 20 years, the same level it was during the 1980s.
“The biggest savings come in the buildings sector,” says Lave. “You could build a new house or new community right now that would use less than half the energy of current buildings we are putting up right now.”
Whitaker, president of Eaton’s electrical group, says about 40 percent of a building’s electrical needs can be sliced off through efficiency. His company, for instance, has helped install energy efficient motors to heat and cool buildings at the University of Notre Dame. Combined with energy-efficient lighting, the measures have helped trim energy use at the school by 10 percent in two years.
Similar measures in place at the U.S. Steel Tower, a Direct Energy Business client, have cut more than 10 percent of its energy requirements over the last decade, says the building’s Director of Engineering Gary Sechler at Winthrop, which manages the 64-story skyscraper. Newly renovated floors have daylight harvesting, which uses light meters to detect ambient light. During the day, this reduces electricity sent to the light fixture. Winthrop has also replaced thousands of light fixtures throughout the building. And under an agreement with Duquesne Light, the building has agreed to power down “non-essential” systems, including its lobby fountain, during peak-use times.
Implementing the smart grid is expected to create 300,000 jobs. Where those workers will come from, however, is a bit of a mystery.
“It’s a challenge for us to find engineers in this country because we haven’t taught power electronics in the university for many years,” says Eaton’s Whitaker. “Frankly, when we try to develop the next generation of power electronics, we have to go to India and China to find people who know how to work with this equipment.”
That’s beginning to change, says Reed, who has several students working on smart-grid and alternative energy technology. “They’re very concerned with how energy use will impact the environment and the social and economic impacts of energy use.” With alternative energy, electric vehicles, and fuel cells, the field is a lot more attractive to young engineers with an idealistic streak, the kind who might have migrated to information technology a decade ago.
“The common wisdom was that utilities was the most boring thing out there,” says Kirkland. “Today that’s not the case.”The bottom line for businesses involved in the efficiency rush is that, no matter how ingenious or novel the technology, it still needs to make money for investors. That’s the perspective of Morgan O’Brien, CEO of People’s Natural Gas Co., and until this year, CEO of Duquesne Light.
“There are going to be some who completely fall on their face, and there will be others who succeed,” says O’Brien. “It’s not a fad. We’ve been focused on energy efficiency since we become an industrial country—it’s the nature of our economic system. If you can make a product that will save customers money and you can turn a profit, then you have a good business plan.”