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Written by Simon Giles

One year after the disappointment of the United Nations climate change summit in Copenhagen, it’s clear that expectations are not high for a global agreement at this week’s summit in Cancun, Mexico. The good news is that business leaders are turning up in large numbers. They hope to prove that where it’s hard for politicians to reach consensus, it’s easier for industry to take practical steps to reduce emissions. Nowhere more so than with smart grids, which are regarded as a major contributor to a low-carbon economy. There are already over 90 smart grid pilots under way around the world and expectations are high. It’s therefore time to pause and reflect on progress. The evidence tells us that we need to learn from some early lessons if smart grids are to make a real impact on emissions.

Smart grids are at the fulcrum of the emerging low-carbon economy. They help exploit distributed sources of renewable energy and can also help to intelligently manage energy consumption. With an impact on both the supply and demand of electricity, it’s no surprise that governments are actively supporting the industry.

China has spent over $7 billion on smart grid developments to date, and the U.S. has spent a similar amount this year.  In Europe, stimulus funding has ranged from $265 billion in France to as much as $800 million in Spain in 2010.  However, East Asia leads the charge with a clear strategy to reposition its industrial powerhouses at the heart of the clean tech revolution with both intellectual property and manufacturing might.

Research by Accenture for the World Economic Forum exposes two key challenges facing utilities in the roll out of smart grids.

The first relates to the industry’s regulatory framework, which in many countries has not caught up with the new priorities of energy security and emissions reductions. Put simply, utilities are being asked to build smart grids in order to reduce demand for energy while long-standing industry rules still reward them for supplying more. This contradiction compromises the financial case for smart grids.

Others utilities are finding that regulated rewards may not always reflect the risks associated with smart grid investment. And where the electricity generation and distribution sectors are separated, it’s possible that some of the benefits will go to industry players who have not taken the investment risks.

We recommend that energy suppliers use their early smart grid pilot experience to guide regulators as they update industry rules and investment incentives.  Policy makers and regulators should recognize that, although smart grid technologies have great potential, they are still maturing. Regulated rewards must therefore match the risks if we are to maximize private sector investment. And to ensure smart grids enable the low-carbon future, regulated utilities must be given output-based incentives that fairly reward them for delivering future capacity to support renewables and the electrification of the heating and transport sectors.

The second challenge is consumer resistance. The move to a low-carbon economy requires a transformation in consumer behavior, but we should not assume that consumers are willing or able to change their habits. Our research shows that technology is not enough. Some pilots have experienced resistance from regulators concerned about consumer value, or from consumers themselves who don’t see the benefits and are worried by higher bills.  In some cases, pilots have been halted or consumers have sued their utility.

Our report for the World Economic Forum suggests that utility companies should complement technology rollouts with more effective education campaigns. They will need to proactively engage consumers to allay their fears over unexpected bills or data privacy issues. More significantly, utilities will have to embark on a shift from today’s commoditized business models to those that satisfy a broader range of consumer interests. Today, the average customer speaks to his utility company for less than 10 minutes a year.  Utilities will have to be ready for more complex conversations with customers once they become suppliers of energy efficiency services.

These challenges have been faced before. The telecom industry learned how to address similar consumer and regulatory problems that arose from broadband. It is clear from the positive progress with smart grid pilots that the energy utilities can also succeed.  The private and public sectors will have to work together, and there’s no better place than Cancun to continue that collaboration.

Simon Giles is Global Lead for Smart Technology Strategy at Accenture.