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Home energy management (HEM) is an integral system of advanced, digital technologies and services that enable utilities to connect with their residential end users as envisioned in the smart grid concept. These technologies and services direct changes in consumer behavior to shift or shave the electricity load profile.

Fundamentally, electric utilities must weigh the costs and benefits of investing in HEM technologies and services relative to investment alternatives that can also promote consumption changes.

Investment in HEM has been growing as North American electric utilities move ahead with their smart grid development plans. However, smart grid stimulus funding (e.g., the American Recovery and Reinvestment Act of 2009) is winding down in the U.S. as much of the one-time cash pool is being fully spent.

Utilities are now focused on developing the business case for investment in technologies and services that can further advance their smart grid objectives. HEM has been down the line after smart meter and infrastructure investments, but IDC Energy Insights projects North American electric utility spending on HEM solutions to reach $577.8 million by 2016.

The question remains how to build additional value in HEM development while enabling components on the customer side of the meter. This is new territory for utilities. Regulatory mandates for home area network development and increasing consumer awareness of HEM benefits will together promote the growth of the market.

Smart grid investments in North America have widely focused on advanced metering infrastructure (AMI) and smart meter deployment because of the financial incentives generated by U.S. federal stimulus funds. The bottom line is that electric utilities in North America face a difficult challenge to develop a clear business case for HEM in light of tepid adoption observed through pilot projects, current costs of HEM solutions and components, and the long cycle of changing consumer behavior with fixed electricity rate structures.

At the root of expectations for new investment in HEM technologies and services is the strength of the business case that utilities can develop for HEM. The business case leans on a mix of benefits that include improvements in the grid's reliability, security and stability, which are shared challenges in the broader focus on the development of the smart grid.

A review of the problem, objectives, approach, mandates, incentives and status of investment will provide some context:

Problem statement: Utilities want to engage residential customers to alter electricity consumption and support smart grid goals, but it is still unclear what combination of devices and services is most effective at promoting cost-effective change.

Key objectives: Determine an investment strategy capable of engaging residential customers in load shifting programs to support smart grid goals with benefits that exceed costs.

North American electric utility HEM approach: Initial utility investment in HEM solutions has focused on technologies and services in four domains:
  • The utility back-office environment, which includes IT and business consulting, outsourcing, engineering and design, meter data management, work and asset management, security, servers and storage;
  • The customer-facing application environment, which includes demand response management;
  • The in-home environment, which includes in-home displays, smart meters and smart  thermostats; and
  • The communication network environment, which includes other IT services, systems integration, other infrastructure software and mobile handhelds.
Regulatory mandates: Mandates for electric utilities to invest in new technologies to replace aging infrastructure and outdated grid architecture are intended to promote system reliability, stability and security. Examples include the following:
  • The Federal Energy Independence and Security Act of 2007 (EISA) mandates investment in the technologies and services defining the development of the smart grid. As a result, investment priorities and deployment initiatives have kick-started grid maturation on both the utility and the customer side of the meter. HEM is one technology segment that has emerged to enable customer engagement and alter electricity consumption in support of the EISA goals.
  • Regional mandates in Canada have also accelerated investment in smart grid technologies and HEM as well. Ontario has led the country's grid improvement efforts guided by the province's Long Term Energy Plan and with regulation mandating smart grid development in the 2009 Green Energy and Green Economy Act.
  • Several states lead the industry in promoting the development of HEM. For example, the competitive markets in Texas and California Public Utility Commission are driving local utility spending in HEM.

Financial incentives: Incentives, most notably the Smart Grid Investment Grant Program of the federal stimulus program in the U.S., have accelerated the deployment of HEM- enabling components. The $4.5 billion allocated to the Department of Energy by the American Recovery and Reinvestment Act of 2009 has been a major revenue source for utility funding of smart grid projects.

Status of benefits: Despite these initial drivers for HEM program development, utilities are hard-pressed to rationalize widespread investment in devices and services. The fundamental objectives for the smart grid are to invest in solutions that most effectively increase grid reliability, stability and security. The overarching goal of most utilities is to develop an infrastructure that can manage growing intermittency due to grid-tied renewables, defer investment in new generation and promote distribution upgrades that improve operations on the utility side of the meter.

HEM has emerged as a model for customer engagement with the intention of altering customer behavior to support the macro goals of the smart grid, but to date, pilot programs have been modestly successful at generating benefits that outweigh the costs, and where success is realized, it is not in broad-brushed technology deployments but in specific customer segments or within certain geographic regions.

Future expectations

The expectation for future investment in HEM is directly impacted by assumptions related to financial incentives, regulatory mandates and utility priorities. In detail:
  • Expect continued growth in HEM investment for the next five years as more utilities ramp up demonstration projects and comply with smart grid mandates. While pilots may be coming to an end for many utilities, there are leading states and provinces pushing the HEM market forward, notably California, Texas and Ontario.
  • Expect a decreasing investment in smart meters, but an increasing proportion of smart meters deployed capable of supporting and being utilized for HEM. While the overall smart meter market is expected to shrink over the next five years as stimulus funds retire, the share of meters capable of supporting HEM will increase. Underlying this assumption is the evolution of the Smart Energy Profile communication standard from SEP 1.0 to SEP 2.0, which will enable more advanced two-way communication between thermostat end points and the grid.
  • Expect investment in HEM solutions to slow as utilities shift their focus from devices to programs such as demand response for increasing customer engagement and reaching smart grid goals to generate more cost-effective results.
  • Expect increasing customer investment on HEM devices, specifically smart thermostats. Retail markets are responding to increasing customer interest in smart thermostats. New HEM solutions are being marketed directly to consumers via broadband vendors and big-box retailers. The impact of these non-utility industry investments remains to be seen.
  • Expect decreasing investment by utilities in in-home displays as other options such as portals and Web pages prove cost-effective for promoting behavioral change via consumer devices.
  • Don't expect utilities spending on HEM to completely stagnate. The stimulus funding produced a rapid and significant uptake in device investment, but moving forward, utilities will have to focus their investment on opportunities with the best business case. In-home technologies continue to be cost-prohibitive in some situations, but as manufactures reach economies of scale, the expectation is that the average selling price will decrease and opportunities for investment will continue to grow.

Casey Talon is a senior research analyst at IDC Energy Insights, a Framingham, Mass.-based market intelligence and advisory firm. This article was adapted from a report titled “Technology Selection: North America Home Energy Management Spending Forecast, 2011-2016.” For more information about the report, click here.

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