Implications for U.S. competitiveness
China’s aggressive smart grid plan poses problems and promise for the United States. On the one hand, U.S. companies currently have the most advanced smart grid technology across the value chain—technology that could create big opportunities in China. State Grid is already working with General Electric Co., Honeywell International Inc., IBM Corp., and other U.S. companies on joint standardization projects. If those projects go well then at least some of China’s smart grid investments could go toward purchasing U.S. products and paying U.S. technology licensing fees.
On the other hand, China’s indigenous innovation program calls for reducing the country’s dependence on foreign technology to 30 percent or below (down from the current 50 percent). That program focuses particularly on strategic emerging industries such as the smart grid. That means we should expect the Chinese to favor home-grown standards wherever they can, particularly when the foreign versions are more expensive. That could make it harder for U.S. smart grid equipment and services to gain a foothold not only in China but also globally.
Where there are competing international standards, the Chinese will face trade sanctions if they adopt State Grid’s proprietary, home-grown solutions as compulsory national standards and blatantly shut foreign technology out of their market. In mobile telecommunications, for example, China developed a home-grown 3G wireless standard but Chinese regulators had to recognize and issue domestic operating licenses for all of the major international standards, not just the home-grown technology. In the smart grid market, however, international standardization is moving rather slowly, particularly in the United States, and that gives China more leeway to adopt home-grown solutions as their national standards and to leverage their domestic buying power to drive down costs and promote those technology solutions abroad.
The United States should not aim to compete with the Chinese on electric infrastructure investment. State Grid’s investment commitments are impressive but a lot of that spending will go toward catching the Chinese up to where the United States is now. Their grid infrastructure is less developed than ours, so it is inevitable that they will have to spend more, and it is inevitable that those expenditures will make China a very attractive market for smart grid equipment manufacturers and private investors.
One thing we can do to improve U.S. competitiveness is to speed up our own standardization program. Most U.S. smart grid solutions are not yet based on common standards. That means that just like the pre-interoperability computer era (when your desktop computer, monitor, keyboard, and printer would only work together if they were all from the same manufacturer), U.S. smart grid technologies are hard to mix and match, and that drives up prices and stifles competition.
The United States is working to improve interoperability but the process is very slow. China boasts only two utility companies but there are more than 3,000 in the United States, and those companies are not used to working together. Our utility regulators are also not used to dealing with technology standardization.
The federal government can speed up interoperability by playing a stronger coordinating role at the national level to help our state and local utility regulators move toward common standards and interoperable (and therefore cheaper) equipment. The United States has already figured out how to do this in telecommunications and information technology; we just need to apply the same lessons to the electricity sector.
One thing the Chinese get right is using policy signals to stimulate private investment, and that is something we can do in the United States as well. When Chinese leaders included smart grid development in the 12th five-year plan and State Grid announced its ambitious spending plans, those moves kicked off a new wave of private Chinese venture capital investments in their domestic smart grid technology companies.
We can encourage more private investment in our own smart grid infrastructure and companies by sending stronger policy signals here in the United States. The American Recovery and Reinvestment Act of 2009 was a big step forward—that funding was the biggest driver of U.S. smart grid market development to date, and it also jump-started the U.S. standardization process. But more work is needed. We do not yet have a strong federal champion to coordinate the different policy and industry stakeholders working on smart grid technologies, and that coordination is particularly critical in this sector because these technologies cut across traditional regulatory and industry divides (power generation, electric utilities, telecommunications, and information technology).
We are also still working to fine-tune the existing investment incentives. Some U.S. telecom companies complain that the Recovery Act gives utility companies incentives to build out their own proprietary smart grid wireless communication networks instead of utilizing the existing wireless infrastructure, which is based on common standards and interoperable equipment. The more we utilize common standards and interoperable equipment, the more we can improve our economy of scale and lower production costs for U.S. manufacturers—and that will lower infrastructure costs here at home and make U.S. technology and equipment more attractive in overseas markets.
Our path to a stronger, smarter electricity grid is actually much easier than China’s. Since our grid systems are already more advanced, we can target our investments toward developing and deploying the latest and greatest smart grid technologies instead of playing catch-up. That means our market can be a much stronger driver for technology innovation, and we can get more economic bang for every smart grid buck.
To take advantage of this lead, we should work toward clarifying our standard-setting process and removing existing policy bottlenecks to smart grid deployment. Then, like the Chinese, we can leverage a stronger, smarter grid to decrease our dependence on foreign oil, to drive innovation, to create jobs, and to give consumers new options for saving money on their utility bills.
Those are goals that we can all get behind.
Editor’s Note: This column comes to us as a cross post courtesy of Center for American Progress. Author credit for the column goes to Melanie Hart.