I have been in the electric utility business for more than three decades, and I struggle to think of a single topic that has ignited more broad-based interest and discussion than smart grid. Clearly, the federal government injecting several billion dollars of stimulus spending into the technology bears large responsibility for this incredible level of interest.

Given this recent meteoric rise to the top tier of utility topics, a casual industry observer might conclude that smart grid is a recent technological innovation. But in reality, the electric utility industry has been in the smart grid business long before the term was coined.

Now with the advent of widely available broadband communications systems, utilities are able to increase the number of monitoring and control devices they place on the grid. And we are seeing these capabilities reaching increasingly into the customer side of the meter.

But in classifying these technologies, the term “smart grid” poses a problem. This term, as it is generally used, encompasses both the utility grid applications and installations on the customer side of the meter. This is problematic because the purpose and use of the technologies in each case are very different.

In order to facilitate discussions internally, Austin Energy calls applications on the utility grid Smart Grid 1.0 and applications on the customer side of the meter Smart Grid 2.0.

Vendors will be supplying SG 1.0 equipment that is designed to enhance grid performance, with electric utilities responsible to acquire, operate and maintain these SG 1.0 systems.

On the other hand, SG 2.0 technologies will be used by the customer with benefits being shared with the utility. Potentially, these technologies hold significant demand-response savings. In its June 2009 national assessment, the Federal Energy Regulatory Commission estimated demand-response savings will range from 38 GW to 188 GW by 2019. This demand-limiting potential may be achieved by either providing appliances such as air conditioners with a direct load-control signal, or by providing customers with appropriate pricing signals and adequate energy-usage information via personal computers, in-home displays, cell phones and energy management systems.

Other differences exist between SG 1.0 and SG 2.0. Technologies in the SG 1.0 space have evolved at the deliberate pace of the utility industry while 2.0 technologies will likely develop at the frenetic pace witnessed in consumer electronics. Expected lifetimes will vary as well, with SG 2.0 technologies exhibiting a relatively short useful life when compared to the multiple-decade lifetimes normally expected of electric utility equipment. The business environments also will differ greatly. SG 1.0 technologies will exist for the most part in a regulated environment, whereas SG 2.0 technologies will exist in a competitive environment with the customer being able to choose among different providers and offerings.

Because SG 2.0 success is heavily tied to customer acceptance and adoption, utility ventures in this space will pose new and potentially higher risk. Participants in the SG 2.0 marketplace will need to rapidly develop and successfully deliver innovative products in order to succeed. Having little or no experience in developing consumer products, utilities will find themselves at a great disadvantage when competing with more agile and savvy consumer-focused companies. Most utilities have historically provided their customers with one-size-fits-all services. While appropriate for regulated electric services, this approach in the consumer-driven SG 2.0 space could be a recipe for failure. Utilities contemplating substantial SG 2.0 deployments should take steps to understand the demographics and requirements of various customer segments. It is highly likely that different market segments will demand different products and services.

SG 1.0 and SG 2.0 will be transformational in their impact upon the electric utility industry, because they will require levels of expertise and sophistication in system control, information and communication technology, product innovation and consumer marketing not demanded of electric utilities today. These technologies hold great potential for improving system performance, controlling costs and delivering enhanced customer experiences. All these aspects will be essential in a rapidly changing and increasingly uncertain energy future.

That said, utilities should not embark upon a smart grid journey blindly or naively and should strongly consider strategic partnerships particularly in the SG 2.0 space. Further, smart grid products and services need to be designed from the ground up with customer value firmly in mind. If customers do not see real value, they will not embrace smart grid and it will not reach its full potential. Finally, mistakes with smart grid could result in stranded equipment, expensive retrofits, unacceptable performance and the erosion of customer trust. Given the likely scale of smart grid deployments, such mistakes could prove very costly and have far-reaching negative consequences.

John H. Baker Jr. (john.baker@austinenergy.com) is chief strategy officer for Austin Energy, the community-owned electric utility of the city of Austin, Texas.