The restaurant industry may be a profitable business for some, but not for all. This point is made clear in the Restaurant Industry Operations Report (2007-2008) edition, published by the National Restaurant Association. Restaurant net income before taxes averaged 5.6% of total store sales for full service restaurants with an average check per person under $15. Net income before tax, as a percent of total sales, ranged from a miniscule 0.3% for the lower quartile, to 12.4% for the upper quartile. Over 23 % of restaurants in this category reported that they were unprofitable during the survey period.
The same picture holds true for store cash flow. The average level of earnings before interest, taxes, depreciation and amortization (EBITDA) was 9.6% of total sales for the subject restaurants.
The question that begs an answer is the extent to which implementation of energy efficiencies can positively impact restaurant profitability.
Understandably, restaurants spend most of their money on food supplies and labor costs. These combined expenses account for 64% of total sales in full service restaurants with average sales per diner under $15. Beyond occupancy costs, the second largest category of other operating expenses is the cost of utility services – electricity, natural gas and water – constituting 3.8% of total sales.
Utility costs can vary widely as a percent of total sales, even within a restaurant chain, due in part to the variability of commercial utility prices across the country. For example, electricity rates range from as low as $0.05 per kilowatt-hour in the Pacific Northwest, to about $0.30 per kilowatt-hour in Hawaii. Another cause of variation is the power consumption of HVAC systems and the load that weather in different climate zones places on the HVAC system. Yet another cause is that the physical buildings and equipment differ in size and age. When you consider all other variables – hours of operation, sophistication of kitchen equipment, etc. – it becomes difficult to discuss an average utility cost across the industry. It is clear, though, that utility costs are a major expense in restaurants, even though they do differ from store to store.
Even so, using data from the NRA report, we can estimate how improvements in energy efficiency can increase restaurant profitability. The cost of electricity and natural gas are probably 90% of a restaurant’s utility bills, which would make them 3.42% of total sales.
One significant way to improve energy efficiency in restaurants is to install and operate an energy management system. These systems differ widely in their performance, but good ones can reduce the consumption of electricity and natural gas by 10% to 20%. At the upper end of that range, 20%, the utility savings can amount to 0.68% of restaurant revenues. This savings in utility bills is also a direct increase in net income. That implies that installing a high performance energy management system alone can increase restaurant profitability by 12% on average, from 5.6% of sales to 6.3% of sales.
Installing an energy management system to is also a good investment. Using $1.2 million as the average annual sales for the full service restaurant, the annual energy savings (and corresponding increase in net income before tax) is $8,160 annually. The installed cost of a comprehensive energy management system for a restaurant of this size, that is capable of reducing the energy bill by 20%, is approximately $18,000. The energy management system generates a 45% pre-tax return on investment, and it pays back the investment in less than 28 months.
Because energy costs are such a relatively large portion of a restaurant’s expenses, measures to increase energy efficiency can make an appreciable impact on its profitability. There are few alternatives for investing in restaurant chains today that can generate those levels of returns.
Monday, July 12, 2010
Tuesday, July 6, 2010
Automation - The Future of Restaurant Operations
Restaurants differ from other service industries. Their services are based around physical products, but, unlike traditional retailers, restaurants must tailor the physical product to each customer at the point of delivery. For this reason restaurants present some significant and unique operational challenges as a service business.
Restaurants are actually mini-factories – and not simple ones. Just as with any production facility, restaurants take in a variety of raw materials and process them to output customer-ready products. The restaurant production process requires multiple, parallel steps to create a meal. Moreover, the product must be produced at a time and place convenient to the customer, and customized to the customer’s specific order at that moment. This complex, time-critical production process has defied automation, and restaurant production remains heavily labor intensive. Indeed, the food service production process epitomizes flexibility, while at the same time it is subject to costly ongoing quality issues.
Factories in traditional industries concentrate on reducing costs and achieving high quality production. Factories sweat the details of equipment efficiency and productivity, product quality, production cycle times and inventory management and wastage control. High performing factories are closely controlled and managed, and successful factories are run that way. Restaurants differ significantly from these production best practices.
A number of service industries emulate modern industrial production practices. Transportation, banking, and wholesale/retail distribution centers all have tightly managed and controlled operations. They understand that you can only manage what you measure, and they measure everything. These companies measure asset and equipment productivity, labor deployment and productivity, inventory levels, supply chain performance, operations cycle times, and the complexity and efficiency of their operating processes. The capture, automation and analysis of operating data are a distinctive advantage for the leading companies in these service industries. This is true even for service industries with a large number of small, geographically dispersed operations, such as low cost mass retailers and branch banking. But these practices are not true in restaurants.
Although restaurants do operate like small factories, there are several considerations that discourage managing them like factories. First and foremost among these factors is that restaurant success is not driven by operational excellence. Restaurants are successful primarily because the product is attractive to customers – an appealing menu at a reasonable price – and because the ambiance of the restaurant encourages dining. This is where restaurants concentrate to achieve success, regardless of their venue. Good performance on these dimensions far overshadows operational performance.
Other factors impede the ability to manage restaurants for operational excellence. Restaurants typically operate on thin margins, and available capital tends to get invested in improving product (or building more restaurants) rather than in improving operations or reducing costs. Restaurants require very high flexibility. The exact order that needs to be produced in one to thirty minutes (depending on format) is not known until the customer appears. On top of this, menus are changing constantly. The high variation in product mix makes it difficult to visualize how to achieve the benefits of traditional production management.
There is, however, a growing impetus to improve restaurant operations particularly for large, national chains seeking to bolster profits. Having saturated the U.S. market, many restaurant chains can not grow profits by growing the number of stores. The restaurant and food services industry must look to operational improvements for the biggest impact on profitability in the US market. Broadly dispersed national chains, can especially benefit by applying more disciplined and comprehensive operation management to these large number of stores. Several of these chains, particularly in quick serve restaurants, are already moving in this direction.
The knowledge and technology to improve kitchen management is largely available. Just as with conventional factories, equipment can be instrumented and networked so that measurements can be made and recorded of all critical performance factors – inputs and outputs, equipment efficiency and productivity, product quality, throughputs and hold times, etc. Once available, this data can be analyzed to identify opportunities to improve process design, equipment selection, and inventory management.
Once restaurant operations are being measured at this level, it is a natural and easy extension to then increase the degree of automated control employed within the meal production process. Information on kitchen operations, together with automated order taking, enables efficiencies to be created in raw material picking/kitting, cooking, and meal preparation and delivery. Analysis of data on restaurant operations will indicate the best places to improve the operation to raise labor and equipment productivity. Restaurants may modify processes; integrate information flows among different stages of operations; and automate processes that were previously manual. This is likely to occur initially in the limited menu, high volume operations of corporate-owned quick serve restaurants. But once the principles and benefits are proven, automation will gradually extend to a larger portion of the food service industry.
The implementation of automated measurement and control processes would actually address many of the challenges facing restaurants today. Industrial factories have shown that automation actually improves the ability of production processes to handle short cycle times, accommodate highly variable product mix, and adapt to changing processes and product flow. Some measure of automation also helps enable just-in-time production and reductions in inventory levels. Automation also helps operate processes that are repeatable, predictable, and with high quality, particularly when a high level of expertise and training can not be maintained in managers and operators. Finally, more automated processes usually lead to lower cost processes. And while the menu will always be “king” in restaurants, higher profitability through lower cost operations will increasingly help a restaurant be successful.
Some restaurants have already started a process to centrally manage and automate their store operations. These innovative chains have installed energy management systems in their restaurants that enable central monitoring of store energy consumption and automate control of their HVAC, lighting and refrigeration. These systems provide centralized control of several restaurant systems that are not directly involved in meal production. It will be an easy future extension for these restaurant chains to expand their automation and centralized control to the meal production aspects of their operations.
Eventually cost reductions from improved operations will matter – and an early mover will force innovation on the rest of the industry by using this approach to improve their profitability. The technology and methodologies to automate restaurant operations are already available. What is needed is a restaurant chain with vision and an excellent understanding of their back end to start incorporating more central automation and control.
Restaurants are actually mini-factories – and not simple ones. Just as with any production facility, restaurants take in a variety of raw materials and process them to output customer-ready products. The restaurant production process requires multiple, parallel steps to create a meal. Moreover, the product must be produced at a time and place convenient to the customer, and customized to the customer’s specific order at that moment. This complex, time-critical production process has defied automation, and restaurant production remains heavily labor intensive. Indeed, the food service production process epitomizes flexibility, while at the same time it is subject to costly ongoing quality issues.
Factories in traditional industries concentrate on reducing costs and achieving high quality production. Factories sweat the details of equipment efficiency and productivity, product quality, production cycle times and inventory management and wastage control. High performing factories are closely controlled and managed, and successful factories are run that way. Restaurants differ significantly from these production best practices.
A number of service industries emulate modern industrial production practices. Transportation, banking, and wholesale/retail distribution centers all have tightly managed and controlled operations. They understand that you can only manage what you measure, and they measure everything. These companies measure asset and equipment productivity, labor deployment and productivity, inventory levels, supply chain performance, operations cycle times, and the complexity and efficiency of their operating processes. The capture, automation and analysis of operating data are a distinctive advantage for the leading companies in these service industries. This is true even for service industries with a large number of small, geographically dispersed operations, such as low cost mass retailers and branch banking. But these practices are not true in restaurants.
Although restaurants do operate like small factories, there are several considerations that discourage managing them like factories. First and foremost among these factors is that restaurant success is not driven by operational excellence. Restaurants are successful primarily because the product is attractive to customers – an appealing menu at a reasonable price – and because the ambiance of the restaurant encourages dining. This is where restaurants concentrate to achieve success, regardless of their venue. Good performance on these dimensions far overshadows operational performance.
Other factors impede the ability to manage restaurants for operational excellence. Restaurants typically operate on thin margins, and available capital tends to get invested in improving product (or building more restaurants) rather than in improving operations or reducing costs. Restaurants require very high flexibility. The exact order that needs to be produced in one to thirty minutes (depending on format) is not known until the customer appears. On top of this, menus are changing constantly. The high variation in product mix makes it difficult to visualize how to achieve the benefits of traditional production management.
There is, however, a growing impetus to improve restaurant operations particularly for large, national chains seeking to bolster profits. Having saturated the U.S. market, many restaurant chains can not grow profits by growing the number of stores. The restaurant and food services industry must look to operational improvements for the biggest impact on profitability in the US market. Broadly dispersed national chains, can especially benefit by applying more disciplined and comprehensive operation management to these large number of stores. Several of these chains, particularly in quick serve restaurants, are already moving in this direction.
The knowledge and technology to improve kitchen management is largely available. Just as with conventional factories, equipment can be instrumented and networked so that measurements can be made and recorded of all critical performance factors – inputs and outputs, equipment efficiency and productivity, product quality, throughputs and hold times, etc. Once available, this data can be analyzed to identify opportunities to improve process design, equipment selection, and inventory management.
Once restaurant operations are being measured at this level, it is a natural and easy extension to then increase the degree of automated control employed within the meal production process. Information on kitchen operations, together with automated order taking, enables efficiencies to be created in raw material picking/kitting, cooking, and meal preparation and delivery. Analysis of data on restaurant operations will indicate the best places to improve the operation to raise labor and equipment productivity. Restaurants may modify processes; integrate information flows among different stages of operations; and automate processes that were previously manual. This is likely to occur initially in the limited menu, high volume operations of corporate-owned quick serve restaurants. But once the principles and benefits are proven, automation will gradually extend to a larger portion of the food service industry.
The implementation of automated measurement and control processes would actually address many of the challenges facing restaurants today. Industrial factories have shown that automation actually improves the ability of production processes to handle short cycle times, accommodate highly variable product mix, and adapt to changing processes and product flow. Some measure of automation also helps enable just-in-time production and reductions in inventory levels. Automation also helps operate processes that are repeatable, predictable, and with high quality, particularly when a high level of expertise and training can not be maintained in managers and operators. Finally, more automated processes usually lead to lower cost processes. And while the menu will always be “king” in restaurants, higher profitability through lower cost operations will increasingly help a restaurant be successful.
Some restaurants have already started a process to centrally manage and automate their store operations. These innovative chains have installed energy management systems in their restaurants that enable central monitoring of store energy consumption and automate control of their HVAC, lighting and refrigeration. These systems provide centralized control of several restaurant systems that are not directly involved in meal production. It will be an easy future extension for these restaurant chains to expand their automation and centralized control to the meal production aspects of their operations.
Eventually cost reductions from improved operations will matter – and an early mover will force innovation on the rest of the industry by using this approach to improve their profitability. The technology and methodologies to automate restaurant operations are already available. What is needed is a restaurant chain with vision and an excellent understanding of their back end to start incorporating more central automation and control.
Monday, July 5, 2010
There Is No Silver Bullet for Energy Efficiency
Over 70% of the energy used in the United States is consumed in the operation of buildings, whether residential, commercial or industrial. Energy efficiency measures can meaningfully reduce the energy consumed by buildings. These energy efficiency measures can even be retrofit to existing buildings, which is important since the vast bulk of energy is consumed in buildings which have already been built.
Focusing on just a small portion of the energy efficiency opportunity, several companies retrofit energy management systems (EMS) into existing smaller commercial buildings, especially free-standing restaurants and convenience stores. Current Energy is one of those companies, and our experience demonstrates that it is possible to make a substantial reduction in the energy consumption in these stores just by installing an energy management system. That reduction has averaged 10% to 20% off the average annual energy consumption before the EMS was installed. At the electricity rates that prevail in most of the country, that savings on the energy bill pays for the system in 1-1/2 to 3 years. Installing energy management systems in other types of buildings has also made meaningful reductions in energy consumption.
Retrofitting an EMS into a building is only one means of improving the energy efficiency of that building. There are a wide range of measures available to building owners, operators and occupants that can further reduce energy consumption. These additional measures frequently include changing to a more energy efficient lighting technology, repairing and reconfiguring the HVAC system (especially the ductwork), changing out to more energy efficient equipment, improving the insulation around the building shell and the HVAC system, and adding reflective coatings to windows. Beyond these are a myriad of other options that can be used in buildings to reduce their energy consumption.
Unfortunately, the Pareto Principle does not apply to energy efficiency. There is not a small set of obvious measures to add to a building that will achieve 80% of the possible energy savings. As a general rule, implementing a single energy efficiency measure creates an incremental savings. Investing in the single energy efficiency measure often creates a positive return on that investment through reduction in future energy costs, but isn’t usually enough on its own to change the economics of the building. For most existing buildings, making substantial reductions in energy consumption usually requires a broad, multi-step attack on the many causes of energy inefficiency. Improving the efficiency of existing buildings can produce dramatic reductions in energy consumption, but several measures need to be implemented to accomplish that result.
This fact was particularly true for Current Energy’s experience just with energy management systems. These systems achieve their savings by providing automated control over energy consuming equipment, usually replacing manual operation or inefficient controls. As with energy efficiency in general, no small set of new control strategies generates most of the energy savings. Rather, dramatic reductions in energy consumption can only be achieved by implementing a large number of control strategies that touch most of the energy consuming equipment in a building.
As an example of the comprehensive approach to reducing energy consumption in a fast food restaurant, Current Energy implements at least eight separate control strategies to reduce the energy consumption of the store’s lighting -- and usually more. Current Energy applies this same comprehensive approach by using a large number of distinct control strategies in managing the HVAC systems, refrigeration, hot water heater, cooking appliances and other equipment. More simplistic energy management systems do save energy with a less aggressive approach, but they can not achieve the 20%+ savings that a more comprehensive system can achieve. As one indicator of its scope of control, a Current Energy EMS typically has 4 to 10 times the number of sensor and switch connections of simpler energy management systems in equivalent stores. Current Energy continually proves that the more things you monitor and control in a building, the greater the energy savings you achieve.
There is no silver bullet for reducing energy consumption. Energy efficiency is a game of inches. Meaningful reduction can only be achieved by implementing a large number of individual measures, each of which has an incremental effect on reducing energy use, but which in total generate significant savings.
Focusing on just a small portion of the energy efficiency opportunity, several companies retrofit energy management systems (EMS) into existing smaller commercial buildings, especially free-standing restaurants and convenience stores. Current Energy is one of those companies, and our experience demonstrates that it is possible to make a substantial reduction in the energy consumption in these stores just by installing an energy management system. That reduction has averaged 10% to 20% off the average annual energy consumption before the EMS was installed. At the electricity rates that prevail in most of the country, that savings on the energy bill pays for the system in 1-1/2 to 3 years. Installing energy management systems in other types of buildings has also made meaningful reductions in energy consumption.
Retrofitting an EMS into a building is only one means of improving the energy efficiency of that building. There are a wide range of measures available to building owners, operators and occupants that can further reduce energy consumption. These additional measures frequently include changing to a more energy efficient lighting technology, repairing and reconfiguring the HVAC system (especially the ductwork), changing out to more energy efficient equipment, improving the insulation around the building shell and the HVAC system, and adding reflective coatings to windows. Beyond these are a myriad of other options that can be used in buildings to reduce their energy consumption.
Unfortunately, the Pareto Principle does not apply to energy efficiency. There is not a small set of obvious measures to add to a building that will achieve 80% of the possible energy savings. As a general rule, implementing a single energy efficiency measure creates an incremental savings. Investing in the single energy efficiency measure often creates a positive return on that investment through reduction in future energy costs, but isn’t usually enough on its own to change the economics of the building. For most existing buildings, making substantial reductions in energy consumption usually requires a broad, multi-step attack on the many causes of energy inefficiency. Improving the efficiency of existing buildings can produce dramatic reductions in energy consumption, but several measures need to be implemented to accomplish that result.
This fact was particularly true for Current Energy’s experience just with energy management systems. These systems achieve their savings by providing automated control over energy consuming equipment, usually replacing manual operation or inefficient controls. As with energy efficiency in general, no small set of new control strategies generates most of the energy savings. Rather, dramatic reductions in energy consumption can only be achieved by implementing a large number of control strategies that touch most of the energy consuming equipment in a building.
As an example of the comprehensive approach to reducing energy consumption in a fast food restaurant, Current Energy implements at least eight separate control strategies to reduce the energy consumption of the store’s lighting -- and usually more. Current Energy applies this same comprehensive approach by using a large number of distinct control strategies in managing the HVAC systems, refrigeration, hot water heater, cooking appliances and other equipment. More simplistic energy management systems do save energy with a less aggressive approach, but they can not achieve the 20%+ savings that a more comprehensive system can achieve. As one indicator of its scope of control, a Current Energy EMS typically has 4 to 10 times the number of sensor and switch connections of simpler energy management systems in equivalent stores. Current Energy continually proves that the more things you monitor and control in a building, the greater the energy savings you achieve.
There is no silver bullet for reducing energy consumption. Energy efficiency is a game of inches. Meaningful reduction can only be achieved by implementing a large number of individual measures, each of which has an incremental effect on reducing energy use, but which in total generate significant savings.
The Smart Grid – The Limited Vision
There is significant fascination in the utility industry today about the future of the “smart grid’.
The expansive electric utility view of the smart grid is a means to know in real-time, in detail, how electricity is being distributed and consumed in their networks. Their view also includes some ability to use the smart grid, either through direct controls or through real-time pricing changes, to manage consumption to limit peak demand for generating capacity. To electric utilities, the smart grid concept includes functions like automated meter reading, distribution automation, and remote service connection and disconnection. Their concept also includes load management and demand response management. The overall purpose of the smart grid is to deliver a more reliable supply of electricity at lower cost – both the average cost and the marginal cost of peak demand.
An underlying element of the utility vision is that they have to establish a communications network to communicate with their infrastructure and with their customer end points (meters). A communications network is essential to the concept of the smart grid because monitoring, management and control of the network elements must happen in real-time. Almost all discussions about building the smart grid inherently include the concept of building a utility-specific communications network as its foundation (such as noted in this blog on Electricity 2.0). Most of these envisioned communications networks are proprietary, whether communicating over the existing power lines that the utilities already have deployed, or constructing some proprietary wireless network overlaid on that distribution infrastructure.
This makes electric utilities, along with the US military, among the last industries in this country that believe that they have to build their own proprietary communications network. They can not imagine any other way to reliably reach the large number of business and residential customers that they serve. Utilities are pursuing this proprietary vision largely because of their monopoly history. They believe that they have to control their entire infrastructure. For example, utilities have been grandfathered with radio frequency licenses from the FCC over which they have operated their own wireless voice communications networks for decades. The utilities believe that the only way to achieve the functionality, reliability, capacity and security that they need is to build, own and operate their own communications network.
Most plans for the smart grid do not currently envision using any of this country’s existing, ubiquitous communications networks. The telephone network is a well-known, technically mature resource that covers almost literally the entire country. The more recently deployed cellular communications networks have almost equally universal coverage, although the technologies continue to evolve. But the utilities are mostly overlooking the advantages of the existing, broadly deployed, broadly supported, low cost nationwide data communications network – the Internet.
If a smart grid is to be built that reaches to every customer meter, and to the power-consuming equipment behind the meter, it will be built on the Internet. The Internet is already broadly deployed, and it is expanding its reach into more places and to more devices every day. The Internet is already the backbone communications network for a broad range of commercial communications, whether conducting financial transactions, supporting on-line retailing, operating an integrated supply chain, or conveying medical information. The costs of adding Internet connectivity to devices, appliances, or machines is continuing to drop, and that connectivity is being built in. Utilities are wasting their money chasing the broad deployment, general adoption, and low cost of the Internet.
Load management and demand control will never operate over a proprietary utility network as envisioned by the electric utilities. Customers are not going to invest to communicate data through a smart electric meter. Particularly in commercial and industrial facilities, and increasingly even in residences, demand management of energy consuming devices is already being conducted by existing intelligent systems – industrial control systems, building automation systems, energy management systems, and even smart thermostats. All of these systems are being connected to the Internet, to the extent that they are not already. Customers will not tolerate having to connect to another network to take input from the utility, whether it is pricing or demand response requests. They will demand that information to come over the data communications network that they already support – the Internet.
Utilities may still pursue the misguided vision of building their own communications network to control their own power distribution infrastructure. They may also extend it all the way to their smart meters. Those smart meters will be the end points of any utility communications network, however, not a portal to the energy consuming equipment of their customers. The only real reason that utilities will install “smart” meters (for AMR or AMI) is so that they can track usage in real-time to assure compliance with pricing and demand response programs intended to limit peak demand. That function could be performed more easily and inexpensively over the Internet, but that will be up to the electric utilities and their regulators. The utilities’ customers increasingly conduct their data communications over the Internet, and they will require utilities to communicate with them that way too.
There may be a “smart grid” over which the utilities do a better job of managing their power distribution network. But it will never be a mechanism for communicating with their customers. That network already exists.
The expansive electric utility view of the smart grid is a means to know in real-time, in detail, how electricity is being distributed and consumed in their networks. Their view also includes some ability to use the smart grid, either through direct controls or through real-time pricing changes, to manage consumption to limit peak demand for generating capacity. To electric utilities, the smart grid concept includes functions like automated meter reading, distribution automation, and remote service connection and disconnection. Their concept also includes load management and demand response management. The overall purpose of the smart grid is to deliver a more reliable supply of electricity at lower cost – both the average cost and the marginal cost of peak demand.
An underlying element of the utility vision is that they have to establish a communications network to communicate with their infrastructure and with their customer end points (meters). A communications network is essential to the concept of the smart grid because monitoring, management and control of the network elements must happen in real-time. Almost all discussions about building the smart grid inherently include the concept of building a utility-specific communications network as its foundation (such as noted in this blog on Electricity 2.0). Most of these envisioned communications networks are proprietary, whether communicating over the existing power lines that the utilities already have deployed, or constructing some proprietary wireless network overlaid on that distribution infrastructure.
This makes electric utilities, along with the US military, among the last industries in this country that believe that they have to build their own proprietary communications network. They can not imagine any other way to reliably reach the large number of business and residential customers that they serve. Utilities are pursuing this proprietary vision largely because of their monopoly history. They believe that they have to control their entire infrastructure. For example, utilities have been grandfathered with radio frequency licenses from the FCC over which they have operated their own wireless voice communications networks for decades. The utilities believe that the only way to achieve the functionality, reliability, capacity and security that they need is to build, own and operate their own communications network.
Most plans for the smart grid do not currently envision using any of this country’s existing, ubiquitous communications networks. The telephone network is a well-known, technically mature resource that covers almost literally the entire country. The more recently deployed cellular communications networks have almost equally universal coverage, although the technologies continue to evolve. But the utilities are mostly overlooking the advantages of the existing, broadly deployed, broadly supported, low cost nationwide data communications network – the Internet.
If a smart grid is to be built that reaches to every customer meter, and to the power-consuming equipment behind the meter, it will be built on the Internet. The Internet is already broadly deployed, and it is expanding its reach into more places and to more devices every day. The Internet is already the backbone communications network for a broad range of commercial communications, whether conducting financial transactions, supporting on-line retailing, operating an integrated supply chain, or conveying medical information. The costs of adding Internet connectivity to devices, appliances, or machines is continuing to drop, and that connectivity is being built in. Utilities are wasting their money chasing the broad deployment, general adoption, and low cost of the Internet.
Load management and demand control will never operate over a proprietary utility network as envisioned by the electric utilities. Customers are not going to invest to communicate data through a smart electric meter. Particularly in commercial and industrial facilities, and increasingly even in residences, demand management of energy consuming devices is already being conducted by existing intelligent systems – industrial control systems, building automation systems, energy management systems, and even smart thermostats. All of these systems are being connected to the Internet, to the extent that they are not already. Customers will not tolerate having to connect to another network to take input from the utility, whether it is pricing or demand response requests. They will demand that information to come over the data communications network that they already support – the Internet.
Utilities may still pursue the misguided vision of building their own communications network to control their own power distribution infrastructure. They may also extend it all the way to their smart meters. Those smart meters will be the end points of any utility communications network, however, not a portal to the energy consuming equipment of their customers. The only real reason that utilities will install “smart” meters (for AMR or AMI) is so that they can track usage in real-time to assure compliance with pricing and demand response programs intended to limit peak demand. That function could be performed more easily and inexpensively over the Internet, but that will be up to the electric utilities and their regulators. The utilities’ customers increasingly conduct their data communications over the Internet, and they will require utilities to communicate with them that way too.
There may be a “smart grid” over which the utilities do a better job of managing their power distribution network. But it will never be a mechanism for communicating with their customers. That network already exists.
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