Itron CEO Talks Smart Grids and Cities, Big Data, China, and Water
Based outside of Spokane, WA, but with a business presence in 120 countries, Itron is the quiet, global giant in the state’s cleantech sector—and a key part of the Pacific Northwest’s cluster of smart grid businesses.
Philip Mezey took the helm of Itron at the start of the year, guiding a company in an enormous marketplace of 2.6 billion electric, gas, and water meters worldwide. “Fewer than 10 percent of them have been automated in any way,” he says, alluding to the massive opportunity in an interview with Xconomy.
“There are really good reasons that we would want to connect our electric, gas, and water meters—to have the utility and the customer understand how and when we’re going to use energy and water, because there are significant inefficiencies built into the market of not knowing.”
Itron just posted 2012 revenue of $2.2 billion, down about 10 percent from 2011, but swung to a $108.3 million profit, from a half-billion dollar loss the year earlier.
As a top supplier of utility meters, communications technology embedded in them, and complex smart grid systems, Itron (NASDAQ: ITRI) has a unique vantage point on a future of connected cities, which Mezey discusses—along with the smart grid “hype cycle,” China, big data, water, and more—in this condensed, edited interview.
The pace of smart grid deployments in North America, and why we’ve seen relatively few very large projects:
“California, Texas, and Ontario, [Canada] mandated electric smart metering and essentially triggered a series of very large projects which are just now completing…. I think what led to a hype cycle in the industry was an expectation that after California, Texas, and Ontario, that all the other states were going to follow at this level of complete commitment, total rollout, and that is not what happened….
“It’s a conservative industry, and there are a lot of utilities that want to wait and see the economics of how these large projects in California and Texas pan out. They want to see results before they make the plunge and commit.
“There are places, large places in parts of the country where the average electric bill is $70 a month and the incremental savings out of having control over how and when you use your electricity is possibly not justified for the level of expense. … And then because of the recession and increasing rates in a number of regions, regulators have been very careful about increasing the burden on the residential consumer to make the investment in smart grid.”
Smart grid pilot projects then and now:
“[Utilities] were proving to themselves, ‘Does it really work?’ I think at this point, we have 5 million meters up and running in Los Angeles, 2 million in San Diego, and another 2 million in Houston. I mean, the stuff works, demonstrably. [Today], they’re business-case pilots, in which they’re studying consumer behavior, and looking at different rate structures, and all kinds of projects to find the best economic model for deploying the technology more widely….
“Innovation tends to focus too much on technology. People think it’s about hardware, and it turns out there is a lot of innovation in business process, and delivery, and channel development.”
A policy change to open the Washington smart grid market:
“Time-varying rates. There is no incentive for people to pay attention to how and when they use electricity if they pay flat rates. And yet the economics of generating power at different times of day are very different, so we’ve insulated the consumer from the economics of how the product is generated and delivered. That’s the single biggest thing that should be done to create a more efficient market, is to have more transparent pricing. I mean that’s been true of so many other markets, outside of the utility market.”
“You’re starting to see ADT and Comcast and Verizon enter the energy space through bundling of home security and energy, and there are going to be high-end customers who engage at that level. Then down at the low end you may have customers that are willing to have you tell them, ‘It’s a really hot day 10 times a year, tell me to turn down my air conditioning.’
“I think a well-designed program is diverse and reacts to the needs of these different groups [of consumers]. And the demonstration projects are trying that. They’re cutting different segments of the user community and trying different levels of automation, different amounts of information.
“What I think we’ve found out is that as much as we inside the energy business would like to think that people care a lot about how much energy they consume, the answer is they care No. 1 about their cell phone bill, No. 2 about their cable bill, No. 3 about their car and their mortgage, and energy ranks about fifth on the list of consumer concerns.”
The best international markets for electric smart grids:
“The most exciting opportunity right now is post-Fukushima Japan. The Japanese government has committed to implementing smart meters as a load-control program to deal with their significant shortage of electricity as a result of shutting down a large number of nuclear power plants. Tokyo Electric Power has publicly stated their intent and has issued tender documents to let what will be the world’s largest smart metering project. And when I say world’s largest, I always caveat outside of China. TEPCO itself is 32 million electric meters. Japan total is about 80 to 85 million electric meters, so these are big projects.” [Previously: Itron In Deal With Panasonic For Huge Japanese Smart Meter Market]
Manufacturing in and selling to China:
“In the electric space, 60 million smart meters are being deployed annually in China—which is a very large number—that are being manufactured by all local suppliers. Very low cost, very low quality meters, and as far as we can see, nobody is making any money. So that is not a market that we are apt to enter in the near term.
“There are some entry points for us in the Chinese market. They are not obvious…. We did supply the electric meters on the Three Gorges Dam, so when it gets to high end commercial/industrial metering, where you need a highly accurate and complex product—that, by the way, has quite a lot of IP in it; it’s a very sophisticated product—that’s differentiated enough that you can sell profitably in the market, but as you go to volume, low-cost, low-quality, then we’ve not found a way yet. We’re still looking at that.
“However we are using it as a low-cost manufacturing site, and we did announce that we have both a gas and a water-meter factory in China, and that is mainly for export markets.”
Competing with Chinese manufacturers:
“The greatest challenge that any manufacturing company faces—and we still manufacture our own goods—is that low-cost imports (codeword: China) are going to bomb your manufacturing business and destroy your gross margins, right? So the sensible way to respond to that is to bundle in more value, more technology, and really focus on delivering value to your customers through a system as opposed to selling a product. So what you’ve seen over the last eight years is a transformation from a product-based company to a systems-based, to ultimately a value-delivery based company, meaning that you not just provide meters, communications, software, and services, but that you may even go to the point of delivering the analyzed data to the customer in the form of recommendations.”
The big data challenge:
“There’s a consistent polling of utility CIOs, their No. 1 concern is data explosion. And they have a reason. Just looking at the metering space, what was 12 pieces of data a year—a guy walks around, reads your meter 12 times a year—has become 8,760 reads. That’s the number of hours in a year, multiplied by the fact that you’re now reading multiple quantities out of the meters….
“What is going to power the smart grid forward is some field technology, but there is a lot of data analysis and data mining, right? OK, now that I’m collecting all this information, what does it tell me that is really useful and allows me to run my organization more effectively?
“So, we are investing in data analytics, we are working with partners. Microsoft, as an example, is very compelling technology for data analysis. Cloud-based offerings—so really changing how it is that you deliver these kinds of insights.”
Build or buy:
“In an innovation cycle, you have to make a decision of what you build internally, what you partner for, what you invest in, and what you acquire…. We will strongly continue on our internal research and development program. You’ve seen us work with Cisco, as an example, in the networking space…. We just announced a relationship with Qualcomm, which really has the potential to blow the doors off the machine-to-machine cellular market in our space… And then there’s a lot of innovation going on in small startups, and so with startups you’re looking at investment or acquisition as a way of getting access to that high-level of innovation at a small company.”
On inefficiencies in the water system:
“Many people say water is going to be the—fill in the blank—the oil, the gold, the whatever of the 21st century. First of all there are billions without access to potable water, so it’s clearly a pressing humanitarian issue.
“Thirty percent of the water put into the distribution system doesn’t make it to its ultimate end use because we have aging infrastructure, many leaks in the system. And then once it does make it to your house—to the customer’s house—a huge amount of water is leaked through watering systems, toilets, other leaks. We’re providing a similar type of network intelligence that’s being developed on the electric side in the water network to create much greater efficiencies on how water is distributed, and how efficiently it’s being used by the consumer.
“In the case of water, that 30 percent number is a huge opportunity for savings. And, by the way, that 30 percent of water is very energy intensive. A huge amount of energy is spent pumping, purifying, processing water so when you waste water, you’re also wasting energy.”
The potential of smart cities:
“There is a tremendous opportunity for coordinating information from multiple streams—and you see this in smart cities, in which they’re collecting of course electricity, gas, and water—but a lot of other sensor based information: street lighting, solar, all of these things. There are going to be many more measured points within the smart grid. On the gas side, methane sensing, corrosion detection, pressure sensing—all sorts of things. You see innovative companies that are measuring traffic distribution patterns. Some of these have privacy issues, but by coordinating this information, cities can run much more efficiently, cool their buildings before it gets too hot in a day, and set the traffic lights in a different pattern so there’s less traffic….
“That’s going to be a huge area of value creation. And so by participating in the imbedded communications and the networking that’s involved of our systems, we really will have the opportunity to participate in adding more measurements, more sensors onto the network that will ultimately create some interesting insights.”