GREENBACKS FROMGREENTECH:INVESTING IN PRIVATE CAPITAL’SHOTTEST SECTOREDITED BY AMANDA WILLIAMS PALMER

About the editor

Amanda Williams Palmer is the executive editor of ThomsonReuters’ European VentureCapital and Private Equity Journal (EVCJ). She was the formerly the editor of HFM Weekand Hedge Fund Manager Magazine and the news editor of Hedge Funds Review. In thepast, Amanda has written for Investment Week, MultiManager Magazine, Global FinanceMagazine, Bloomberg Money and Legal Week. She has been quoted in the Financial Timesand the International Herald Tribune, as well as, by Bloomberg and Reuters. She hailsfrom Oak Ridge, Tennessee but lives in London. She is a popular addition to the Europeanconference circuit and launched the EVCJ Awards and the EVCJ European Venture CapitalForum. Williams Palmer is currently an MBA student at Cambridge University. In 2009,she was named one of the Five Extraordinary Women in Thomson Reuters.

© Thomson Reuters 2009

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First published 2009 by Thomson Reuters, Aldgate House, 33 Aldgate High Street, LondonEC3N 1DL, UK

Typeset by: Nita Webb, Nicola O’Hara and Angela Allwright

01 IntroductionBy Amanda Williams Palmer,Executive Editor, EuropeanVenture Capital Journal

Governments promise massive investmentPrivate equity and venturecapital investmentCleantech investment trends

Chapter 0103 Maintech, not cleantechBy Vinod Khosla, founder,Khosla Ventures

Forecasts: why are they sowrong?

OilGas and coalCell phonesBelief system bias

Black swans – the solution tothe energy crisis?Carbon-negative cementFast-track biofuel crudeDrive for carbon reductionEvaluating solutions: the scalingmodelCost trajectory

Carbon trajectory costsTypes of cost

Adoption riskOptionalityCapital formationCarbon reduction capacity

Chapter 0215 Accessing the low carboninvestment opportunity:generating returns andmanaging riskBy Jim Totty, partner and seniorinvestment manager, OsmosisCapital

The growth of the low carboneconomy

Energy and water securityCommodity price volatilityClimate change and the need

to create a newinter-generational legacy

Financial consequences ofclimate change

Long-term ‘green collar’ jobcreation and governmentstimulus

Population growthFunding the growth: whysuperior investment returns areavailable in the low carbonsector

Investment required in thelow carbon sector

The changing fundinglandscapeRecent private equityinvestment levels

Investment stageRegionSectorFuture growth

Returns in the low carbon sectorNeed for experienced banks

and advisorsInvestment funds in cleantech

Funds in the low carbonsector

Venture capitalPrivate equityThe challenge of fund

selectionCapital raising in the sector

Investment considerations forLPs

Diversification of exposureSub-sectorsInvestment stylesVintage yearsMajor geographiesFundsSelection of top quartile

managersLack of track recordNeed for specialist sector

knowledge for due diligenceCleantech experienceDirect investing experienceTeam and fundAccess to funds

Investing through funds of funds Characteristics of successful

funds of fundsTeamIndependence and

specialisationNetwork and database

Conclusion

Chapter 0333 Why government policy iscentral to solving climatechangeBy Mark Fulton, global head, andMark Dominik, vice president,Climate Change InvestmentResearch, DB Climate ChangeAdvisors

Why government intervention isnecessary: climate change andmarket failureWhat government commitmentneeds to unlock: financial flowsHow policy is crafted

Long-term target settingA taxonomy of governmentpolicy

Carbon pricingInnovation policy

Traditional regulationThe dynamics of policydevelopment over timeImplications for investors: theneed for long-term focus andcommitment

Chapter 0443 Venture capitalinvestment ingreentech/cleantechBy Andrew Affleck, chairman,Low Carbon Accelerator

Venture capital compared toother funding sources

Grants and soft loansFriends and familyAngel investorsBank debtCorporationsCapital markets

Venture capital in thegreentech/cleantech sectorGreentech/cleantechchallenges for venture capital

Price premiumsSuppliersCustomersCapital requirementsFinancing riskTime frames

If not venture capital, thenwhat?Innovative private sectorfinancing approaches

Supporting investment incarbon reducing technologies

Supporting financing of firstcommercial plants and marinetechnologiesIs venture capital the mostimportant cleantech investor?

Chapter 0553 Private equityperspectives on investing inrenewable energyBy Mark Brown, managingdirector, head of BarclaysNatural Resource Investments

The rising profile of renewableenergyBroad parameters for privateequity investment

ManagementTechnologyDevelopmentPolitical and regulatory

contextInvestment scale and timingReliance on debtAbility to exitReturn on (and competition

for) capital

CONTENTS

iii

iv

Case study: MainstreamRenewable Power

Mainstream's business strategyHow Mainstream meets

BNRI's investment parametersConclusions

Chapter 0661 Cleantech’sopportunities forsector-focused portfoliodiversificationBy Thomas Martin, senior vicepresident, PCG AssetManagement

Sector-focused funds provideopportunity for institutionalinvestmentPortfolio contruction factorsInvestment stageSub-sector allocationInvestment structureGeographyVintage yearSummary

Chapter 0765 Cleantech financingtrends – a EuropeanperspectiveBy Robert Markus Feldmann,managing director, CorporateFinance Advisory, Deloitte &Touche Corporate FinanceGmbH

Cleantech financing barriersProject financing: new mixFinancing trendsInvestor analysis more critical

Chapter 0869 Cleantech opportunitiesin emerging markets By Ashish Patel, managingdirector, Intel Capital EMEATailoring investment strategiesto development stageBarriers to cleantech adoptionAdvantages of emergingmarketsDrivers of opportunity Regional opportunities Supply-side opportunitiesDemand-side opportunitiesServices opportunitiesIndividual opportunitiesChina

Goals and regulations Current investmentCoalWindSolarEnergy efficiency Water treatment

IndiaEnergy efficiency Rural electrification Clean water

AfricaOther marketsConclusions

Chapter 0981 Why MENA shouldintegrate CSP into its energymixBy Samer Zureikat, managingdirector, MENA Cleantech AG

The energy intensity of theMENA water-use cyclePer capita renewable waterflows, not per capita CO2emissionsDecoupling fossil fuels from thewater-use cycleCSP technologies fit MENA’ssolar resourcesCase study: JOAN1, 100MW CSPPlant, Ma’an, JordanA sustainable MENA water-usecycle can also sustain Europe

Chapter 1087 Perspectives on smartgrid developmentBy Ashutosh Shastri, director,EnerStrat Consulting

OverviewDefining the smart gridHow smart is the grid today?Smart grid growth drivers

Customer demand andtechnology supply

Political push forinfrastructure investmentSizing and segmenting thesmart grid space

Advanced transmission anddistribution systems

Advanced meteringinfrastructure

Demand response systemsCorporate activity in smart gridsSmart grid deployment in theUS and EU

EU energy policyUS energy policy

Smart grid implementationchallengesInvesting in the smart grid futureOutlook and conclusions

Chapter 1199 Case study: MBAPolymersBy Nigel Grierson, managingdirector, Doughty HansonTechnology Ventures

IntroductionMBA Polymers and cleantechfundingMarket opportunityHow do they do it?Customers are demanding amore sustainable supply chain

List of tables and figures

Table 2.1: China, India, MiddleEast – population and freshwater supply (%)Table 2.2: Active PE and VCinvestors in the low carbonsector, 2007, 2008Table 4.1: Largest companies bymarket value, 2008 (US$m)Table 7.1: Financing solutions for phases of companydevelopment

Figure 1.1: Oil price forecastsand actuals, 1985–2005Figure 1.2: Gas price forecastsand actuals, 1985–2005Figure 1.3: Coal price forecastsand actuals, 1985–2005Figure 1.4: New technologycost trajectoryFigure 1.5: Technology costcurves differ Figure 1.6: Cost types asproportion of total costFigure 1.7: Carbon trajectoryFigure 1.8: Optionality: biofuelsfeedstocks and pathwaysFigure 1.9: Optionality: hybridsvs. biofuelsFigure 1.10: Global carbonreduction capacity to 2050

Figure 2.1: Investment growthin the low carbon sector,2004–08 (US$, %)Figure 2.2: Estimated annualinvestment required to maintainglobal warming at 2ºC abovecurrent temperatures (US$bn)Figure 2.3: Global VC/PEinvestment by type, 2002–08(US$bn)Figure 2.4: Global VC/PEinvestment by region, 2002–08(US$bn)Figure 2.5: Global VC/PEinvestment by sector, 2008(US$bn)Figure 2.6: Total equity value ofVC/PE low-carbon investmentworldwide, 2002–2014 (f)(US$bn)Figure 2.7: Global funds raisedfor the low carbon sector,2000–09

v

Figure 2.8: Disclosed VC & PE funds raised, 2002–08(US$bn)

Figure 3.1: The capital curveFigure 3.2: Incentives andtargets are linked in a structureof supportFigure 3.3: Three broad types ofclimate policyFigure 3.4: The governmentpolicy process will move

through stages over time for agiven technology that has beenproven in demonstration

Figure 10.1: Smart gridsub-technologies andcharacteristicsFigure 10.2: Smart gridtechnology applications acrossthe electricity value chainFigure 10.3: Key drivers ofsmart grid deployment

Figure 10.4: Segmenting smart grid technologies andmarketsFigure 10.5: Growing globalcorporate activity in smart gridsFigure 10.6: Comparison of US and EU smart griddevelopmentFigure 10.7: US smart gridfunding from the governmentstimulus package

INTRODUCTIONBy Amanda Williams Palmer, executive editor, European Venture Capital Journal

1

Greentech and cleantech are two of the hottest buzzwords for investors now, and it iseasy to understand why. Shell has forecasted that by the year 2040 the majority ofenergy generated or used on the planet will come from renewable sources.

Governments promise massive investmentGovernments around the world have promised billions of dollars of investment intothe sector to combat climate change. The US has committed to US$150bn, Australia isinvesting US$3.4bn and Taiwan is committing US$1.4bn. China has one of the mostaggressive energy targets in the world, including having renewable sources accountfor 10% of all energy requirements by 2010, and 30% by 2050. The Chinese Ministry ofScience and Technology promised to spend up to US$3bn to support projects thatimprove energy efficiency and cut emissions. And according to predictions, by theend of 2010 the country will have invested approximately US$66bn in green businessas a whole.

Private equity and venture capital investmentThough much of the growth of cleantech and greentech will come from governmentprojects, it is still a favourite investment area for private equity. From 2000 to 2008,investment flows into the cleantech sector grew by 55% per year to represent overUS$35bn of cumulative investment since 2000, according to New Energy Finance.Over US$1.2bn has been invested in the sector in the first three quarters of 2009, andin 2008, US$824m was invested in renewable energy, according to data fromThomson Reuters. Market researcher Greentech is even more optimistic, reporting112 venture capital investments into cleantech worth US$1.9bn so far in 2009.

Many of the notable deals in the sector in 2009 were backed by financial sponsors,including the US$190m investment in thin-film solar company Solyndra by ArgonautPrivate Equity; Crédit Agricole Private Equity’s purchase of energy consulting firmElettrostudio and Waterland Private Equity’s US$64.3m purchase of Enfinity, whichdevelops and finances renewable energy projects in solar and wind. Private equityplayers were equally active in 2008, with the Sina Renovables buyout of AdelantaCorporation, an energy company which uses wind, solar and biomass. 2008 also sawGerman-based Sirius Venture Partners’ buyout of GEB a co-generation plant.

According to the Cleantech Group’s annual review, Khosla Ventures is the most activeinvestor in renewables, with 21 deals completed in 2008. Vinod Khosla, the founderof Khosla Ventures, writes in this report about black swan ideas which fundamentallychange the world, which are scaleable and meet the ‘Chindia price’ – the price atwhich China and India would freely adopt the technology without subsidies overfossil fuel-based products.

Another private equity firm with makes the Cleantech Group’s top 10 list with eightdeals executed in the sector in 2008 is PCG AM, an active investor in renewables for

over 15 years. In this report, Thomas Martin, senior vice president of PCG AM talksabout his relationships with institutional investors and the themes he has seenemerge in LP portfolios, where existing general partners are migrating to investing inthe cleantech space or LPs are taking on additional specialist managers which areactive in this space.

Cleantech investment trendsThis report also drills down into specific trends affecting cleantech investments, suchas corporate VCs investing in the sector and the development of investmentopportunities in emerging markets. Ashish Patel, managing director of EMEA forIntel Capital, hits on both these themes as he looks at the opportunities in this sector.Patel mentions that energy is needed for development, and this needs to be as cheapas possible, which often means the use of fossil fuels. But climate change is a hugedevelopmental barrier for the third world too, so it is a matter of finding a delicatebalance.

Samer Zureikat, managing director of MENA Cleantech, looks at why oil-richcountries in the MENA region should integrate solar power into the energy mix.Zureikat includes a case study on JOAN1, a 1000MW CSP Plant in Ma’an, Jordan. Thesouth of Jordon boasts some of the highest solar irradiance in the world. This projectproduces both energy and water. This case study also highlights favourable foreigndirect investment terms for solar energy in MENA, just as in much of Europe and theUS.

From the US to China to the Middle East, renewable energy provides investmentopportunities for private equity players and is supported by almost every majorgovernment in the world.

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In 2009, the credit crunch has affected the low carbon market. New investment forQ3 2009 was US$26bn, down 22% compared to the third quarter of 2008 (source: NewEnergy Finance). Investment has been affected by the severe shortage of bank financeand variable levels of confidence in public markets, although the US$500bn of fiscalstimulus announced by governments is expected to reverse this trend in 2010.

IEA and New Energy Finance research estimates indicate that US$542bn of annualinvestment will be required through to 2030 in order to maintain global warming at2˚C above current temperatures. Should global spending on low carbon technologiesbe lower than this, temperature rises by 2100 could be 4–6˚C or even higher. Thecurrent US$155bn a year spend falls well short of the level required, and creates asignificant funding gap that needs to be satisfied through long-term investment.

Although governments are well aware of this shortfall in funding in the sector, most

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$35bn

$59bn

$93bn

$148bn$155bn

2004 2005 2006 2007 2008

58%growth

59%growth

5%growth

68%growth

Figure 2.1: Investment growth in the low carbon sector, 2004–08 (US$, %)

Source: New Energy Finance

WEO 2008 -Reference

229

379

6oC515

542

WEO 2008 -550ppm

NEF GlobalFutures 2008

WEO 2008 -450ppm

600

500

400

300

200

100

0

7

6

5

4

3

2

1

0

4oC

2.5oC2oC

US$bn oC

Figure 2.2: Estimated annual investment required to maintain global warming at 2oCabove current temperatures (US$bn)

Source: World Economics Forum, IEA, New Energy Finance, Osmosis Capital

SectorBy sector, the majority of VC/PE investment went into the more established areas ofsolar and wind in the form of late-stage venture and expansion capital. In addition,there were a number of wind component companies that became buy-out targets.Energy efficiency also received significant venture investment, second only to solar,as the sector comes to the fore with increasing enthusiasm for technologies such assmart grid. Figure 2.5 shows global VC/PE investment by sector excluding projectdeals.

Future growthAlthough VC/PE investment has grown at a steady pace since 2004, it is recognisedthat the severe reduction in the levels of debt finance provided by banks, limitednear-term exit opportunities and the slow recovery of confidence in stock markets,will lead to a fall-back in investment in 2009. However, we expect that the current

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2002 2003 2004 2005 2006 2007 2008

US$12.5bn(318/407)

US$3.8bn(187/249)

US$1.7bn(114/153)

US$0.9bn(83/100)

US$18.3bn(426/530)

US$26.7bn(595/716)

US$32.4bn(494/615)AMER

EMEAASOC

Figure 2.4: Global VC/PE investment by region, 2002–08 (US$bn)

Note: Numbers in brackets relate to disclosed deals / total dealsSource: New Energy Finance

Solar

Wind

Biofuels

Efficiency

Other low carbontechnologies

Other renewables

Biomass and waste

VCPE Expansion CapitalPE Buy-outPIPE/OTC

$6.5bn

$5.6bn

$2.3bn

$1.6bn

$1.6bn

$1.0bn

$0.8bn

Figure 2.5: Global VC/PE investment by sector, 2008 (US$bn)

Source: New Energy Finance

Government policy is therefore essential to tackle the recognition of externalities inmarkets in order to combat climate change. However, this carries a short-term cost inorder to avoid the risks of much greater costs in the long term. Some constituenciesin society may question whether they wish to bear this cost. This is the key challengeto government policy in the long term, barring a change in the scientific consensus.

This chapter looks at the overarching, long-term shape of government targets tocombat climate change. It then examines individual government policies thatunderpin and support the core goal of government climate targets.

What government commitment needs to unlock: financial flowsMitigating and adapting to the impacts of climate change will require significantcapital to be deployed. Analysis conducted by Project Catalyst, an initiative of theClimateWorks Foundation (an international philanthropic network dedicated toachieving low-carbon prosperity), has found that the incremental transition costsassociated with climate change will be approximately €55–80bn per year from2010–2020 for developing countries and €40–50bn per year for developed countries.4

These incremental costs are on top of very large business-as-usual costs – meaningthat government policy will need to be crafted in such a way as to redeploy trillions ofdollars of investment.

In many ways, mitigating and even adapting to climate change is a technology andengineering issue. Investment will need to be deployed across the capital curve.Technologies at different stages of development, demonstration and deployment willpresent different risk/return profiles, and will require different forms of governmentintervention (see Figure 3.1.)

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Figure 3.1: The capital curve

Source: : DB Climate Change Advisors

Technologydevelopment& businessformation

100% equity

High risk/return

60-100% equity

Medium risk/return Low to medium risk/return

60-80% debt Varies

Pilot plant Demo plantFirst

commercialscale plant

Businessstrategy

Projectfinance

Mature operations

Typicaldeal size

Companystage

Financing

US$5-20m US$20-100m US$100+m

Venture capital Expansion/development

Buyout/infrastructure

Standards are used by many states, with some having penalties for failing to achieve compliance.

0 Grants for research, development, demonstration and deployment are used to rapidly spur uptake of clean technologies. China unveiled a US$586bn stimulus plan in November 2008, containing billions of funding for green infrastructure. Under the ‘Golden Sun’ pilot project, the Chinese government will subsidise 50% of total investment for solar PV projects and transmission facilities. For PV projects in remote areas, the subsidy will increase to 70% of investment cost. China is also to offer Rmb600m (about US$90m) in subsidies to promote the use of energy-saving lighting products. The programme aims to put 120m units of energy-efficient lighting products into use, saving around 6.2bn kWh of electricity. In July 2009, the Chinese government announced that every city that applies renewable energy technologies and products in buildings and projects will receive between US$7.32–11.7m from a central budget. And China continues to collaborate with the UK on carbon capture and storage, building on previous collaboration through the UK’s Carbon Trust. The UK has committed £3.5bn to carbon capture and storage demonstration. Some of that money may be used to fund demonstration projects in China and other developing countries.

0 Concessionary financing mechanisms, including loan guarantees, interest rate sweeteners, reduced collateral requirements, and extended loan periods, are used to lower the cost of capital of important projects. Such mechanisms have been developed around the world, but the set of facilities available to Brazil is particularly attractive. The World Bank Clean Technology Fund can support programmes involving renewable energy and energy efficiency in Brazil, co-investing with other multilateral development banks. The Inter-American Development Bank's Multilateral Investment Fund is focusing on promoting clean energy markets in South America, providing low-interest loans for agro-industrial ethanol firms. An international fund to protect the Amazon was launched by Brazil in August 2008, to harness the forest's wealth in less destructive ways. The fund gained an initial pledge of US$100m from Norway. Brazil is the world's third-largest seller of carbon credits through the Clean Development Mechanism (CDM), with 400 projects either approved or in the pipeline. The Global Environment Facility, a financial mechanism under the Convention, also provides grants and co-financing for climate change projects. In the US, the Department of Energy operates a loan guarantee programme under Title XVII of the Energy Policy Act of 2005 that supports clean energy projects.

0 Business incubators are used to accelerate the development of green start-ups, increasing the likelihood that early-stage businesses will be viable in the long term. In the US, Chicago has developed a green business incubator in a rehabilitated paint factory, as part of a joint public-private initiative. The incubator is part of a broader, city-led effort to grow green businesses, which also includes office and manufacturing space for enterprises at the LEED (Leadership in Energy and Environmental Design) Platinum-certified Chicago Center for Green Technology.

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Power Company (Eastern Hemisphere). Quoted in the Egyptian Gazette during theinauguration of his CSP plant outside Cairo on 12 July, 1913, Shuman explained that “a sun power plant, to be commercially practicable, must possess (1) high efficiency; (2)low cost of installation and maintenance; (3) well-marked length of service; and (4) thepossibility of being worked without the aid of specially trained mechanics.” LinearFresnel systems relying on direct steam generation fulfill Shuman’s perceptive criteriaby possessing: (1) up to 32% cycle efficiencies; (2) lower installation and maintenancecosts than parabolic troughs; (3) over 20 years of linear-focusing system operation; and(4) the simplicity of a conventional steam boiler.

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Case study: JOAN1, 100MW CSP Plant, Ma’an, Jordan

MENA Cleantech’s CSP project in Jordan encapsulates the fruits of this discussion. The project,

referred to as JOAN1, will include a 100MW steam turbine powered by suitably sized linear

Fresnel ‘Solar Boiler’ or solar thermal steam generator backed up by a similar-sized fossil fuel

boiler. The project will be located in Ma’an in the south of Jordan, which boasts some of the

highest solar irradiance in the world. Over and above the project site’s technical superiority,

Jordan was chosen for MENA Cleantech’s first CSP project due to its legislative and regulatory

infrastructure, which is supportive of foreign direct investment in general and the Independent

Power Producer (IPP) project model, in particular.

Jordan can also be considered a benchmark for the water and energy challenges outlined above.

Its overall water footprint is eight times greater than its total available per capita water resources,

while its internal water footprint is over twice as large as its available renewable water (source:

Chapagain & Hoekstra, 2004). By 2050, Jordan’s internal water footprint could be five times larger

than its per capita water resources, while its overall water footprint could reach an astounding 19

times its per capita renewable water resources. And while possessing access to the water of the

Red Sea, Jordan’s indigenous energy resources of oil shale and uranium are, unfortunately,

decades away from being an available source of energy. This reality is compelling Jordan to

unsustainable actions, like the depletion of its stock of non-renewable water, as evidenced by the

project to pump the waters of the Disi fossil aquifer to the country’s capital, Amman. Moreover,

without an indigenous and affordable source of energy to power its water-use cycle, Jordan’s fiscal

stability could be severely compromised. This fact was plainly evident in 2008, when, according to

Jordan’s Minister of Energy, the country’s energy imports amounted to 23% of GDP. As such, the

JOAN1 project is both timely and necessary. By utilising linear Fresnel technology, the project aims

to deliver an immediate, indigenous, and affordable source of energy to help Jordan meet its

energy challenges, while at the same time providing a renewable energy source which can be

used to fill the country’s gaping water deficit in a sustainable manner.

Based on the reality that increasing sustainable fresh water flows is the MENA region’s priority,

JOAN1 is being designed to allow for maximum flexibility in operation through hybridisation with

fossil fuels as back-up or for night-time operation in extraordinary situations. Emphasising

JOAN1’s sustainable design, the plant’s power block will be designed according to the saturated

steam parameters of the solar, as opposed to the fossil fuel, boiler. This design favours the

operation of JOAN1’s solar boiler, since prolonged burning of fossil fuels in a saturated steam

cycle can be cost-prohibitive. At the time of writing, JOAN1 was in the final phase of pre-design

engineering. It will take under three years to construct and, once commissioned, will serve as a

benchmark for the deployment of a robust and cost-effective CSP technology in the MENA.

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Elsewhere, ‘smart grid-to-vehicle’ solutions envision multiple hybrid car batteries(when not in use) used for the temporary storage and supply of power. In future, itcould even incorporate large compressed air energy storage systems and rapiddischarge battery storage assets that will help maintain grid balances and stability.

One of the key enablers to understanding smart grids is the fact that electricity networkstraditionally moved power in one direction, ‘distributing’ bulk power to consumers andbusinesses. Smart grids will permit power to move in two (or even more) directions,from consumer to network, and also potentially, from consumer to consumer.

Figure 10.1 shows the sub-technologies and characteristics of a smart grid.

How smart is the grid today?A very good way to understand the role of grids (and how smart they already are) is to lookat smart grids from the perspective of the electricity industry value chain. The electricityindustry of today as we know it is no longer a monolithic black box of assets that generateelectricity and somehow miraculously deliver it at the mere flick of a switch.

Figure 10.2 shows how the various aspects of smart grid technology and applications couldbe viewed from an unbundled electricity value chain perspective. Unbundling of theelectricity value chain to systematically isolate the natural monopoly aspects of theelectricity business and subject it to regulatory oversight, whilst unleashing the forces ofmarket-based competition within other value chain segments, has been a provensuccessful approach to restructuring the electricity industry. This approach has also createda new element of wholesale trading to the electricity industry and transmission now playsa critical role in not only connecting the upstream generation business to the downstreamdistribution and supply side, but also in enabling and making electricity markets work.However, as noted below, this unbundling creates its own implementation issues.

This has quite dramatically changed how the transmission business functions todayand the forces of energy market liberalisation and the unbundling of the value chain

Smart grid is a suite oftechnologies comprising...

...which vary in their assetintensity (and hence investmentrequirements) and applicability

...and fulfil the growing demandson efficiency and robustnessmade on the electricity system

0 Sub-station equipment andswitchgear

0 Wires and cables

0 Power electronics based control systems

0 Generation and load controlsystems

0 Metering equipment andinfrastructure

0 Data capture, monitoringanalysis and communicationsystems

0 ICT interfaces for control andcommunications

0 Remote sensing and controlsystems

0 Digital instead of electro-mechanicalcontrol

0 Ability to integrate both lumpy(nuclear) and distributed (wind)generation

0 Adaptive, self-healing, monitoring andrestorative capabilities

0 Ability to facilitate wholesale and retailenergy trading

0 2-way energy flow andcommunication ability

0 Ability to facilitate customer choice

0 Ability to optimise the energy flowsand overall energy efficiencythroughout the electricity system

Defining “smart” gridHardwareSoftware

Figure 10.1: Smart grid sub-technologies and characteristics

Source: Industry literature and EnerStrat Consulting