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Grid David J. Leeds October 13, 2009
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Smart Grid Stimulus: A Dead End Without Smart Pricing
The promise of the smart grid is to move from demand destruction to value creation. But how
do we get there?
It's the night before Christmas in the smart grid sector with the Department of Energy soon
expected to announce $4.5 billion in federal stimulus awards reserved for Smart Grid
projects. Will those investments matter without new state-level regulations that incentivize
both utilities and customers to better manage and reduce electricity consumption?
The first challenge is how utilities are compensated. An electric utility's revenue is
primarily tied to the amount of power it sells. That was fine 50 years ago, in a world with
seemingly unlimited resources and no hint of climate change, but no that longer makes
sense today. Under this model utilities have little motivation, if any, to: (1) encourage
customers to find ways to reduce demand, or (2) practice energy efficiency themselves – two
core tenets of a smart grid vision.
The crucial regulatory reform needed to encourage utilities to foster energy efficiency will be
found in establishing new rate structures and business models. These will create incentives
for utilities to earn revenue in ways that are not entirely linked to additional sales. Otherwise,
asking a utility to sell less power is analogous to asking Starbucks to sell less coffee.
Furthermore, since utilities are granted monopolies at regulated rates, a reduction in sales is
equivalent to demand (and profit) destruction.
Smart grids aim to replace demand destruction with a practice called Demand Response.
Utilities intentionally reduce overall demand by sending signals to customers to turn down
their energy use in exchange for financial rewards. Demand Response, also referred to as
the "Fifth Fuel," can serve as an addition to the four traditional fuels used to generate
electricity: coal, natural gas, nuclear and renewables (once the baseload minimum power is
generated). The nickname the "Fifth Fuel" suggests that Demand Response deserves to be
acknowledged by regulators in a similar manner to new supply.
The second challenge is the end user's passive relationship to energy. In the U.S.,
customers were numb about energy costs because prices were dirt-cheap. This came as a
result of flat rates that didn't really express the true variable costs of energy generation and
delivery. However, significant increases in the cost of electricity are coming, and fast.
According to the DOE, electricity prices are forecast to increase 50 percent over the next
seven years, while the EIA expects nationwide demand for electricity to grow by 30 percent
by 2030.
The critical regulatory reform needed to encourage consumer energy management will be
eliminating the single, fixed retail rate for electricity. Until dynamic rates that reflect current
market conditions are implemented, smart grid technologies (such as smart meters, home
energy management systems and smart appliances) will have little effect in altering
consumer use. Customers will have no impetus to shift their consumption to off-peak hours.
A smart meter without a smart rate schedule is not smart at all.
http://www.greentechmedia.com/articles/print/smart-grid-stimulus-a-dead-end-without-sm... 11/2/2009