Michael Giberson

Regular readers of Knowledge Problem will know that both Lynne and I are enthusiastic about the potential for smart meters and the smart grid to benefit consumers. (The difference between us on this topic is that she knows much much more than I do. Examples: One, two, three, and four.) But, as Lynne has explained before, a utility-centric approach to the smart grid can frustrate the potential consumer benefits.

So far, the utility-centric approach is dominant, and as a result – as Andy Stone explains at Forbes.com – utilities are benefiting from smart meters mostly at consumer’s expense. Advanced meters get installed, typically accompanied by a surcharge on the consumer, and they help the utility cut costs. Eventually, in a world governed by state regulation of monopoly utility rates, those savings should be passed along to consumers.

Stone wrote:

Utilities get a good deal on smart meter investment. The meters send power usage information directly to power companies via the Internet or wireless networks, replacing human meter readers. Utilities can also use the meters to remotely turn off power when a customer moves out or fails to pay bills, or automatically reroute electric power when a storm knocks out power lines. Such operational savings cover about 70% of smart meter investment, according to the California Public Utilities Commission. California’s three major utilities have installed a million smart meters since 2006 and plan to have all homes wired by 2012. But “the power companies are spending on rate payers’ account,” says Nancy Brockaway, a utilities attorney and former counsel with the New Hampshire Public Utilities Commission. Rate payers foot the bill for the meters through higher utility bills. “Utilities don’t have much skin in the game,” she says. What do consumers get for their smart grid investment? Apparently, not much. “In terms of energy efficiency and conservation, just installing a smart meter isn’t going to have much effect,” says Greg Guthridge, a smart-grid consultant with Accenture.

The article continues by explaining that consumers need a complementary rate structure to gain much benefit from smart meters. Real-time rates or time-of-use rates are the suggestions offered. The article speculates on smart meter value in the Texas deregulated market:

… demand response will likely be a tough sell in very deregulated electricity markets such as Texas, where customers can choose from dozens of power retailers that compete by offering the lowest, most predictable energy prices.

Tough sell? Maybe, but it will be easier to sell real-time pricing and demand response to consumers that also have the opportunity to select among alternative competing rate packages. Presumably only consumers that expect to benefit will be tempted to switch, and the burden of proof will be on the companies wishing to sell such contracts.

The article suggests making dynamic pricing the default option. This is one of the approaches promoted by James Bushnell, Benjamin Hobbs and Frank Wolak in their article, “When it comes to Demand Response, is FERC its Own Worst Enemy?” Electricity Journal, 22:8, October 2009, (ungated version here), and I’m in favor. But the evidence so far has suggested that the real “tough sell” has been to get state regulators to accept dynamic pricing and consumer-centric demand response in place of easy-to-explain status quo of flat rates.

NOTE: For background on regulation, dynamic pricing and demand response, see “What Could Possibly Be Better than Real-Time Pricing? Demand Response,” by Fereidoon Sioshansi and Ali Vojdani (Electricity Journal, Volume 14, Issue 5, June 2001.)