Electric intelligence: establishing a smart grid requires regulatory reform, not subsidies

Reason, June, 2009 by Lynne Kiesling

How much thought have you given to your electricity consumption? If it hasn't gone beyond "I flip the switch and the light comes on," you're not alone, which is one of many reasons electricity usage in the United States is inefficient. But that's beginning to change.

The digital communication technology revolution that has created mass productivity gains throughout the economy during the last 20 years is finally creeping into the electricity industry as well, under the broad moniker of the "smart grid." The basic concept of the smart grid is to replace the faceless, impersonal "grid" of networked electricity delivery with a transparent, interactive system that allows users to see and select from pricing choices in near-real time. President Barack Obama included $4.5 billion in smart grid subsidies in the stimulus package Congress enacted in February. But absent substantial regulatory reform, mostly at the state level, such federal spending may simply reinforce a century-old model that is all but obsolete.

Imagine a future in which your home has a system that connects all its appliances, entertainment systems, heating and cooling, laundry, and lighting into one communication network. The network would be accessible through a computer screen or a Web-based portal. Through this interface, your electricity company would communicate real-time information about how much electricity you're consuming, the price you're paying at different times of the day, and whether the juice is coming from renewable or conventional sources.

Using that information, you could change the settings on your various devices in response to prices. If you knew that you could save money by lowering the temperature of your water heater five degrees when the price per kilowatt hour increases from nine to 12 cents, you would be more likely to lower the temperature of your water heater. Furthermore, if you could program your appliances to take care of the price response work for you, you'd be even more likely to do it. And once plug-in electric vehicles become more widespread, you could set up your home network to charge the car during less expensive, off-peak hours, and maybe even sell your excess energy to neighbors when prices are high, since electric vehicles are essentially energy storage devices.

Such systems are becoming increasingly feasible as information technology costs fall. Intelligent devices such as your thermostat, water heater, television, and plug-in vehicle all have digital communication capabilities and can be programmed to respond autonomously to data, including price signals. An in-home system networking these machines could cost as little as $250, with costs going up as sophistication and functionality increase. Having extra intelligence embedded in devices could add, say, $25 to the price of a clothes dryer, to judge from estimates from the production of such dryers for the GridWise Olympic Peninsula testbed project. Home electricity management systems are being developed and will be on the market in the next several years.

The key piece of network infrastructure that's making it easier and cheaper to get data to and from such in-home systems is a "smart meter." A simple digital meter that communicates only with the utility company can cost as little as $50. More sophisticated meters that talk with both the utility and individual customers can cost as much as $300.

The ability to communicate from customer to utility and back will benefit consumers by helping them save money, buy new energy-saving products and services, and reduce their environmental impact. But to make this vision a reality will require regulatory reform, particularly at the state level. Utility regulation has long been based on the now-obsolete idea that electric power generation and delivery is a natural monopoly. Consequently, state regulators have granted most utilities a monopoly over the retail sale of electricity products and services within a geographical area, as well as a monopoly over the construction of distribution wires across public rights of way.

The most crucial regulatory reform would be eliminating the single, fixed retail rate for most consumer electricity consumption. In February, Obama pledged to install 40 million smart meters in homes. But it doesn't matter how smart these meters are if homeowners are going to get charged the same old flat rates. Customers need to know how prices vary over hours, days, and seasons. With that information they can decide how much energy to buy and when. Smart technology makes responding to changes in price as easy as scheduling your DVR to record your favorite TV show.

Some regions already have a rudimentary form of a smart grid in which customers can respond to some prices. One variant called "time of use" lets consumers know in advance what prices will be during certain hours. But the pricing choices offered by real retail competition is rare. In a large number of pilot projects, including the California Statewide Pricing Pilot and the GridWise Olympic Peninsula project, customers typically save 10 to 20 percent on their electricity bills and reduce their peak electricity consumption by 12 to 15 percent. But the bulk of residential customers still pay fixed prices that are calculated by regulators to cover the costs of the utility plus a profit margin.