Achieving the smart grid’s potential requires a revolution in electricity pricing. Smart metering and smart rates might yield surprising and beneficial changes in the U.S. utility industry. But...
Advanced Metering: Policymakers Have the Ball
explore state funding or rate-based funding of advanced meters to roll out the technology faster and more cost-effectively, and to enable consumer participation in demand-response programs.
- California already is on the move. In June, the California Public Utilities Commission (CPUC) initiated a rulemaking 6 aimed at developing and implementing a plan to provide customers in the state with the enabling technologies and program options to increase demand response. The CPUC said that:
- demand-responsive capabilities are important regardless of the ultimate electricity market structure that emerges in the next few years. A perfectly functioning wholesale and/or retail electricity market is not a precondition for development of demand response. On the contrary, demand-responsive capability can be a tool in mitigating the effects of a dysfunctional market, as well as for controlling costs, even in a completely vertically integrated and regulated market.
The commission believes that customers should have access to the greatest feasible range of price information, metering and communications technologies, and energy management equipment to assist them in demand-response efforts. 7
In July, working closely with the CPUC, the California Energy Commission initiated a parallel proceeding that will develop state policies on dynamic pricing and beyond-the-meter demand-response technology standards, such as smart thermostats. 8
States Should Focus on the Mass Market
With the notable exceptions of Puget Sound Energy and Gulf Power (which has a highly successful residential real-time pricing program), the primary focus of demand response has been load reduction programs. These programs include demand bidding and interruptible/curtailable programs, and have been operated by Independent System Operators as wholesale programs or as utility offerings to large industrial customers.
As evidenced by discussion of demand response at the July NARUC meetings, it is wholesale-level, large-customer demand response that is still getting the attention. Yet, the demand response that state regulators can have the most control over, and impact on, is the other type-price-responsive demand response on a mass-market basis. Currently, state regulators are giving far less attention to what they can, or should, do to design time-based rates and to ensure that the advanced metering is deployed.
While wholesale level demand response is a natural starting point, it will not provide the most permanent benefits to the nation's electricity system and industry. For example, its usefulness in meeting the generation adequacy requirement is limited. In contrast, mass-market dynamic pricing can have a much greater long-term effect. Providing residential customers with price signals and choices of time-based rates, especially time-of-use and critical peak-day rates, can lead to a cultural, societal-level shift in how customers think about and use electricity. It can lead to utilities and other service providers having new abilities and opportunities to optimize the planning and operation of their generation and delivery systems. Mass-market dynamic pricing also can lead to savings equal to, or greater than, those of commercial demand-response programs. The McKinsey study estimated that the majority-53 percent-of savings would come from the residential sector, even though residents consume only 40 percent of total power.
The Need for Cost Recovery Certainty
The gateway to giving customers price signals and providing them