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
with time-based rates is an advanced meter. Thus, state regulators must focus on how to get them deployed. In doing so, they face many barriers and challenges.
A major part of the regulatory bargain for most states that have restructured has been some form of rate cap or freeze. Legislatures saw such caps as a political exchange, a benefit to consumers balanced against the utility side of the ledger that gained the recovery of potentially stranded costs, among other things. What this means, however, is that many utilities are reluctant to make an investment in advanced metering, since they have no ready and available way to recover their costs.
With restructuring still a work in progress, and with competitive metering withering but not officially dead, utilities will continue to be reluctant in their approach to meters unless they can be certain that such costs can be recovered in regulated rates.
Many utilities have moved to AMR based on the business case of cost reductions resulting solely from replacing human meter readers. Advanced metering costs slightly more than AMR, but yields far greater benefits. The dynamic information and communications/operational functionality that utilities get with advanced metering can provide cost savings. They may not be as obvious as eliminating meter reader jobs, but ultimately the savings are much larger.
Misconceptions About Mass Market Demand Response
When given a reasonable choice, residential customers consistently have expressed a desire to volunteer for dynamic pricing and other load-reducing options. This includes millions of customers who have participated in air-conditioner load control, and tried time-of-use prices. For example, in a nationwide survey conducted in 2000, 43 percent of consumers said they were interested in time-of-use prices. 9 Moreover, residential consumers are more price-responsive than other customer groups, according to the Department of Energy and others. () 10
Yet another misconception, particularly among legislators, is that price signals and time-of-use rates in the residential sector mean that consumers will be forced into the spot market and required to monitor and actively manage their consumption on an hourly basis. This misconception surfaces particularly when real-time pricing is used in general policy discussions as a proxy for the entire range of time-based pricing. The political reaction to this is understandably negative-but active consumer monitoring is not what is being talked about in terms of price-responsive, mass-market programs. Care must be taken to convey the nature of the programs correctly and avoid confusion that could hamper movement forward in this area.
Incentivize Utility Action and Performance
It has been some time since John Rowe, then-CEO of New England Electric System, made his famous statement that "the rat must smell the cheese" if demand-side programs are to be vigorously pursued and optimally run by utilities. Demand-side management now has evolved into demand response, which involves a utility offering new and different rates, and incurring costs for the advanced metering and communications technology needed to implement them. Both utilities and state regulators should look at how utilities might be provided with incentives (carrots instead of sticks) to help them move forward in this area.