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Selling the Smart Grid - The Backlash

California learns painful lessons from its proposal to mandate demand response.

Fortnightly Magazine - April 2008

different pieces of the load management puzzle and try to find out what’s the right combination of prices and technology that will give California the most response.


Fortnightly: What lessons were learned from this episode? What advice can you offer to regulators in other states considering DR programs?

Pfannenstiel: The first lesson we learned was the need to get information out in advance, make sure people understand what DR is and isn’t, and why it makes sense. We haven’t done that well anywhere in the country. Second, I’d stress economic benefits to customers, the potential savings that are available. Our society responds to prices but people don’t know much about electricity prices. We need to compress the learning curve to have effective demand-response programs.


Fortnightly: In the past consumers have been disappointed when utilities and regulators promised cost savings, and then prices went up anyway. Doesn’t it make more sense to tell consumers, “Prices are going up inevitably, and we’re giving you the tools to manage your costs”?

Pfannenstiel: It makes sense in general, but for an individual household or business it’s not necessarily the case. If you are a customer whose usage is primarily off peak, under cost-based time-varying prices, one would expect costs to go down. Those whose use is mostly on peak will see their electricity costs go up.

In moving to cost-based rates, the individual customer impact will vary enormously, and that variation may wipe out average cost variations. I believe a cost-based rate design is where we need to go, in California and across the country. We need to give people signals about the cost their usage is imposing on the whole electric system. This will be a difficult transition because we’re so far away from that now. But if we start now, it will make other issues we’re dealing with, such as technology applications, more tractable.