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The Carbon-Smart Grid

Network intelligence yields green returns.

Fortnightly Magazine - October 2008

delivery efficiency might be encouraged through ratemaking, much as reliability has been in some states.

Carbon-Market Innovation

Carbon costs almost certainty will increase the retail price of electricity, although the magnitude of that increase isn’t yet clear.

The degree to which wholesale and retail electricity rates reflect the cost of carbon emissions ultimately depends on political decisions, market reaction, and subsequent commercial electricity rates. Electric rates depend on regional differences in the generation mix, as well as regional load growth, and delivered prices for fossil fuels. The price of carbon emissions will be affected by many factors, including: market demand for allowances, determined by underlying emissions; market supply, determined by the overall cap, allowance allocation, amount of offsets allowed, and links to other trading systems; regulatory uncertainty; transferability— i.e., the ability of companies either to bank or borrow allowances for future compliance periods; and liquidity drivers such as the degree to which hedge funds and speculators enter the market.

The smart grid will add value for electricity customers by increasing both the amount and quality of information they receive about their energy usage. One potential outcome is the evolution of energy end-users from “ratepayers” to active energy consumers with smart appliances, energy-management systems and distributed generation. New energy service bundles and customized service levels will be designed to enhance the customer experience, encourage more active participation in customers’ energy-use decisions, drive higher customer satisfaction, and ultimately create a more favorable regulatory climate and higher returns for utilities.

In addition to helping their customers better manage and reduce their electricity usage, electric utilities are positioned to further increase overall energy efficiency and capture new markets by shifting usage to less carbon-intensive technologies and expanding into markets not currently using electricity to its full potential. One prominent example of this is the market for plug-in electric vehicles. While capturing increased electrical sales from powering these devices does not technically reduce a utility’s carbon liability (and might actually increase this liability if the added electricity is generated from fossil fuels), the extent to which new products and services can be based on a common energy currency of electricity, the greater the leverage and impact of the smart grid will be—and the greater the potential for utilities to capture this value.

One key question for utilities is this: How can the smart grid create competitive advantages for electricity in a world where higher energy prices stimulate demand for more efficient and less carbon-intensive end-use technologies? Understanding the answer can open the door to a more sophisticated interaction with customers involving new, higher margin products and service offerings above and beyond the delivery of electricity.

To the extent the smart grid makes electricity relatively less expensive and improves the customer experience, it helps expand overall energy market share. The energy management and renewable energy integration capabilities that the smart grid has the potential to support also might position electricity more firmly in the overall energy value chain. And, this is very possibly just the first step, with the future presenting additional opportunities for creating richer and more