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...
Engaging customers will require more than TOU pricing.
Imagine a setback thermostat programmed at the factory that the consumer couldn’t modify. Who would want this device? You could give the customer a big enough discount to get her to accept the device, but she would be happier and you could save about as much energy if the customer could decide on the temperature and time settings.
Similarly, most of the in-home displays and dynamic-pricing structures entering the market today lack the most important feature necessary to change customer behavior. Namely, they don’t give customers control over their energy consumption in response to real-time price signals. Instead they tend to force changes in consumption according to a schedule that might or might not reflect true market prices at any given moment.
An electronic energy manager with a display conceptually is different from the smart meters and other devices in the field. It focuses on empowering the customer to decide how much electricity to use under specified conditions. It does not oblige the customer to reduce electricity use, but only does what the customer tells it to do.
The energy manager is similar to the best devices in that it empowers the consumer by providing better information. Unlike the other devices, it gives a wider range of choices as to how to respond to high prices. And like the best devices, it can respond immediately to price signals from the utility.
An underlying philosophy supporting the regulation of electric and gas utilities is that the utility should be required to supply sufficient electricity and gas to meet customer demand under all circumstances. The supply and delivery of energy through regulation must be met in a manner that mimics the provision of such services in a competitive market; prices must be reasonable and fair, supplies must be efficiently produced and delivered, and all customers must have access to such services. If this philosophy had been accompanied by real-time pricing that reflected the cost of the most expensive electricity generator dispatched, and customers were able to respond to price signals, it would have produced an efficient outcome. Instead, most customers served by a regulated utility pay a flat price, with energy priced the same at 2 a.m., when the locational marginal price is close to zero or even negative, and at 5 p.m. on the August afternoon when the year’s peak demand occurs and the locational marginal price is $1.00 per kWh. One result is that demand is sharply peaked, with 15 percent of the capacity in PJM used less than 100 hours per year, because customers are not even aware of the higher peak costs. Time-of-use studies show that customers want to buy less electricity at 18 cents/kWh than they do at 12 cents/kWh. Even critical-peak prices don’t get into the range that reflects the locational marginal price during the peak hours.