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Technology for the Masses

The consumer-centric smart grid and its challenge for regulators.

Fortnightly Magazine - October 2011

can be reasonably expected to consider the marginal or avoided costs of energy delivered to consumers.

One significant market failure in the industry likely will be the disconnect between the very high prices the utility must typically pay in the wholesale market at times of peak demand or system stress, and the relatively low value many customers put on marginal consumption at such times. It certainly would be attractive to consumers to get the wholesale price for agreeing to back off phantom (and perhaps other) loads for a limited number of hours. The feasibility and advisability of letting retail customers participate in the wholesale market —either actually or virtually—is subject to fair debate. Indeed, the FERC is working to encourage this type of market response for both individual customers and third party aggregators. 14 What isn’t debatable is that the technology that could permit this to occur is becoming available.

Another reason for adopting regulations that keep the implementation inside a regulated utility world is to connect the consumer responses to the economic, environmental, and other social reasons for ushering in these changes. Furthermore, with better full-avoided utility and social cost information, there’s little or no need for more conventional utility-sponsored energy efficiency and all its pitfalls and cost-benefit allocation issues. Competition will take place in the dimension of software and management services providers, and among appliance manufacturers.

A Half-Trillion in Play

American consumers spend about $500 billion each year on electricity and natural gas delivered to their homes and businesses, not including natural gas used for electricity generation. Improved building codes and appliance efficiency standards already have made a significant dent in energy use in the nation. Nevertheless, there are many more cost-effective things virtually all consumers could do. Many consumers have done very little.

The electricity and natural gas utility sectors are more than ripe to adopt improved communication and digital technology. Most likely, new applications would be written to make it easy for consumers to save money without mastering the physics of their energy use. Such investments will increase jobs and re-start productivity growth, and won’t significantly adversely affect lifestyles. Most consumers won’t need to be able to explain how the new technology works any more than they can explain cellular technologies. The benefits also include an economy that’s more efficient, has less impact on the environment and the global climate, and less dependent on imported fuels. The reasons for pursuing these technologies are compelling.

To clear the path toward this transition, regulators need to decide who owns consumer data. Furthermore, the demarcation between regulated utility services and third-party applications, devices, and services will complicate matters and cause regulators to reconsider the definitions of “utility” and “utility service.” It will also affect the interconnectivity of distributed generation, electric vehicles, and the tariffs that accommodate these systems. Load management and the tariff provisions they support have heretofore been a utility-regulated option. This might continue. Alternatively, consumers and their chosen vendors could conceivably manage their use based on the published tariffs. The latter could easily result in significant problems that utility