Snake Oil & Smart Meters

Deck: 

Customers deserve the straight truth about electricity costs.

Fortnightly Magazine - April 2008

Recently I attended a birthday party at a neighbor’s house. As the birthday girl cut the cake, her father showed me his latest acquisition—a handsome electric space heater for which he’d paid $400.

My neighbor is notoriously stingy. But he proudly explained that his investment was a wise one for a variety of reasons—most notably because this heater performed with an efficiency of 200 percent.

I tried to tell my friend—who is a mechanic by trade and an intelligent person by any standard measure—that the first law of thermodynamics prevents efficiencies greater than 100 percent. Moreover, I told him that all electric heaters are exactly 100 percent efficient, no more and no less. The only energy wasted is what escapes the house—for example, through the large picture windows or stone fireplace chimney.

Slightly chastened, my friend acknowledged the heater might not be quite 200 percent efficient, as the salesman had claimed. But he insisted this heater’s patented design was fundamentally more efficient than others on the market, featuring a radiant element that heats a copper plate. Furthermore, he said energy companies had tried to keep this “new invention” off the market, to protect their own sales of fuel and electricity.

At this point I gave up trying to convince my friend. I didn’t want to spoil a fine party with an argument.

Selling Snake Oil

The utility industry faces the difficult task of trying to educate the general public about the realities of delivering electricity service in the 21st century. California’s recent experience trying to put smart thermostats into the state’s building code provides a cautionary example (see “Selling the Smart Grid”). And my friend’s space heater provides another, albeit a very different one.

In California, air conditioning drives home energy bills, but where I live, in Minnesota, it’s heating. Fuel oil and natural gas are the two most common home heating fuels, and prices have skyrocketed here just as they have everywhere else. My friend bought his electric heater because his home-heating costs have doubled, and he’s trying to find a cheaper alternative.

I was curious about how the salesman convinced my friend this particular alternative would deliver 200 percent efficiency. I looked at the marketing materials, and they didn’t actually claim 200 percent efficiency (which clearly would be false advertising). Instead, they offered “up to 50 percent savings,” compared to propane heat.

This made more sense. But even at current propane prices, I found it difficult to believe. So I read further, and discovered the heater’s marketing geniuses were careful to avoid claiming 50 percent savings on a Btu-for-Btu basis. Instead, their brochure argued the space heater could be moved around the house, and therefore would heat only the spaces that are occupied at a given time—rather than “wasting” energy on central heat. Further, it said the radiant design would focus most of its heat on the objects in the room—including the human bodies—rather than trying to warm the air to 72 degrees.

These are excellent arguments, but they’re not exactly what my friend had in mind when he imagined cutting his heating bills in half. And of course these arguments don’t justify a $400 price tag for the heater. Any 1,500 watt, portable radiant heater (like the $20 ceramic unit that sits next to my desk) will do exactly the same thing.

I didn’t want to tell my penny-pinching friend that, in the middle of his daughter’s birthday party. But eventually he’ll figure out he’s been swindled, and his heater salesman will have some explaining to do.

Who Do You Trust?

Like my neighbor, all energy customers are looking for cheap and easy answers. Their first choice will be to continue their current lifestyles, or perhaps improve them, while paying less for energy than they’re paying today. They want someone to give them 200 percent efficiency, even if they know in their gut it’s impossible.

Conversely, energy consumers don’t want to hear prices are going up, or that they have to change their habits. They would rather believe the salesman who offers a quick fix. After all, he’s promising to give them a secret weapon in their daily fight against the big, bad energy companies, most of which seem to be offering nothing but higher energy bills.

In some ways, this situation is the industry’s own fault.

Since electrification in the early 20th century, utilities have encouraged people to take electricity service for granted. Arguably, that’s the goal of the regulatory compact—to make electric service so reliable and affordable that customers never have to think about it. We’ve shielded the customer from the nitty-gritty details of energy service, such as the true costs of flat-rate tariffs in a system designed to serve the critical peak load. As long as the lights stayed on and the bills were affordable, why should anybody care about the details?

Now, in states where smart metering and TOU rates are moving forward, we’re asking customers to think about their utility service—and not for some branding and bundling scheme (“You want home security with that?”) We’re asking people to actually learn about electricity—where it comes from, how much it really costs and how its production and delivery affects the environment. We’re asking customers to learn how their personal choices affect the system, and we’re asking them to take responsibility for those choices.

Many Americans are ready and willing to accept that responsibility; they’re probably expecting it, given what’s happening with fuel prices and environmental concerns. Unfortunately, they’re not sure they can trust the utility industry to offer the best possible deal—and that might be the smart grid’s biggest hurdle.

This distrust comes from experience. Most recently, half-baked attempts at retail restructuring discouraged real competition and hid price increases from consumers until it was too late. Broken promises led to disappointment and anger, as artificial price caps expired and prices spiked painfully.

So when the utility industry starts touting a newfangled solution for saving electricity costs, is it any wonder American consumers are skeptical? They’ve choked on the prescriptions of so many snake-oil salesmen that they don’t trust anybody anymore, least of all big energy companies and politicians.

But that skepticism shouldn’t stop the industry from making difficult decisions and struggling to earn customers’ trust. After all, can ratepayers trust the utility that analyzes smart meters primarily in terms of shareholders’ interests, and views tariff policies in terms of cash flow instead of sustainability and end-user economics? Can they trust the regulator who hides behind supposed lack of customer interest in smart metering (see “The Policy”), and thereby dodges the politically uncomfortable policy of making people responsible for their energy consumption?

This industry is at a crossroads. America is counting on utilities and regulators to make decisions that will ensure energy services remain affordable and reliable for the long term. The industry owes customers the straight story about electricity choices and costs, whether they want to hear it or not.

Moreover, it’s in the industry’s long-term interests to be straight with customers. Eventually they’ll find out whether we’ve sold them a fair deal or a bill of goods. And when the party’s over, we could have some explaining to do.