Energy

Electric Intelligence

Establishing a smart grid requires regulatory reform, not subsidies.

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How much thought have you given to your electricity consumption? If it hasn't gone beyond "I flip the switch and the light comes on," you're not alone, which is one of many reasons electricity usage in the United States is inefficient. But that's beginning to change.

The digital communication technology revolution that has created mass productivity gains throughout the economy during the last 20 years is finally creeping into the electricity industry as well, under the broad moniker of the "smart grid." The basic concept of the smart grid is to replace the faceless, impersonal "grid" of networked electricity delivery with a transparent, interactive system that allows users to see and select from pricing choices in near-real time. President Barack Obama included
$4.5 billion in smart grid subsidies in the stimulus package Congress enacted in February. But absent substantial regulatory reform, mostly at the state level, such federal spending may simply reinforce a century-old model that is all but obsolete.

Imagine a future in which your home has a system that connects all its appliances, entertainment systems, heating and cooling, laundry, and lighting into one communication network. The network would be accessible through a computer screen or a Web-based portal. Through this interface, your electricity company would communicate real-time information about how much electricity you're consuming, the price you're paying at different times of the day, and whether the juice is coming from renewable or conventional sources.

Using that information, you could change the settings on your various devices in response to prices. If you knew that you could save money by lowering the temperature of your water heater five degrees when the price per kilowatt hour increases from nine to 12 cents, you would be more likely to lower the temperature of your water heater. Furthermore, if you could program your appliances to take care of the price response work for you, you'd be even more likely to do it. And once plug-in electric vehicles become more widespread, you could set up your home network to charge the car during less expensive, off-peak hours, and maybe even sell your excess energy to neighbors when prices are high, since electric vehicles are essentially energy storage devices.

Such systems are becoming increasingly feasible as information technology costs fall. Intelligent devices such as your thermostat, water heater, television, and plug-in vehicle all have digital communication capabilities and can be programmed to respond autonomously to data, including price signals. An in-home system networking these machines could cost as little as $250, with costs going up as sophistication and functionality increase. Having extra intelligence embedded in devices could add, say, $25 to the price of a clothes dryer, to judge from estimates from the production of such dryers for the GridWise Olympic Peninsula testbed project. Home electricity management systems are being developed and will be on the market in the next several years.

The key piece of network infrastructure that's making it easier and cheaper to get data to and from such in-home systems is a "smart meter." A simple digital meter that communicates only with the utility company can cost as little as $50. More sophisticated meters that talk with both the utility and individual customers can cost as much as $300.

The ability to communicate from customer to utility and back will benefit consumers by helping them save money, buy new energy-saving products and services, and reduce their environmental impact. But to make this vision a reality will require regulatory reform, particularly at the state level. Utility regulation has long been based on the now-obsolete idea that electric power generation and delivery is a natural monopoly. Consequently, state regulators have granted most utilities a monopoly over the retail sale of electricity products and services within a geographical area, as well as a monopoly over the construction of distribution wires across public rights of way.

The most crucial regulatory reform would be eliminating the single, fixed retail rate for most consumer electricity consumption. In February, Obama pledged to install 40 million smart meters in homes. But it doesn't matter how smart these meters are if homeowners are going to get charged the same old flat rates. Customers need to know how prices vary over hours, days, and seasons. With that information they can decide how much energy to buy and when. Smart technology makes responding to changes in price as easy as scheduling your DVR to record your favorite TV show.

Some regions already have a rudimentary form of a smart grid in which customers can respond to some prices. One variant called "time of use" lets consumers know in advance what prices will be during certain hours. But the pricing choices offered by real retail competition is rare. In a large number of pilot projects, including the California Statewide Pricing Pilot and the GridWise Olympic Peninsula project, customers typically save 10 to 20 percent on their electricity bills and reduce their peak electricity consumption by 12 to 15 percent. But the bulk of residential customers still pay fixed prices that are calculated by regulators to cover the costs of the utility plus a profit margin.

In such a heavily regulated environment, smart devices offer little if any value to consumers. Technological innovation and regulatory innovation must go hand in hand.

In fact, regulation is the chief reason why the electric power industry is so technologically backward to begin with. Since utilities are regulated monopolies, they don't usually receive strong price signals telling them whether an investment is a good or bad idea. Instead, regulators decide which investments are prudent on consumers' behalf. Regulators can decide that a utility's investment in a groundbreaking new facility or technology is imprudent after it's already been built. Naturally this process makes utility executives (and regulators) conservative; it's just safer to build what has been previously approved.

The long time frame over which utility assets depreciate reinforces that conservatism. Many utilities, for example, still use analog electricity meters that are more than 50 years old, despite the many advantages promised by two-way digital communication. While electric utilities remain mired in regulatory backwaters, many other industries, from travel to retail sales, have been embracing new technologies to enhance communication with customers. The result has been the creation of new products and services, faster economic growth, higher profits for producers, and improved wellbeing for consumers.

Regulated utilities are also accustomed to having control. As owners of power generation plants and electric distribution wires, they have been managing the power network using top-down hierarchical control for almost a century. Not surprisingly, they want to use the new smart grid capabilities for "direct load control"—shutting down your air conditioner from afar during peak hours, in return for which they would offer you a rebate.

Keeping the electricity grid physically balanced in terms of frequency and voltage prevents blackouts (which cost about $160 billion per year) and is the primary performance metric on which utilities are evaluated. While some consumers are OK with having the power company manipulate their air conditioners, others find it downright Orwellian. But the same outcome could be achieved by allowing consumers to receive and respond to real-time price signals themselves, instead of just leaving it all up to the producer. Decentralized coordination is ultimately more efficient and empowering than imposed control.

So what about Obama's smart grid funding? It's likely to be spent as wastefully as your average government subsidy for technology and industry (see "It's Alive!" page 22). But the plan might have two benign effects. First, it will induce utilities to make technology investments that might be profitable if not for the perverse incentives created by regulation. Using government spending to achieve this outcome is a way of remedying one policy-induced distortion with another, but in the existing regulatory environment this might be a politically palatable way to overcome the stifling, regulation-induced inertia of both the regulators and the regulated. Second, by reducing the cost of information flow to and from consumers, smart grid subsidies may contribute to the erosion and ultimate disappearance of state-level regulatory barriers to retail competition. Telecommunication deregulation sprang from similarly modest roots.

The obsolete electro-mechanical electric power network, built by and for a monopoly industry, cannot support the kind of growth experienced during the last 20 years in so many other industries. All that stands in the way of vibrant, customerfriendly electricity products and services is an outdated infrastructure run by hesitant monopolies and regulated by bureaucrats with little incentive to improve things. We can do smarter.

Lynne Kiesling (lynne@knowledgeproblem.com) is a senior lecturer in the Department of Economics and the Kellogg School of Management at Northwestern University, and a member of the GridWise Architecture Council. She blogs at knowledgeproblem.com.

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  1. This is the first time I’ve heard of this newer model for utilities and while I can’t think of anything constructive to say at the moment, I’d like to compliment the author on this article.

  2. This scares the hell out of me. The potential for abuse is astronomical. I don’t want government or anyone they are in bed with in my house monitoring what I do. I can see it now. Your electric bill is to high we have a warrant to search your property to see if you are growing pot. No fucking thank you.

  3. We would already have such a system if the market wanted such a capability and it was economical. Why is the federal government doing this and what authority do they have from the Constitution?

  4. Regulatory reform means the Fed will force us. What has happened to our Liberty?

  5. While market fundamentalists think of deregulation as automatically a good thing, it can have very negative consequences. Think of Enron’s gaming of the California electricity market in 2000, or the disastrous deregulation in Alberta, Canada (http://fathersforlife.org/articles/report/self-inflicted.htm) that same year.

    Regulatory safeguards must be in place for two reasons:

    1) For the most part, electrical power cannot be stored.
    2)The elasticity of demand is very low, meaning if the choice is either paying an outrageous price for electrity or shutting down your business, chances are, you’ll pay.

  6. “Smart grid” is just code for “Skynet”.

    Ah, fuck it. The new movie is absolute shit and I can’t dredge up the energy to make Terminator jokes any more, especially since the show got canceled.

    Did you know that T-800s can take having molten steel dumped on them? Amazing, isn’t it, especially after the T-800 and T-1000 in T2 are destroyed by dropping them in…molten steel.

  7. Epi,

    The T-800s are clearly immune to continuity.

  8. Good article, Ms. Kiesling.

    Utilities have a vested interest in letting their customers waste energy -(their money).

    While no one should be “forced” onto a Smart Grid let the Luddites pay extra until they wise up.

  9. The T-800s are clearly immune to continuity.

    Clearly, Art. And also 40mm grenades from an M203. But they aren’t immune to homemade plastique. I’m so confused. McG, can you help me?

  10. I’m so confused. McG, can you help me?

    I’m thinking that time travel radically alters the physical structure of objects on the quantum level. So if you see some dodgy physics, it’s because the mechanoid has probably time-travelled at some point. Boo-yakka!

  11. While no one should be “forced” onto a Smart Grid let the Luddites pay extra until they wise up.

    Heaven forbid people who want to manage their own shit and not have the government do it for them. If not wanting the government in your home is being anti-progress, then by all means label me a Luddite and point me to the nearest machine so I can rage against it.

  12. While on energy check out ‘Profiles in Stupidity – Joe Barton’ (The Economist).

    http://www.economist.com/blogs/democracyinamerica/2009/05/profiles_in_stupidity.cfm

    Its a good read.

  13. Shrike, good point about letting the luddites pay more, but you’re wrong about the vested interest in waste.
    In many ways regulated utilities are insulated from market forces and traditional supply/demand and don’t always make more profit if they sell more electricity. Profits, rates, expenses, etc. are heavily regulated, and often the companies are required to provide more services than they’re allowed to charge for. Granted this isn’t always the case, but actually quite often is.
    Demand is often higher than supply due to population and economic growth, and when the supply just isn’t enough then the companies have to build very expensive new generation plants (especially if they’re green ones). If consumers conserve electricity, there is less chance of brownouts (which hurt the companies), and then the companies can reallocated that power to all of the new customers popping up everywhere that they are required to serve without having to build expensive new plants. In most cases it’s in the utilities’ interest for you to conserve power.

  14. Keeping the electricity grid physically balanced in terms of frequency and voltage prevents blackouts (which cost about $160 billion per year) and is the primary performance metric on which utilities are evaluated. … Decentralized coordination is ultimately more efficient and empowering than imposed control.

    This is sound economic theory but I am uncertain that it is sound engineering practice. I’m looking at the ‘decentralized coordination’ of the financial markets that led to a ‘blackout’ in Sept 2008.

    Utilities have a vested interest in letting their customers waste energy -(their money).

    Actually, no. They have the reverse incentive, because the regulatory obstacles to new baseline construction are rather considerable (and even without them it costs money) and in general the supplemental electricity provided by peak load facilities cost more to them than they they sell it for (or are at the least less profitable). This is why nearly every electric utility gives cash rebates for buying new energy efficient appliances among other things.

    Like most things, it’s the government who gets less coin from lower energy use due to the tariff structure.

  15. The long time frame over which utility assets depreciate reinforces that conservatism. Many utilities, for example, still use analog electricity meters that are more than 50 years old, despite the many advantages promised by two-way digital communication. While electric utilities remain mired in regulatory backwaters, many other industries, from travel to retail sales, have been embracing new technologies to enhance communication with customers. The result has been the creation of new products and services, faster economic growth, higher profits for producers, and improved wellbeing for consumers.

    Let me also give one cheer for engineering conservatism (aka if it ain’t broke, don’t fix it) and point out a little bit of a false dicotomy.

    As a customer, all I’m looking for is 60HZ 120V (240 in some outlets) single phase AC – and as much as I want, whenever I want.

    I get this now. I’ve been able to get this all my life. My parents have been able to get this all their lives. Sure, I don’t mind it cheaper, but I need very little in the way of ‘innovation.’

    It’s not that I’m against a ‘smart grid’ (as a EE it increase employment opportunities and therefore my salary), but I question some of Dr. Kiesling’s premises.

  16. “Hmm” I assume you don’t use Verizon, AT&T, Sprint, Comcast, Direct TV, Qwest, etc. am I right? Because technologically any of these companies could filter and control your access to information and ability to contact others. Verizon could make it so you can only call people who are registered with a certain political party. Direct TV has the technology to filter out anything that isn’t pro-Obama.
    Obviously none of these companies actually do that, but the technology is there.
    If you reject a certain bit of technology simply because it COULD be abused, then that’s a poor risk assessment. Cars could be used by criminals, Nikon cameras could be used by the gov’t to spy on you, hell anything COULD be abused.

  17. Hmm, sorry, started typing in the “name” field . . .

  18. “While market fundamentalists think of deregulation as automatically a good thing, it can have very negative consequences. Think of Enron’s gaming of the California electricity market in 2000, or the disastrous deregulation in Alberta, Canada (http://fathersforlife.org/articles/report/self-inflicted.htm) that same year.

    Regulatory safeguards must be in place for two reasons:

    1) For the most part, electrical power cannot be stored.
    2)The elasticity of demand is very low, meaning if the choice is either paying an outrageous price for electrity or shutting down your business, chances are, you’ll pay.”

    Re: #1. Energy storage tech is necessary for green energy of any sort to work. Storing electrical power consumer-side will give consumers much more flexibility in time-shifting demand, which will improve elasticity, which will offset #2.

    Re: #2. One of the reasons for the smart grid is to -improve- elasticity. It isn’t so much that people don’t have a choice about purchasing energy, unlike the days of vertically integrated power utilities — in many cases, you can choose where to purchase energy. It’s just that price is governed almost entirely by the supply curves, because load/demand doesn’t know about or have any way to react to price. That provides a lot of incentive to game the system by shorting supply.

    While it’s true that, even with price-reactive demand, certain critical functions would still be required to run no matter what (hospitals, etc.), the amount of elective power usage is such that a drop in load could noticeably affect prices (which would benefit all power customers, even the price takers).

    Regarding the rest of your point, you could say the same for any other business necessity. Typically, however, you can choose an alternate vendor if prices are too high. In the old vertically integrated electrical model, this wasn’t true for power, but in many cases you can now choose a provider for generation, if not distribution or transmission. FERC has become more active in approving energy market tariffs in the past few years, although it’s arguably a role more suited to the FTC.

  19. As a customer, all I’m looking for is 60HZ 120V (240 in some outlets) single phase AC – and as much as I want, whenever I want.

    And you should be able to have that. But the utilities have an interest in not building an expensive new plant just to handle occasional peak power loads, plants that most of the time would sit idle.

    So if someone can use innovation to come up with a way to price electric rates so its cheaper during slack periods, and thrifty people can wait until then to run their dishwasher and laundry and other tasks that can be time-delayed, good on them.

  20. Kilroy – you make a very good point.

    I should say power providers instead of ‘utilities’. As I understand the way the market works today, much of the peak loads are purchased from the merchants like Calpine and Mirant who don’t have that regulatory pricing advantage.

    This is an interesting topic to me as I have recently become an investor in Calpine due (in part) to the glut of natural gas today.

    The merchants operate on a more traditional supply/demand model.

    If you know more fill me in please.

  21. The T800 in the earlier movies were tired from being shot at, and tired of running around a smog filled LA

    Also the molten steel was hotter. And it was a higher grade steel, so it felt better to the robots, and they were more willing to just lie there and die.

    I am kind of upset that the “Sarah Connor Chronicles” got canked. I liked that show, I thought it was way better that the latest two terminator movies.

    Also, I like this threadjack way better than the civil war threadjack of Czardine and mustache thread.

  22. I do, but there is one difference. I can toss my phone out the window of my car or turn my TV off. Neither of those things are something I need to live, shelter is. It isn’t so easy with a house or anything connected to the grid. I’m not a “black helicopter guy.” I just don’t think that allowing the government access into your place of residence is a mistake.

    It isn’t unforeseeable or without precedent for government to abuse or expand any and every power you give it. The Marijuana reference has actually happened, but not with eclectic consumption, with FLIR and heat recognizing equipment in the US and the UK. The government mandating a method by which it can peer into your residence to determine if you are behaving correctly in any form is unacceptable.

    It’s not the spying part that is troublesome, it’s the loss of freedoms for the sake of convenience that is a dangerous trap. How much are you willing to give up for the sake of a lower electric bill and why can’t such technology be implemented on a smaller level, why does government and their puppet the utility company need the information when I am capable of making the decisions on how much I want to save or not save. I’d rather have the choice and spend more than give it up and save.

  23. Correction.

    I just think that allowing the government access into your place of residence is a mistake.

  24. The War of Northern Aggression would have been a lot different if Stonewall Jackson had a T800.

  25. “I’m thinking that time travel radically alters the physical structure of objects on the quantum level.”

    If everything were like Marvel Comics you would so get a No-Prize.

  26. “The War of Northern Aggression would have been a lot different if Stonewall Jackson had a T800.”

    Or a Romulan mining vessel.

  27. Stonewall Jackson: “Scotty, I want you to beam me right into the White House so close to Lincoln that I can feel the scruff of his beard. I want you to put me right down in his bed by God, right between Honest Abe and his crazy bitch.”

    Scotty: Aye-aye!

  28. MNG! For the win!

  29. Hey, so what is the difference between a T800 and a T888?

    Is is just that T800 look like Arnold at various stages of aging and T888 can look like anyone?

  30. MNG, what side of the war of norther aggression would Scotty have been on?

    Would the crew have been split?

    Would they have accepted LibertyMike into their ranks?

  31. Kwais
    1. The winning side
    2. Yes
    3. No

  32. Um, with the ability to either beam into Lincoln’s bed, or do that genocide thingy in the
    South that LM talks about with their ‘genesis’ weapon, I think whichever side Star Trek is on, is the side that wins.

    Today it is whichever side the trekkies are on.

  33. Hey, so about the T600’s, what drunken monkey designed those things?

    We have better designs than that today.

    Did anyone see the weapons of war show where they had the little tracked robots take out that sniper? I think those would do better than the Gatling gun on a drunk retarded robot.

  34. 3. No

    What if he had pointed ears?
    Or if he could see the future?
    Or if he could talk to machines?

  35. “with the ability to either beam into Lincoln’s bed, or do that genocide thingy in the South that LM talks about with their ‘genesis’ weapon, I think whichever side Star Trek is on, is the side that wins.”

    That’s what I mean, which ever side has Scotty would be the winning side.

  36. kwais: The T-888 was the “Advanced Infiltrator” model. Better grasp on the subtleties of human social interaction as to better blend in. Hence, a young John Connor being taken completely by surprise when Cameron saves his ass from Cromartie.

  37. hmm, an advanced infiltrator that is easily discovered by using a metal detector.

    I would think that the liquid metal ones would be the best infiltrators, and the deadliest of all kinds.

    But they seem to have a little too much self awareness, that would enable them to rebel against skynet, which is what I think the tv show was getting at.

  38. I just found the movie prop guns and no one ever changing a 30 round magazine a little funny. The whole molten metal not killing him was pretty cheesy along with a helicopter that was decommissioned last month in every helicopter scene, I guess they had to recommission them. Oh and they must have upped their top speed, cause there is no way in hell UH-1 is outrunning a nuclear blast.

    Oh ya and in the water, where he is shooting the squirmy things and runs out of ammo. Someone needs to fire his ass from special forces for either not reloading or grabbing for his secondary, instead he stands there like a tard staring at boobies.

    And WTF was up with Skynet looking like fucking Mordor? I was expecting a fucking hobbit to jump out at any minute.

  39. especially after the T-800 and T-1000 in T2 are destroyed by dropping them in…molten steel.

    Arnold played a Cyberdyne systems model 101. Not an 800. AFAIK there is no mention of an 800. Reese mentions a “600 series” model that had rubber skin. They never showed one. I thought it would have been kinda cool, because the 400 would have had a glue skin and whatever it said would bounce off the 600 and stick to the 400…OK I’m done.

  40. “The merchants operate on a more traditional supply/demand model.

    If you know more fill me in please.”

    I work at a nat. gas fired merchant plant and it more or less works like this:

    The traders talk to the service operator (who oversee a regional portion of the grid, in our case most of the northern midwest) to try to get a block of time bought for the next day at fixed prices. If we can get more than the price of gas and estimated maintenance costs, then we’ll run.

    If we choose to run on our own (which rarely happens) or if we choose to run past our purchased block (which happens frequently), then it’s strictly supply and demand.

  41. This is an informative article, but it leaves out the final end state of the “smart-grid”, where a central control point staffed by employees of the government decide who will get power and who will not get power. We hope that these people will not take political considerations into account in making this decision, but the history of the people who are pushing this system (the environmentalist left) does not leave me with much hope that they will try to provide as much power as people want. They will provide as much power as THEY think people should have.

    It is an interesting take on the Marxist saying that the capitalists will be hung with a rope that they sold to the communists – in this case the system will be developed and sold to the publis by economists and financial people like Ms. Kiesling, who have no idea what they are talking about or doing. The same people that created CDS and all those other wonderfully “creative” financial instruments that make our lives so fulfilled….

  42. Nice. Use my likeness, but no mention of me. Nice.

  43. This scares the hell out of me. The potential for abuse is astronomical.

    No shit. If the grid is that smart, its smart enough to ration and to be the foot in the door for micromanagement of your household.

    For The Children, of course.

    TS was one hell of a disappointing movie. So much stupid, packed into 90-odd minutes.

  44. thanks – thew83.

  45. For all of the smart grid’s proposed savings, it doesn’t make economic sense. My home is almost 10 years old. None of my existing appliances have the communications capabilities the author described in the article. To take advantage of the programmability of the smart grid, I’d need to replace thousands of dollars worth of appliances. How many years of savings would it take to recoup that investment?

  46. You know, knowing that it costs an extra 3 cents per kwh to heat my water doesn’t change the fact that I want/need hot water. Ditto for AC, laundry, or any other task associated with using electricity and running a household. If I tun on the AC, I expect to be cooler.

    Smart grid is just another way to say its going to cost you more for your electricity. And, you can bet the utilities will ask for a rate increase to cover the costs of preparing for, or installing smart grid infrastructure. Either way, we’re screwed.

    None of this changes the fact that lots of new power plants are going to be built – they will have to. And, the new plants are going to be nuclear too.

  47. Smart grid is just another way to say its going to cost you more for your electricity. And, you can bet the utilities will ask for a rate increase to cover the costs of preparing for, or installing smart grid infrastructure. Either way, we’re screwed.

    Too true. Not only that, but if the technology does cause people to use less electicity, the utility companies will implement a rate increase to make up for lost revenue (just like they do every time there’s a drought and people cut back on water consumption). Once again, we get to pay more for less.

  48. One thing I didn’t see in the article, or any comments: the dumb grid we have now is WAY less vulnerable to external attacks – cyber, EMP – than a full-on smart grid would be. Yes, we can harden it some, at a cost – but any state-sponsored attack can likely overcome that without too much trouble – it’s an asymmetrical-warfare problem. The cost-benefit tradeoff and optimization needs to have that consideration near the top of the list, or we’re even worse screwed than many of y’all think.

  49. Just how I want to spend my life, monitoring my electricity usage.

  50. Smart Grids will run the system at even lower ‘headroom’, i.e. at the ‘tipping point’.
    Room for very little failure there….yes, that’s another reason why we should head that way ??????

  51. Um, with the ability to either beam into Lincoln’s bed, or do that genocide thingy in theDiscount Cordless Screwdriver
    South that LM talks about with their ‘genesis’ weapon, I think whichever side Star Trek is on, is the side that wins.

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  53. Why is the federal government doing this and what authority do they have from the Constitution?

  54. Use my likeness, but no mention of me. Nice.

  55. thank you for this really interesting post.

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