It's the night before Christmas in the energy  sector, with the Energy Dept. expected to announce $4.5 billion in federal stimulus awards soon for projects aimed at ushering in the smart grid. The aim of the money is a far-reaching upgrade of the system that distributes energy to homes and businesses across the U.S., adding two-way communications and control technologies throughout the newly networked grid.
But those investments may have little impact if they're not accompanied by new state-level regulations that give both utilities and customers strong incentives to better manage and reduce their electricity consumption.
The first area in need of change is how utilities are compensated. An electric utility's revenue is tied primarily to the amount of power it sells. That was fine 50 years ago, in a world with seemingly unlimited resources and little evidence of climate change, but not today. As it stands, utilities have little motivation, if any, to encourage customers to find ways to reduce demand or to practice energy efficiency themselves -- two core tenets of the smart-grid vision.
To encourage utilities to foster energy efficiency, we'll need regulations that establish new rate structures and business models. These will create incentives for utilities to earn revenue in ways that are not entirely linked to additional sales. Otherwise, asking a utility to sell less power is analogous to asking Starbucks to sell less coffee. Furthermore, since utilities are granted monopolies at regulated rates, a reduction in sales is equivalent to demand [and profit] destruction.
From Demand Destruction to Demand Response
Smart grids aim to replace demand destruction with a practice called demand response. Utilities intentionally reduce overall demand by sending signals to customers to turn down energy use in exchange for financial rewards. For example, a utility might offer a discount to users who run their dishwashers in other than peak-demand hours.
The second challenge is overcoming the user's passive relationship to energy. In the U.S., customers have long been numb to energy costs because prices were dirt cheap. This resulted from flat rates that didn't really express the true, variable costs of energy generation and delivery. However, significant increases in the cost of electricity are coming, and fast. According to the Energy Dept., electricity prices are forecast to rise 50 percent over the next seven years, while the Energy Information Administration, which compiles energy statistics for the government, expects nationwide demand for electricity to grow by 30 percent by 2030. (continued...)
© 2009 Business Week Online under contract with MarketWatch. All rights reserved.
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