Post # 26 - The Debate Over Dynamic Pricing Moves to Ohio

A key smart grid debate revolves around whether, once their customers have access to real-time pricing information, utilities should institute “dynamic” or “time-differentiated” pricing. That debate has raged in many localities where smart meters are being installed. A chapter in that debate is now taking place in Ohio.

Under dynamic pricing, customers pay different prices at different times – prices that, at least in theory, reflect system conditions. This contrasts with “flat rate” pricing, under which customers pay the same price for each kilowatt-hour they consume power, without regard to the time of day or electric system conditions,

Supporters of dynamic pricing claim these programs have the potential to save customers money and reduce utilities' costs. Dynamic pricing advocates say consumers generally will adjust their use of power if they are equipped with information about the true cost of their energy. And if people are financially incented to reduce consumption during peak periods (the argument goes), this lessens both utilities’ needs to build costly new power plants to cover times of peak energy demand and their overall emissions of greenhouse gases.

Conversely, consumer advocates tend to take a more cautious view, fearing that utility customers who sign up for dynamic rates without knowing how to take advantage of them – for example, those lacking the education or skills to correctly read and incorporate smart meter information or those unable to afford smart appliances – could end up paying more for their power than under the present flat rate regimes.

Concerns over the impact of dynamic pricing on low income customers led to the moratorium on smart meter installation earlier this year in the Australian state of Victoria (see Post # 11). Likewise, the impact of dynamic pricing has been a concern of consumer advocate in states such as California as utilities have begun to install smart meters, see here and here, as well as Post # 25 on the BGE smart meter decision in Maryland.

Late year, American Electric Power’s Ohio subsidiary successfully sought federal stimulus funding for fifty percent of the cost of a $150 million smart grid demonstration project. The demonstration program, kicked off last December, involves the installation 110,000 smart meters, testing of plug-in hybrid electric vehicles, and energy-efficient appliances.

AEP’s smart meter installation, involving 110,000 residential and retail customers in Ohio’s Northland region (a 150-square area encompassing parts of Columbus and other communities), is now complete. The next item on the company’s agenda is to offer those smart meter customers the option of rates that vary based on the actual time of usage, as opposed to flat rates. AEP has asked the Public Utilities Commission of Ohio to authorize a time-differentiated rate option. PUCO staff indicates that the commission could act on AEP’s request within the next several weeks.

AEP says a typical household uses about 11,000 kilowatt hours per year. Under the company’s time-differentiated rate program, the per-kilowatt-hour charge for participating customers who avoid using air conditioners and other appliances between 1 p.m. and 7 p.m. from June through September would drop by 68 percent for all power used during the other 18 hours of the day (and all day on weekends) – a reduction from 10.4¢ per kilowatt hour under the current flat-rate plan down to 3.36¢.

On the other hand, for participating customers who do not -- or cannot -- avoid using power during the peak periods, the time-differentiated rate jumps to 25.62¢ per kilowatt hour – or 146 percent more than what they would be paying on the current flat-rate plan.

So here are some issues that the PUCO likely will be addressing (albeit, in the context of an optional program):

• Will this combination of smart meter “discounts” and “penalties” change consumer behavior, and to what degree?
• Will those consumers adept at using their smart meters to manage the time periods they purchase power actually be subsidized by those consumers who lack that ability or inclination?
• Will time-differentiated rates lead to reductions in AEP’s generation during traditional peak periods?
• To what extent should the results of this pilot rate program serve as a metric for regulatory decisions aboutmandatory dynamic pricing?

Again, the AEP program is an optional program. But, if authorized by the PUCO, the outcome will clearly impact long-term debate over dynamic pricing – and not just in Ohio.

Post # 25 - A Smart Meter Setback In Maryland

In a move that caught many observers by surprise, last Monday (June 21, 2010) the Maryland Public Service Commission denied the application by Baltimore Gas and Electric Company – the State’s largest gas and electric utility – to install smart meters for each of the company’s 1.2 million customers – largely to be funded by a mandatory customer surcharge. Is the MPSC's order a major setback to smart grid development? More likely, the order highlights what always has been the “sixty-four dollar question”: how are smart grid costs most efficiently and equitably apportioned between utilities and their customers?

On the one hand, the initial reaction in many quarters is that the PSC has dealt a major blow to smart grid development in Maryland -- see, for example this editorial from The Baltimore Sun. Certainly, BGE appears reluctant to take up the PSC’s invitation to submit a new proposal that does not include guaranteed cost recovery (see here and here). At a minimum, the PSC has hit a major-league “pause” button.

At the same time, it would be a mistake to view the MPSC as “anti-smart grid” or “anti-smart meter.” The Maryland Commission was not ruling on the desirability of smart meters or the smart grid. The question before the MPSC – and before public utility commissions around the country – is “who pays the freight?”

BGE estimated that its smart meter project would cost $835 million – $482 million during the initial deployment period and an additional $353 million over the expected life of the program. The company secured a $200 million stimulus grant for the project from the U.S. Department of Energy. The company then sought MPSC authorization to recover the balance though a mandatory smart grid surcharge that would start at 38 cents a month for electricity customers and an additional 44 cents for those who also use natural gas. Over the course of a 15-year schedule, it would rise to an average of $1.24 a month for electricity customers and an additional $1.52 for gas customers.

In addition, BGE sought authorization for a mandatory “Smart Energy Pricing” schedule for all residential customers that would vary electric rates during the peak months of June through September based on the time of day and time of week.

BGE asserted that its smart meters would lead to an estimated $2.6 billion in customer savings over the life of the project, but the MPSC ultimately concluded that those customer savings were uncertain and far off:

Although we share BGE’s (and others’) hopes, and even enthusiasm, for the long-run potential and importance of the infrastructure upgrades known colloquially as the “smart grid,” we find the business case for this Proposal untenable. The Proposal asks BGE’s ratepayers to take significant financial and technological risks and adapt to categorical changes in rate design, all in exchange for savings that are largely indirect, highly contingent and a long way off. We are not persuaded that this bargain is cost-effective or serves the public interest, at least not in its current form.

Of particular significance, the MPSC was concerned that BGE's proposal was actually too limited. Thus, the PSC noted:

BGE’s Proposal is not solely a request for approval of the deployment of [smart meters]. It also is a request to establish a customer surcharge for advance recovery of the costs of the Proposal, thereby shifting all financial risk to BGE customers. The Company seeks approval to recover those costs through a “tracker” surcharge that would begin appearing on BGE bills for both gas and electric customers almost immediately upon the Commission’s approval of the Proposal, but before any of the infrastructure is installed or any benefits are realized. In addition to recovering the Proposal’s capital and operating costs through the tracker mechanism, the Company proposes that the surcharge be used, among other things, to collect a return on the Company’s net investment under the Proposal, as well as to collect Company “incentives” tied to anticipated wholesale capacity revenue, wholesale energy revenue, and wholesale capacity price mitigation resulting from anticipated changes in its customers’ energy use. The tracker virtually guarantees that the Company will recover from its ratepayers the prudently incurred costs associated with the Proposal, a profit for its investors, and a portion of certain projected benefits, if they are realized. In other words, with the proposed tracker in place, the Proposal is a “no-lose proposition” for the Company and its investors. [Emphasis supplied].

The PSC also questioned BGE’s underlying business rationale, concluding that BGE's proposal was "in no small measure" motivated by the availability of federal stimulus funds. Moreover, and significantly, the PSC found that installation of smart meters itself "would not enhance the electricity transmission grid or [BGE's] distribution 'backbone.'" And it is just such enhancements that the PSC believed would normally be part of a true smart grid initiative.

In other words, while smart meters can be an important element of the smart grid, smart meters are not the equivalent of the smart grid. In Maryland, in any case, rate treatment for smart grid investments will require a clear demonstration of grid improvements tied to clear customer benefits. This appears the real “take-away.”

Post # 24 - More Problems For PG&E? San Francisco Seeks Smart Meter Moratorium

Pending an investigation by the California Public Utilities Commission, the City Attorney of San Francisco is trying to prevent Pacific Gas & Electric from installing any more smart meters.

As discussed in prior posts, PG&E has been installing smart meters in northern California since late 2006 – approximately 5 million to date. But the road has not been smooth – there have been loud and recurring consumer complaints of meter inaccuracy and overcharging. See Post Nos. 6, 8, 13, 15, 16.

In response, the CPUC last March launched an investigation into PG&E’s smart meter roll out, citing about 600 complaints in the PG&E service area since January 2009 (compared to 10 in Southern California Edison's service area and 15 in the San Diego Gas and Electric Company's service area). See Post No. 8. The CPUC's investigation remains pending, with results expected later this summer.

Last Thursday, however, San Francisco City Attorney Dennis Herrera petitioned the CPUC to halt further PG&E smart meter installation until the CPUC completes the investigation. In a companion statement, Herrera asserts that “common sense should argue against installing millions of defective [smart meters] until their problems are fixed, and questions about their accuracy are fully resolved."

PG&E had previously apologized for problems with its smart meters, but argued that those errors have been rectified and that millions of smart meters have been installed without any reported problems. See Post No. 16. With respect to Herrera’s petition, PG&E spokesman Jeff Smith said that "we do not believe a moratorium (on installing the meters) is necessary, and the California Public Utilities Commission has agreed with us." Smith also said that smart meter technology "is already in place and working well around the world, with many different kinds of utilities." Moreover, he added, San Francisco is using the same technology for the city's water meters as PG&E does for gas meters. Smith argues that “by continuing those installations, [PG&E] will provide our customers in San Francisco with many benefits and allow them greater control over their energy."

But Herrera contends that the potential benefits of smart meters do not outweigh the risk of inaccuracies and overcharges to customers. "Receiving a timely and correct bill from PG&E is the least a customer is entitled to expect, Customers should not be in the position of wondering whether their bills are accurate or whether the equipment installed by PG&E is working properly."

Herrera’s petition apparently makes San Francisco the first city in PG&E's service territory to formally petition the CPUC to halt the program. But in an editorial this morning, the San Francisco Chronicle called on PG&E to suspend further smart meter installations until the CPUC investigation is complete – and urged other city attorney to support the Herrera petition.

To read more about the Herrera petition and PG&E’s response, see here, here, and here. The ball, once again, is in the CPUC's court.

Post # 23 - Smart Meters: "Ripe for a security-economics analysis."

At a paper delivered last week at the Ninth Workshop on the Economics of Information Security at Harvard University, Professor Ross Anderson of the University of Cambridge Computer Laboratory and software engineer Shailendra Fuloria argue that “energy metering is ripe for a security-economics analysis.” For all the current push to install smart meters – driven by stimulus funding in the United States (see Post # 9 and here) and the European Union's directive that member states (to the extent economically feasible) replace all meters with smart meters by 2022 (see Post # 10) – the authors believe that security concerns have not been adequately addressed.

The lack of proper analysis flows largely from conflicting stakeholder interests. For example, Anderson and Fuloria note that the utility wants to cut energy theft, and thus wants the ability to disable any meter remotely. Conversely, however, “a prudent nation state might be wary of a facility that could let an attacker turn off the lights.” Similarly, the authors note, while the utility may want to monitor its customers’ consumption by the half hour (it can price differentiate more effectively), regulatory authorities may find this “abhorrent.” Likewise, other parts of government might find it “convenient” to have access to fine-grained consumption data, but might find themselves up against privacy law.

Anderson and Fuloria state that there are at least half-a-dozen different stakeholders with different views on security, “which can refer to information, to money, or to the supply of electricity.” Further – and significantly – the authors assert, “it’s not even true that more security is always better: some customers may opt for an interruptible supply to save money.” Thus, they argue that thorough security-economics analysis is critical

Anderson and Fuloria note that there are a number of practical consequences for research, both on technical and policy matters:

What sort of incentives will really cause customers to save energy, and what implications does this have for the design of tariffs and indeed meters? How can we design a tariff description language that will enable an energy supplier to download a tariff to a customer’s meter, in such a way that both the customer and the distributor can audit what’s going on?

How can we be confident that features such as a remote off-switch (or for that matter the tariff description language) aren’t abused for service-denial attacks? And perhaps of most interest for the security-economics community, what sort of regulatory structures are likely to work best as the industry moves from being a staid vendor of energy at regulated prices into a complex socio-technical system?

Anderson and Fuloria make five basic recommendations. First, smart meter data should belong to the customer, who should be forced to share it with the utility only to the extent necessary for service provision and billing. Further uses should be a matter for the customer’s discretion. Second, rather than a centralized system for data collection, what’s needed is a framework of standards that allow data to be shared between energy suppliers, distributors and management companies. Third, the distributors should do the “heavy lifting” when it comes to audit, because (Anderson and Fuloria assert) they alone have the incentive to do it vigorously. Fourth, governments should leave active demand management to the energy companies. Fifth, protection from market abuse requires that regulators, rather than setting technical standards, instead limit there role to ensuring security of supply and market competition.

These recommendations in turn, flow from Anderson and Fuloria’s basic vision of Smart Grid: “[T]he ‘smart grid’ of the future will not be a monolithic entity under the control of a single company or ministry, but rather a complex socio-technical system of energy generators, distributors, regulators, market-makers, aggregators, advisers and suppliers, interacting with both industrial and retail customers.”

Post # 22 - Boston Consulting's Smart Meter Study: A Mixed Bag

Last month, the Boston Consulting Group, a global management consulting firm, announced the results of a smart meter survey conducted in December 2009. BCG’s study is mixed bag. On the one hand, the study finds evidence that consumers are prepared to use smart meters – and new technologies that smart meters can enable – to manage energy usage and reduce costs. But BCG also finds a current low consumer awareness of smart metering, a large degree of consumer suspicion of power companies, and the lack of effective communication between power companies and their customers. Moreover, BCG estimates that for utilities to recognize a “winning” return on smart meter investment, from 20 to 30 percent of a utility's customers will have to reduce their overall consumption or peak demand by 15 to 20 percent.

BCG surveyed roughly 1,700 U.S. consumers, of whom (a) 75 percent resided in zip codes with smart meter deployment and (b) 25 percent resided in the same states but in areas without smart meter deployment. BCG notes that this concentration necessarily “skews” the results toward California and Texas. BCG also screened respondents for household income greater than $25,000 and for primary or “at least occasional payers of residential power bills.”

In addition, this was an online survey. Although BCG doesn’t make the point, online surveys may somewhat skew the results to “computerphiles” while leaving out “computerphobes.”

With those potential limitations in mind, the BCG study makes six findings concerning consumer attitudes:

First, there is low overall customer awareness of smart meters and their potential benefits. More than 50 percent of customers have never heard of a smart meter and its benefits, and only 15 percent were “very aware.” Interestingly, awareness levels were not affected by whether there is in-region deployment of smart meters.

Second, consumers in fact generally believe in the potential for smart meters to help them reduce energy consumption. However, BCG finds that they need to be further educated about reliability, privacy, and pricing.

Third, while 40 percent of the respondents "just want power," 60 percent displayed “green attitudes” or “environmental concerns.” Of those “green” respondents, moreover, the vast majority are also cost-conscious, i.e., “interested in the smart meter's cost-conscious conservation potential.”

Fourth, those “cost-conscious greens” have more negative attitudes regarding their power company: fifty percent believe that home power bills are relatively large, while 40 to 45 percent believe that their power company is not interested in reducing consumption “and that the power company is not on their side.”

Fifth, a majority of the respondents were interested in services that can be provided using smart meters as an “enabling technology.” Moreover, they consider utilities to be credible providers of such services.

Sixth, reaching customers with information on smart meters will be difficult, “as few consumers actually read or recall any power-company communications.”

BCG believes that utilities are in a “good starting position” since many consumers are intrigued by the energy-saving capabilities that smart meters would afford. Sixty-two percent of the survey respondents agreed that they would actively log onto an Internet site to check their power consumption on at least a weekly basis. Moreover, 56 percent agreed that they would set their thermostat by time of day based on consumption and pricing information from smart meters.

At the same time, however, BCG estimates that “from 20 to 30 percent of a utility's customers will have to reduce their overall consumption or peak demand by 15 to 20 percent to make smart meters a winning proposition.” Falling short of that threshold, BCG believes, “will likely prevent the utility from delivering the necessary return on investment.”

BCG's press release for the study can be found here. As noted in the press release, a summary of the findings and conclusions can be obtained directly from the company (I obtained a copy, upon which this post is based, but don't seem able to attach it).

Post # 21 - Some Good Smart Meter News From Cape Cod

Over the past few months, I have highlighted problems that have occurred with smart meter rollouts in California, Texas, Australia, and Ontario (see Post ## 6, 8, 11, 13, 15, 16, and 17). But, while those problems are real and significant, there have also been successes.

For example, earlier this Spring the Cape Cod Light Compact – an inter-municipal regional energy services organization representing 21 Massachusetts municipalities (approximately 200,000 residents) – released results from its Residential Smart Home Energy Monitoring Pilot. This program, commenced in February 2009, uses web-based in-home monitoring software (developed by GroundedPower, Inc.) that: (1) provides real-time viewing of actual energy consumption, (2) suggests opportunities for energy saving, (3) actually allows participants to see their neighbors consumption habits, and (4) includes social networking features designed to encourage sharing of energy-saving tips.

The Compact’s independent auditor, the PA Consulting Group, reports that the 100 active participants on Cape Cod and Martha’s Vineyard reduced their daily energy use by 9.3 percent, which is about 2.9 kilowatt hours per day. Approximately three-quarters of the participants reduced energy consumption during the course of the project, and one-third of those participants reduced usage by more than 4 kilowatt hours per days. Interestingly, the ability to share information with other households was perceived as a major benefit by many participants, while a large majority were neither overly concerned with on-line security nor energy “privacy.” Eighty percent logged on to the site weekly, with one quarter doing so daily and nearly half more than three times a week. Nearly all want to continue using the service, and most are willing to pay $8.00 per month for the service once the pilot concludes. To read the Compact’s press release, see here. To read PA Consulting’s entire report, see here.

Of course, the Cape Cod Light Compact is not a large, investor-owned utility with millions of customer in its service territory. And even on the Compact's own level, 100 homes out of approximately 200,000 does not appear to be a particularly big sample. Moreover, there are questions of just how representative pilot participants drawn from Cape Cod and Martha’s Vineyard can be of overall U.S. residential energy consumers. For example, nearly 44% of the participants had graduate degrees, while another 38% had college degrees. Nearly 44% of the participating households had annual incomes in excess of $100,000, while another 17% had incomes in the $75,000-99,999 range.

Nevertheless, the participating households clearly used their access to real-time information to significantly reduce their energy consumption. The Compact's program demonstrates that access to energy information can cause real changes in consumer behavior.

Post # 20 - Report: Consumer Acceptance and Behavior Still a Smart Grid Challenge

A report produced by the telecom research firm Maravedis in partnership with the Telecommunications Management program at the University of Maryland University College finds that the current level of utility commitment to smart grid widely varies, while consumer buy-in remains a major challenge.

Entitled “Smart Grids and the New Utility,” the report concludes that -- for all the smart grid buzz over the past few years -- most roll-outs to date have been in secondary markets involving small clusters of trial users. Among the report's principal findings:

• New levels of standards protocols need to be agreed on, from device to network, and especially across utilities (investor-owned, municipally-owned, coops, etc.). Since the different utility classes are regulated differently, Maravedis identifies a need for “utility‐agnostic” devices.
• While most smart grid focus is on “micro‐energy management” within households, the "onslaught" of Plug‐in Hybrid Electric Vehicles (PHEV) will require new “macro‐energy” levels of management.
• With respect to wireless issues, the report reached two principal conclusions. First, use of licensed spectrum is preferred over unlicensed spectrum. This will place WiMAX (Worldwide Interoperability for Microwave Access, a telecommunications protocol that provides fixed and fully mobile internet access) at an advantage for wireless smart meter communication and the backhauling of aggregated usage data. Second, wireless carriers believe that smart grid initiatives will help machine‐to‐machine (M2M) services and, like Kindle and the iPAD, “offer new opportunities in monetizing 3G wireless services.”
• Maravedis concludes that utilities likely will not emerge as a new breed of wireless carrier even after embracing IP technologies, wireless access and intelligent 2‐way devices. However, Maravedis says it uncovered “some interesting examples of electricity coops rolling out triple play services that include Internet access, television and wireless solutions.”
• Due to the enormous costs, complexity, standards, and regulatory needs a truly operable smart grid will require, “[t]he government’s role is paramount in moving Smart Grid initiatives forward.”

Maravedis also highlights a major challenge frequently discussed in this blog: the jury is still out in the key areas of consumer acceptance and consumer behaviors:

"A Smarter Grid will turn the utility business model inside‐out, but will smart meters create smarter consumers? Do consumers really care to micro‐manage their electricity usage? There is a populist back‐lash against smart metering trumpeted by notions of higher rates, horribly‐managed roll‐outs, ideas of big brother hovering, and who will own (and get to utilize) the volumes of near real‐time usage data. Smart metering is only the start to the Smart Grid transformation, and if its value isn’t properly communicated then household, township, state‐wide and nationwide economies will end up being the largest challenge to Smart Grid initiatives." [Emphasis added.]