Recommendations for smart grid policy (Part 5 of 5)

Lynne Kiesling

So far in this series I have stressed what I think are some important foundational concepts in defining smart grid, thinking about its scope and its potential for value creation, and distinguishing it as an investment category from traditional transmission construction. All of these concepts have some interaction with government policy, at either (or both) the federal or the state level.

Smart grid policy is very topical right now, because of the inclusion of $4.5 billion in smart grid funding in the federal debt-stimulus package that Congress passed in February; smart grid was also the focus of a Senate Committee on Energy and Natural Resources hearing last week. There are too many dimensions to smart grid policy for me to opine on all of them in this brief post, so I’ll restrict my attention to one point: at both the federal and the state level, smart grid policy should focus on enabling the various participants, and potential participants, in the electric power network to benefit from a smart grid’s transactive capabilities.

This recommendation sounds more straightforward than it actually is in practice. This policy prescription can mean different things to different people. Does it mean, for example, that state regulatory commissions should approve utility investments in advanced metering infrastructure (AMI) for their residential customers that will go into the utility’s rate base? That is certainly how regulated utilities are interpreting my normative prescription in many jurisdictions. But in order to create the fullest possible benefits from a smart grid’s transactive capabilities, that two-way communicating digital technology outside of the home must be coupled with dynamic pricing. If regulatory institutions do not allow consumers the freedom to choose how much price risk to bear and what price signals to receive, then they fail to deliver on that potential. The digital meter technology is only part of the enabler for this value creation.

Moreover, I would argue that the digital meter outside the home is not even the necessary enabler for this value creation (I know others disagree!), while the dynamic pricing is essential. If I had to pick one, I would choose intelligent pricing options and dumb technology over intelligent technology without intelligent pricing options to which to respond.

A different way to interpret my policy prescription is to say that smart grid’s transactive value potential can best be realized by having competitive retail electricity markets. What if we had multiple competing retailers, each of whom could offer a menu of product and service offerings to residential customers? Consumers who already have broadband connections can get price signals and the two-way communication capability over the Internet directly to their intelligent end-use devices, and can use a web portal to program their devices and to enable remote access. From the perspective of the consumer, then, the meter is superfluous!

I think the truth is a combination of these two interpretations. Digital meters are enablers of the kind of product differentiation and product-service bundling described in my third post in this series. But the combination of factors that is most likely to lead to the highest total value creation is the digital meter plus retail product differentiation and retail competition. Not only does the digital meter enable customer-facing product and service innovation, it also provides valuable real-time data back to the utility to help it do a better job of providing high reliability as a wires company and load-serving entity. Yes, the implication of what I’ve just said is that utilities should be wires companies, should be evaluated and rewarded based on their performance as wires companies, and should not be in the retail business of serving residential customers any longer.

Not surprisingly, then, I view the smart grid-designated funds in the federal debt-stimulus package as a way to overcome the intertia of a century of regulation. Regulation has made both regulated utilities and regulators very conservative with respect to the technologies they approve/invest in. To the extent that the funding overcomes that technology inertia and induces utilities to invest in value-enhancing, enabling, smart grid technologies, it may turn out to  be money well spent.

However, without regulatory reform at the state level to remove barriers to retail choice and retail competition, the net economic value of that federal stimulus spending will be truncated, and limited solely to utility-centric, operations-focused effects. The combination of regulatory change and smart grid technology can unleash lots of value creation potential, but subsidizing investments in smart grid technology alone will generate much less.

Other posts in this series: