Knowledge Problem

Lynne Kiesling

GE and Silver Springs Network will work with FPL to implement smart grid investments for 1 million Miami customers (here’s GE’s press release). This is an exciting and promising investment, and its open architecture holds a lot of promise for the development of customer-facing applications. GE and Silver Springs have great technology.

So why am I not doing cartwheels in the streets about this? Two reasons. Take this quote from the WSJ Environmental Capital post linked above:

What will Miami’s smart grid do, exactly? The whole power grid, from power plants to wall sockets, will be put on an Internet footing. That will let the power company—FPL—get a better handle on how electricity flows through its system and better manage supply and demand. Consumers will get an idea how much power they really use—and when. And companies like GE, Cisco, and Silver Springs will get a new market to sell their smart meters and wireless networking equipment.

The Miami project is a result of the stimulus package—roughly half the $200 million cost will come from federal smart grid incentives, while FPL will pick up the rest, figuring the new-and-improved network will soon pay for itself. Consumers won’t have to pay anything, says Mr. Gilligan, but he expects households to see savings of between 10% and 20% on their power bills. That’s because consumers who are aware of how much they are using, tend to use less electricity.

This is a utility-centric value proposition, not a consumer-centric one; as has been the case for the past century, the customer is an afterthought, is load that has to be centrally managed and served. The focus remains on the utility, the utility’s investments, the utility’s benefits. Yes, those benefits can ultimately redound to customers through lower operating costs. But Florida’s regulatory institutions remain in the 20th century, and the firms in its electricity industry remain vertically integrated. Its retail consumers do not have any choice; there is no competition for their business. Florida does not have a regulatory environment that enables the possible innovations in retail products and services that would create new value beyond the distribution automation and the provision of electricity consumption information to consumers.

And that’s my second reason to be cautiously optimistic about this investment. If you approach the retail electricity market from a regulated, utility-centric perspective, not only will you view consumers as load to be centrally managed and served, you will think of “enabling the consumer” as nothing more than providing them with technology to increase their information on their electricity use. Information is a start, but a truly consumer-focused smart grid strategy must involve pricing, must involve allowing entrepreneurs to develop new products and services around the technology, and must be transactive.

In other words, a truly value-creating smart grid industry model requires not just the technology, but also the regulatory institutions that enable retail innovation, retail competition, and retail choice. Without that combination of technology and institutions, we will fail to create all of the potential benefits from smart grid investments.

The next paragraph in the post indicates some prospect for a truly transactive smart grid in Miami, though:

Most of the area will see the basic infrastructure of the next-generation power grid, such as the smart meters that wirelessly transmit information on electricity use back to the power company. The really intelligent part of the smart grid will be limited to about 1,000 households in the Miami demonstration. Those homes will be outfitted with smart-energy gadgets to use electricity more wisely. “Eco-panels,” for instance, will help manage power use when electricity is most expensive; smart appliances will reschedule themselves to run when it’s cheapest.

Although no mention is made of it in the post, in order for price-responsive transactive “gadgets” and a home energy management portal to create value for consumers and save them money, the regulatory institutions have to allow dynamic pricing. Smart grids and smart appliances and dumb pricing squander the opportunities that the technology creates.

Lynne Kiesling

This earth2tech post comments on a presentation from Rich Sedano at the Ceres conference this week in San Francisco. Rich has been working on electricity regulatory issues, demand response, and institutional design for a long time, and his insights as reported here are very important and frequently overlooked:

The way Sedano sees it, the Securities and Exchange Commission, which oversees Wall Street credit rating agencies, and state-level utility regulators have failed to communicate and, by extension, to establish consistent rules and incentives — leaving utilities “waiting for a sign that it’s safe to pull the trigger on an investment and hoping they don’t miss the opportunity to do the right thing.”

Not enough people realize the role that credit rating agencies, and/or a utility’s perception of a credit rating agency’s likely response, play in influencing utility investment decisions. I’ve often argued that the 100-plus year history of regulatory codependency between the regulator and the regulated reinforces a culture of risk aversion and cautious decision-making that stifles innovation and the adoption of new technology. The credit rating agency dynamic reinforces that pattern:

As Sedano noted, when it comes to considering investments, utilities keep credit ratings top of mind — and ultimately their very perception of how credit raters will view different investments can cause them to rule out certain options, thus avoiding or postponing investment in efficiency tools or smart grid technologies altogether. Instead of leading innovation, utilities are waiting for markets to catch up. Meanwhile, state regulators often focus on immediate stakeholders and overlook utilities’ place in the larger financial market.

Plus, he said, there’s a jargon problem — financiers don’t speak electricity, and utility regulators don’t speak Wall Street. Better communication between Wall Street regulators, credit rating agencies and state utility regulators, which control utility rates and investments, could help ease the gridlock.

Hear, hear.

On another note, why is it that conferences like this very cool-sounding Ceres one never include academics? I think academic economists who work on applied institutional design topics would add substantially to this conversation in the technology, investment, and sustainability space. Here I’m thinking not just selfishly, but also of outstanding economists and communicators like David Zetland.