On Wednesday afternoon around 3:45 the power went out in areas of Manhattan and the Bronx in New York City. Although the outage lasted less then one hour, it was sufficient to cause traffic congestion and inconvenience to almost 400,000 customers on a hot, humid summer afternoon.
This experience illustrates the challenges facing the electric utility industry: in the face of economic growth and the associated growth in demand for electric power, providing product and service offerings that customers value, and doing so with reliability that meets the expectations of diverse customers, puts tremendous strain on the physical infrastructure in the electric power network. Despite these strains, building new physical infrastructure, particularly new transmission wires, faces serious obstacles and community disputes over siting and other issues. Furthermore, developments in digital communications technology have created alternatives to constructing new physical infrastructure, and in many cases these alternatives may be more cost-effective than traditional iron-and-wires. In creating a reliable smart grid network to meet the future needs of a thriving, modern society, bits are cheaper than iron. Thus I wanted to bring to your attention a couple of recent news articles highlighting the role that smart grid technology, pricing, and policies can play in helping us to avoid blackouts like yesterday’s in New York.
One of the mechanisms by which a smart grid delivers reliability is through the use of dynamic pricing, which can itself reduce electricity use during peak hours when the costs of producing electricity are the highest. And if consumers have enabling technology, particularly two-way digital communications capability in thermostats so the electric retailer can send prices to the thermostat, customers are even better able to respond and the reduction effect is amplified. Ahmad Faruqui recently wrote about this effect as a guest contributor at The Clean Slate Report, referring to the California Statewide Pricing Pilot that he led:
The latest evidence comes from a scientifically-designed experiment that was conducted in California over a three-year period beginning in 2003. Involving some 2,500 customers, it showed that customer demand dropped by 13 percent when prices rose during the peak periods to reflect the higher cost of power in those periods.
When customers were provided “smart thermostats” that automatically raised the thermostat setting by four degrees Fahrenheit, the drop in load doubled. Similarly encouraging results are now coming in from commercial and industrial facilities that have installed automatic demand response software. This software uses the Internet to transmit price signals to the energy management control systems that are commonly present in such facilities, dimming certain lights, raising thermostat settings and raising chilled water temperature.
In another post at Clean Slate, Faruqui argues that reducing national peak demand by five percent would have a net present value of $35 billion over a 20-year period.
CenterPoint Energy in Texas is also implementing smart grid technology and pricing, taking advantage of the opportunity that Texas’ competitive retail environment creates for electric retailers to create new products and services. As this Houston Chronicle article reports,
The CenterPoint system includes “smart” meters and software that bring transparency to the market, allowing consumers to see how they use electricity, and how that usage affects their bills.
“To some degree, electricity is something of a mystery,” said David Dollihite, vice president of U.S. home services for Direct Energy, another electricity retailer. “You get a bill and you pay it. You don’t know how you get it, how you use it, what you’re paying for.”
The intelligent grid changes that. Customers eventually could set the amount they want to spend each month. Air conditioning accounts for more than half of most customers’ summer electric bills. A computer program would tell them what temperature to set their thermostat at to achieve that price.
They also could do the reverse — enter a temperature and have the program estimate the bill.
“It provides the consumer a gateway into the market, so that they can tie the cost of their electricity to their usage,” said Guy Braden, senior vice president of operations and technology for Suez Energy Resources, which sells electricity to commercial customers in Texas. He predicts customers will cut their usage by as much as 20 percent, simply because they’re more aware of their usage. …
In touring the CenterPoint lab, though, it became clear that its new system could offer customers more savings and choices, while also making the complexity of deregulation easier to manage.
Combined with competition, the new grid may encourage an array of innovation, from products such as prepaid debit-type cards for electricity to sensors that alert you to appliances or lights left on when you leave the house.
“The promise lies in the new products that can come out of that,” Braden said.
One of the important foundations of a smart grid is the interoperability that enables all of these different devices, technologies, and agents (producers, consumers, operators, etc.) to interact beneficially in the network. The GridWise Architecture Council (www.gridwiseac.org) works to promote interoperability principles to enable the transformation of the electric power network into a system that integrates markets and technology to enhance our socio-economic well-being and security. One of my GridWise Architecture Council colleagues, Rik Drummond, recently reported in the Smart Grid Newsletter that evidence from other industries indicates that interoperability generates tangible cost savings and intangible benefits amounting to 0.3 to 4 percent of industry revenues annually. In the electric power industry that could mean a net benefit of up to $12.6 billion per year.
These examples all illustrate the potential value of thinking differently about how to address service reliability and security concerns. Not only are bits cheaper than iron; they can also deliver robust reliability and product differentiation benefits to consumers through information transparency and the interaction of interoperable technology and pricing.