Lynne Kiesling
Today’s New York Times has an article describing the results of the GridWise Olympic Peninsula Project, the year-long smart grid research project on price-responsive household technology, dynamic electricity pricing, and consumer behavior in which I participated:
The demonstration project was as much a test of consumer behavior as it was of new technology. Scientists wanted to find out if the ability to monitor consumption constantly would cause people to save energy — just as studies have shown that people walk more if they wear pedometers to count their steps.
In the Olympic Peninsula, west of Seattle, 112 homes were equipped with digital thermostats, and computer controllers were attached to water heaters and clothes dryers. These controls were connected to the Internet.
The homeowners could go to a Web site to set their ideal home temperature and how many degrees they were willing to have that temperature move above or below the target. They also indicated their level of tolerance for fluctuating electricity prices. In effect, the homeowners were asked to decide the trade-off they wanted to make between cost savings and comfort.
This project provided homeowners with price-responsive thermostats (and, in some cases, water heaters), and importantly, provided them with the opportunity to choose the type of contract and how much price risk they were willing to take.
Every five minutes, the households and local utilities were buying and selling electricity, with prices constantly fluctuating by tiny amounts as supply and demand on the grid changed.
“Your thermostat and your water heater are day-trading for you,” said Ron Ambrosio, a senior researcher at the Watson Research Center of I.B.M.
The average participating household saved 10 percent over the course of the year, and households that were willing to participate in the real-time market saved even more. Not only did these individual actions lead to individual savings, though; in aggregate their willingness to respond to price signals reduced the strain on the congested distribution system in peak periods. The results of this project are strong evidence for how enabling end-user technology and dynamic electricity pricing can lead to consumer savings, increased system reliability, and reduced and delayed capital expenditures to expand distribution systems.
The key to making this work for all parties involved is the combination of smart grid end-use technology and retail price signals to the end-use customer. But to the extent that distribution utilities are implementing smart grid technologies, they are doing so only with a view toward lowering their operating costs. They are failing to see and create the new value opportunity that the GridWise Olympic Peninsula Project shows is possible.
Why are they failing to see and create this new value? Because their profits are determined by cost-based rate-of-return regulation, which gives them no incentive to pursue business opportunities such as that shown in the GridWise Olympic Peninsula Project.
The technology is not enough. The technology has to be accompanied by regulatory change, to unshackle the distribution utility’s incentives from traditional cost-based regulation. Until that happens, customers like those in the Olympic Peninsula, who like the technology and pricing of the GridWise Project and miss it now that it’s gone, are the real losers.
The fact sheet on the GridWise Olympic Peninsula Project and the final report on the GridWise Olympic Peninsula Project are available at the PNNL GridWise website.
In re: “Not only did these individual actions lead to individual savings, though; in aggregate their willingness to respond to price signals reduced the strain on the congested distribution system in peak periods.”
Are you saying that there are positive externalities associated with an individuals decision to conserve energy beyond his own energy bill savings? Could this be seen as a potential rationale for the government to get involved in promoting efficiency/ conservation, as the market may be underinvesting in efficiency?
Rich,
That is precisely what I’m saying.
No, it is not a case for government intervention; it is what Buchanan & Stubblebine called an irrelevant externality — even if each person got a miniscule subsidy to account for the marginal benefit they are not capturing, would it change their behavior? In most cases, probably not.
Here are some other posts that have discussed irrelevant externalities:
http://www.knowledgeproblem.com/cgi-bin/mt-search.cgi?IncludeBlogs=1&search=irrelevant+externality
Plus I have a whole chapter on it in my forthcoming book, the manuscript of which goes to the publisher tomorrow (!!).
An additional aspect, in addition to what Lynne mentioned, is the interface for the AVERAGE consumer. While the GridWise Olympic Peninsula Project highlighted consumers who like to track energy and cost daily, there is another aspect. Not all consumers want to be that involved on a daily basis.
During brief moments of grid instability, a PNNL sensor notified the special dryer, designed by Whirlpool Corporation, of the grid event. Without any inconvenience or noticeable consumer impact, the dryers turned off their heating element for a time ranging from a few seconds to several minutes. Responding in well under one second, the smart dryer turned off over 5,000 watts while continuing to tumble the clothing and monitor the drying process. If necessary, the Whirlpool-designed smart dryer would extend the cycle for several seconds or several minutes to ensure the drying process met consumer expectations.
Whirlpool was pleased for the opportunity to take part in this program, and contributed significant efforts in development of the electric dryer uniquely adapted to be grid-friendly and consumer friendly at the same time. In short, the product did what many energy-saving products do not: it provided the energy and environmental benefit without compromising consumer satisfaction.
Gale Horst
Lead Engineer & Project Manager for the GridWise project dryer
I had a quibble with the NYT article, though it is almost a different subject.
The line was this:
“One big hurdle is that in most states, utilities are still granted rates of return that depend mainly on the power plants and equipment they own and operate instead of how much energy they save.”
First, basing returns on “energy not consumed” is a problem of measurement, and invites abuse. Second, is it the job of the utility to save energy? Or is it the job of consumers to save energy? Third, the concept of uncoupling is meant to make utilities’ returns independent of electricity sales, specifically by basing returns on “power plants and equipment” assets in a way that doesn’t depend on sales volume. The intent of uncoupling is to reduce utilities’ resistance to conservation efforts. Is this author opposed to that? Finally, utilities’ returns on existing assets are not a major hurdle to anything these days anything. What we need to concentrate on is avoiding consumption of expensive fuel inefficiently and avoiding unnecessary construction of *new* assets on which utilities will require a return in the future. We need to get out of the present and look at where we’re heading as a nation, planet, and species. And the responsibility should not be placed by government on regulated utilities to engineer and implement. Let’s show the right prices. Then technologies and service providers will come out of the woodwork, and consumers can save their own money.
Are we sure there is no “Western Electric Effect” driving the results?
Besides, my electric bill last month was $95, all in. Do you really think saving $9.50 a month (10%) will cause my family to reorganize our lives?
What this program needs is a better marketing prospective. Real time pricing or “dynamic pricing” has its pros and cons. One of the cons is a lack of hard data on volutary market acceptance data. I’m very skeptical of market acceptance or significant market penetration by end users.
Like PCTs, there must be voluntary acceptance. Not only no control within the home, but it must be “opt in” not “opt out.”
Are we sure there is no “Western Electric Effect” driving the results?
Besides, my electric bill last month was $95, all in. Do you really think saving $9.50 a month (10%) will cause my family to reorganize our lives?
What this program needs is a better marketing prospective. Real time pricing or “dynamic pricing” has its pros and cons. One of the cons is a lack of hard data on volutary market acceptance data. I’m very skeptical of market acceptance or significant market penetration by end users.
Like PCTs, there must be voluntary acceptance. Not only no control within the home, but it must be “opt in” not “opt out.”
I have no idea what a “Western Electric Effect” is.
What matters is not *your* specific preferences and whether you think 10% is enough of a value proposition. What matters is if entrepreneurial retailers think that there are enough customers out there for whom 15% (because the average savings waas 15%, not 10%) is meaningful, and furthermore, that the technology makes it so that your family doesn’t have to reorganize their lives.
And anyway, most folks have reorganized their lives when they get new audio, video, computing, and/or communication technology. And they benefit from doing it. Why should this be any different?
This entire project was premised on voluntary choice and the ability to use pricing and technology to achieve decentralized coordination.
I have no idea what a “Western Electric Effect” is.
What matters is not *your* specific preferences and whether you think 10% is enough of a value proposition. What matters is if entrepreneurial retailers think that there are enough customers out there for whom 15% (because the average savings waas 15%, not 10%) is meaningful, and furthermore, that the technology makes it so that your family doesn’t have to reorganize their lives.
And anyway, most folks have reorganized their lives when they get new audio, video, computing, and/or communication technology. And they benefit from doing it. Why should this be any different?
This entire project was premised on voluntary choice and the ability to use pricing and technology to achieve decentralized coordination.
It’s interesting how we often retreat back to “price” as our main throttle control for saving energy. Apparently this is our traditional comfort zone of control? As was already mentioned, 5% or 10% may not be very meaningful to an individual home energy bill. But in avoiding the need for new generation and transmission, it has significance. Controlling demand via price will again ding the poor and inconvenience their lifestyle while relying solely on price is only a very minor annoyance to the wealthy who will just pay the price and demand continues to rise. Price seems to be our old crutch.
Let’s separate money & waste. Separate willingness to pay, from conservation of resources. The GridWise project survey indicated that many people are now motivated by doing the right thing for the environment. 43% of participants in the GridWise portion of the project selected either “help the environment” or “help the electric power grid” as their motivation. This is a greater number than the 36% who stated that they would participate to reduce their electric cost. (see page A.23 of the Part II GridWise project report at http://gridwise.pnl.gov/docs/gfa_project_final_report_pnnl17079.pdf )
We still seem to portray the old American notion that anything that is inexpensive, can be consumed in mass quantities without giving it a second thought. Let’s introduce the concept that waste is waste regardless of cost. If we have technology to help manage energy without inconvenience but with results and consumer acceptance, this sounds like the 21st century solution as opposed to the centuries old money manipulation game. It requires different motivation factors and leadership from a broad spectrum of perspectives and influences.
Gale Horst
What I called the “Western Electric Effect” is also know as the “Hawthorne Effect.”
The NYT article spotlighted a guy who saved 11% on his bill. He was a retiree who was highly motivated to make the project a success.
A first rule of business is never rely for long on “do gooder” enthusiasm since such motivations are fads and will fade. Anyone care to build a business case for profits from Prohibitionists?
What I called the “Western Electric Effect” is also know as the “Hawthorne Effect.”
The NYT article spotlighted a guy who saved 11% on his bill. He was a retiree who was highly motivated to make the project a success.
A first rule of business is never rely for long on “do gooder” enthusiasm since such motivations are fads and will fade. Anyone care to build a business case for profits from Prohibitionists?
It would also seem that a key variable in the motivation equation is that demand side management can be an enabler for higher penetration rates of intermittent renewable sources. Many consumers would probably participate consistently in such programs if they understand the role it can play in a broader energy plan to address dwindling fossil resources and climate issues.
It’s one thing to do something consistently if the perception is that I’m conserving 10%… wasting less… it would be a different level of commitment perhaps if I knew that everyone chipping in with DSM allows for X number of wind turbine and solar sites to replace a certain number of gas or coal plants. Many people would probably view the ongoing transformation of our energy infrastructure as a necessity, not a “do gooder” project.
It would also seem that a key variable in the motivation equation is that demand side management can be an enabler for higher penetration rates of intermittent renewable sources. Many consumers would probably participate consistently in such programs if they understand the role it can play in a broader energy plan to address dwindling fossil resources and climate issues.
It’s one thing to do something consistently if the perception is that I’m conserving 10%… wasting less… it would be a different level of commitment perhaps if I knew that everyone chipping in with DSM allows for X number of wind turbine and solar sites to replace a certain number of gas or coal plants. Many people would probably view the ongoing transformation of our energy infrastructure as a necessity, not a “do gooder” project.