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.