Three interesting articles and analyses this week on various aspects of smart meters and the – mostly failed thus far – need/attempt to captivate consumers. As KnowledgeProblem points out, home energy innovation is still the goal of many, especially the deregulated markets such as Texas where Direct Energy recently introduced a home energy management system:
“…Whirlpool and Direct Energy have long been two of the most forward-looking companies working in the electricity value chain. Whirlpool was the appliance partner on the GridWise Olympic Peninsula transactive network project, and have committed to all of their global products being grid friendly and transactive by 2015. Direct Energy, an energy retailer, has been leading efforts to open retail electricity markets for residential customers; as long-time KP readers know, this continues to be an uphill battle in the face of persistent (and, in my view, deluded) beliefs in regulated, cost-based retail pricing determined by a set of political elites instead of pricing that enables consumers to make product and service choices based on their own values, local knowledge, and preferences.
Last week at the Consumer Electronics Show in Las Vegas, Direct Energy debuted a home energy monitor application that has many features that reflect a lot of the economics and psychology of potential competition that I have emphasized for a long time. This CNet article summarizes the product/service offering, which involves Direct Energy partnering with Whirlpool, OpenPeak (consumer interface device), Best Buy, and Lennox.
Through the OpenPeak device, consumers can control appliances as well as heating and cooling. It will also display real-time energy use and act as central hub for a wireless home network.
Direct Energy plans to gather energy data and provide recommendations on how consumers can cut energy use, said David Dollihite, vice president of product development at the company.
“We don’t want to give people technology to manage energy but try to integrate energy management into their existing lifestyle with things they actually enjoy doing,” he said. For example, Direct Energy could recommend a thermostat change which a consumer could quickly act on without sacrificing overall comfort. …
Once information is available on Direct Energy’s servers, consumers can access the data from multiple points, such as a PC, TV, or smartphone.
In other words: automated home energy management — there’s an app for that! See also this article from the Dallas Morning News on the Direct Energy HEM offering.
As usual, Katie Fehrenbacher at Earth2Tech gets to the heart of the matter — the innovation in these value-oriented, consumer-focused products and services is going to occur disproportionately in truly deregulated retail markets like Texas:
… the HEM center device would be unique in two ways: It will focus on the consumer and will offer more than just energy information. Compared to previous pilots and products that are more utility-focused, the HEM center will be focused on what the consumer wants, said Woods. Direct Energy is a power supplier, operating in the deregulated Texas market — not a traditional utility — and hopes to win over new customers with the device.
The device will also offer communication and social network information (like Facebook) says Woods, because a single one-off energy device will be ignored by consumers. Energy-specific devices will land in the drawers of consumers after a couple weeks, predicted Woods. The device will also be compatible with Whirlpool smart energy dryers and Lennox smart thermostats.
The HEM center product is interesting in that fact that it’s coming from a energy reseller in a deregulated market. Competitor Texas-based TXU Energy is also offering its own energy management tools, including the iThermostat, which hooks into the customer’s home broadband connection and enables people to go online to program and monitor energy consumption related to their heating and cooling. Germany’s utility Yello Strom (Germany is also a deregulated market) also makes a smart meter and energy management products.
Note the experimentation that is occurring in Texas, the only meaningfully deregulated state in the U.S., and is in large part enabled by the installation of digital meters that will facilitate the communication of price signals to consumers; as these meters proliferate, retailers are evolving their products to incorporate more dynamic pricing and other forms of product differentiation. Are Direct Energy correct in their approach of integrating energy applications with other communication and network activities of consumers, or are energy-only devices and applications going to succeed because of interoperability and the growing ability to see all sorts of applications through home area networks (HANs)? Both approaches may survive, but I’m inclined to think that the integration of energy applications into consumer lifestyles is likely to be more successful.”
But, despite such initiatives and the availability of real-time price information for electricity, the residential customer is still not “behaving” as utilities and smart meter companies envisioned:
A study of consumers’ responses to real time pricing, by Hunt Allcott, examines 2003 and 2006 data from the Center for Neighborhood Technology’s Energy Smart Pricing Plan. Allcot observes:
This is a particularly interesting time to be studying real time pricing. Most US households currently have electricity meters that simply record the total consumption of electricity since installation, meaning that the consumer cannot be charged prices that vary from hour to hour. Furthermore, the only way for the electric utility to observe households’ consumption is to actually send a worker to read the meter, a costly and potentially error-prone process. The “Smart Grid” is a set of emerging electric power information technologies that include, among other things, household energy management devices and technologies that facilitate communication between electricity retailers and consumers. From the utilitys perspective, improvements in these technologies offer reduced meter reading and administrative costs and the potential for real time metering of electricity use. Furthermore, by allowing households to more easily observe prices and consumption, and even to automate how air conditioners and other appliances turn on and off in response to real time prices, Smart Grid technologies can increase consumers price elasticity of demand.
Allcot offers three key conclusions from his data analysis: households participating in the program were price elastic, but just a little; the typical response is conservation rather than load shifting; and energy management technology can signi cantly increase households’ price elasticity. He calls this final result “fundamental but perhaps unsurprising.” Perhaps unsurprising, but frequently overlooked: how many times have economists, utility executives, or policymakers claimed that power consumers are not responsive to electricity prices based upon observation of consumers lacking both the information and incentive to respond to prices?
Allcot then assessed the estimated welfare affects of real time pricing policies. In general he concluded that efficiency gains from consumer responsiveness to prices were not likely large enough to overcome the costs associated with conservation and metering infrastructure.
In weighing this conclusion, a couple of issues must be considered. As Allcott notes, as the CNT is a voluntary, “opt in” program, we may expect participants to be more likely to be price sensitive than other consumers. Switching all consumers to a real-time price may produce even smaller benefits. On the other hand, larger programs may induce more complementary offerings, enhancing responsiveness. For example, in the CenterPoint and Oncor service areas in Texas, millions of consumers will have smart metering, which may induce, say, local appliance retailers to promote “price aware” appliances and competitive energy retailers to offer real-time pricing contracts. (In fact, as noted by Lynne yesterday, energy retailer Direct Energy is partnering with an energy management systems developer, a electronics retailer, and two appliance makers to offer a consumer-friendly home energy management system. See Lynne’s post for more along these lines.)
Allcot observes in his paper that, prior to his own study, there was “no empirical evidence on how households would respond to hourly real time prices.” (Is this true? Sounds incredible. Surely somewhere … Lynne, do you know of anything?) Whether or not his report on the literature is correct, clearly this is, as Allcot says, “a particularly interesting time to be studying real time pricing.”
And, finally, from Master Resource, an article noting that the most fascinating aspect of the Smart Grid may be the absense of an economic rationale. As the report notes:
“…But guess what? People are finally starting to wonder if this smart grid is worth the trouble. Intervenors, at last, are turning up at state proceedings. For a good sample of the issues and alternatives, look at Synapse Energy Economics’ July 8 filing at the New Jersey Board of Public Utilities on behalf of the state Department of Public Advocate. Synapse is possibly the best firm in the business to represent efficiency or environmental interests, but they stand with the skeptics on smart grids.
The utilities have yet to find consultants who can make an easy case for the grids. Advanced Metering Infrastructure (AMI) by itself recovers only 50 to 80 percent of its costs if all it gets used for is automated reading, data transmission, and service initiations and terminations. (See Brattle Group’s The Power of Five Percent, at p. 6.) Getting a positive cost-benefit figure requires time-varying rates for small customers and ways they can react to them, or giving their utility power to do that for them.
California is in the midst of distributing smart meters to everyone over the next few years, but it has already made certain that the necessary rate reforms and controls rate and controls won’t be there. First, the state just got a law that prohibits any mandatory form of time-varying pricing, with or without bill protection, prior to 2013. Mandatory real-time pricing without bill protection has to wait until 2020. Utility-controllable thermostats (originally deemed necessary for a positive cost-benefit figure) were removed from the state’s regulatory options a year ago by public protests.
But let’s say that redesigned rates somehow come to be. Then the increase in consumer bills to pay for the meters will be counteracted by reductions due to peak shifting. The actual levels and persistence of these adjustments are far from clear. The purported evidence for responsiveness comes from controlled experiments in which self-selected consumers got all the hardware for free and were rewarded for their participation. Brattle calculates that a reasonable shaving of the peak under smart metering will save about $3 billion a year nationwide in avoided generator investment ($2.4 billion) and operation ($0.6 billion). Relative to almost any dimension of the industry, this is a trifling figure. Edison Electric Institute (at p. 17) says that total investment by corporate utilities amounted to $84.2 billion in 2008 (these figures do not include IPPs).
Raise that to $112 billion to account for the 25-odd percent of power that comes through municipals and co-ops, and assume that about $40 billion of it goes to build transmission and distribution. Discounting at 9 percent on a 20-year horizon, Brattle calculates the present value of the savings at $35 billion, $28 billion if we look only at generation investment. After the smart glacier comes and goes, the detritus is equivalent to a four-month moratorium on generator construction, and that happens only once.
Things get better still once we realize that these are only figures from the utilities’ side. The smart grid’s promise only materializes after small consumers buy a bunch of their own equipment – flashy thermostats, premium-price appliances that can talk to the grid, controllers, assorted communications gear, etc. Add a few hundred bucks of costs like these, multiply them over, say, 80 million homes and small commercial units, and then use the same logic as environmental intervenors to calculate the “societal” cost, also known as the wealth loss to ratepayers. The utility? Unlike consumers, it gets a regulated return on its investments, and possibly even stranded cost recovery on unamortized equipment that the smart stuff replaces.
But as long as we are talking societal, exactly where is the smart grid’s environmental contribution? Just about everyone agrees that its main effect will be to time-shift peak consumption, with little if any effect on total power use, i.e. no carbon consequences. Synapse notes that there may be benefits from scaled-down versions of smartness – automated meter reading without advanced communications may be effective, and there surely are circuits that could benefit from smarter technologies. For cutting carbon they recommend mandated efficiency measures. The rollout of everything to everyone doesn’t help much, even assuming that it works and is secure. The smart grid does have one virtue – it’s something big and durable for utilities to spend on and manufacturers to produce, which is looking more and more like the entire point of the program.”
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