Courtesy of the Harvard Business Review, an interesting article on what the author calls the Smart Meter Backslide of 2010, the upcoming shakeout that is going to occur given the utility industry’s failure to engage customers in this transition. Smart markets anyone? As the report notes:
“…Bolstered by stimulus funds and the growing market for smart grid technologies, smart meter deployment recently reached a high of 50.5 million meters (or 25% of U.S. residential accounts). Ironically, this record coincides with unexpected consumer backlash to smart meter deployment. The most notable debates have centered on California, Texas, and Maryland, where meter rollouts have been delayed by moratoriums, the center of lawsuits, and questioned by regulators. How can it be that an innovation designed to empower customers, reduce costs, and increase reliability has become so widely disliked?
Before answering this, let’s get a few facts straight. First, smart meters are only a part of the smart grid — the entire smart grid is a vast array of technologies stretching across the whole of the industry that will be deployed in stages over the next several decades. Smart meters are the source of some of the smart grid’s many benefits and costs, but not all of them. As my colleague at The Brattle Group, Ahmad Faruqui notes, their cost is small compared to the industry’s trillions of dollars of investments.
Substantial smart meter benefits stem from their ability to provide dynamic pricing, or rates that vary throughout the day to reflect fluctuations in the cost to produce power. These prices provide incentives for customers to use power at times when it is cheapest. When power use is spread more evenly throughout the day, prices decline, reliability increases, and fewer plants are needed. Smart meters will modestly improve reliability and reduce outage times but also enable customers to have more control over their power use and utilities to adopt far superior business and pricing models.
Smart meter opposition is rising due to concerns over costs and potential impacts on low income customers, misinformation about dynamic rates, mistrust of utilities, and a variety of privacy and health concerns. As for the costs — $200 to $500 per meter — these outlays are largely offset over time with the savings utilities realize (and pass on to customers) in lower prices and better service. Other benefits are more difficult to quantify, but I’m convinced that the overall economic impact is positive.
A cost-benefit calculation of this nature never tells the whole story. To the emerging smart meter opponents, these meters also bring some less welcome attributes. Smart meters will provide utilities (and possibly other parties) with much more information on energy use, raising genuine privacy and security concerns.
Cyber security issues are also critical, and not yet treated. Consumer advocates, who’ve spent decades trying to ensure that low income customers aren’t disconnected too readily, worry that the immediate control afforded by smart meters will allow utilities to disconnect delinquent accounts with a single click.
Most of all, there is enormous suspicion that utilities are using smart meters as a cover for raising prices. Here misinformation enters the fray. The introduction of time-varying prices in regulated utilities lowers rather than raises costs for the vast majority of customers, and in particular lowers them for nearly all low income ratepayers. There are reasons why utility rates will be going up in the future, but this applies equally to flat and dynamic rates, while the latter conveys added benefits.
Remarkable as it may seem, most utilities have rolled out smart meter change-outs across their territories without first engaging in programs to inform customers and ensure a measure of buy-in. Many customers and stakeholders felt they weren’t asked whether they wanted these meters — they were given no information and no choice. Combined with misinformation about the intent, cost, and impact of smart meters, this “top-down” has bred something of a backlash that isn’t surprising, even if it is regrettable. As Nancy Brockway, a leading voice in consumer advocacy puts it: “It is possible to create a clamor from consumers for these technologies, if they really work and work for the overwhelming majority of customers. You can’t force them down consumers’ throats and then be surprised that consumers don’t want to swallow.” As the industry finds better ways to inform customers and address some of the specific smart meter concerns, I think this opposition will fade.
The lesson here for the utility industry is straight out of Business School 101. If you are changing your relations with customers and spending their money, engage them first! Let customers validate the new benefits themselves. Make them your partners, not your guinea pigs. As the energy industry continues through an era of many product, service, and business model transformations, this rule should remain front and center. Meanwhile, the Smart Meter Backslide of 2010 will make for a great future case study at Harvard Business School.
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