Smart grid technology offers consumers the opportunity to become active participants in the management of their power costs. It seems fairly certain that the rates for energy will be on the rise. People are likely to have a greater interest in ways to control those increases. Looking at the possibilities for implementation of such schemes requires an understanding of the economics of the electrical power industry.
This is my primary source for this diary.
Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities
It is very up to date and I found it very readable.
There are a number of reasons why we can anticipate increases in the costs of energy in general and of electric power in particular. Two important ones are:
The large investments required to improve the technology of the infrastructure and to develop clean renewable energy sources are going to be passed along in large part to the end consumers of energy.
Regulatory schemes to discourage the use of carbon based energy sources are going to result in most of the incentive associated costs during a transition being passed along to the end consumer.
We need to start with an overview of how costs and prices are tracked and managed in the present system. In the late 19th and early 20th centuries when electrification was just getting underway, individual power generating plants were built in towns and cities. These plants were connected to the homes and businesses of the end users, bit they had no connections to plants in other nearby towns.
Gradually local systems began to be interconnected so that power that was surplus in one location could be transferred to another location that was experiencing a shortage. This made it possible to develop large capacity remote generating installations such as hydroelectric plants. These arrangements have now developed into a very complex infrastructure that is collectively referred to as the grid. It is made up of power generating sources, high voltage transmission networks and local distribution networks. It is operated by a variety of different types of organizations and is regulated by a combination of federal and state regulatory agencies.
These interconnected power resources are pooled together in regional grids that may extend into more than one state. These grids are in turn interconnected to other grids over larger areas. A basic physical reality of grids is that they must remain in balance. The power supply entering the grid from generating sources must be equal to the to the power demand from end users. If that balance is not maintained then the grid will crash resulting in a widespread blackout. The ability to maintain this balance is referred to as reliability.
Unlike water, natural gas, oil and coal electrical energy is difficult to store when it is not needed. Our present grids have very little capacity for power storage. This means that balance is maintained by bringing generators and users on and off line. The demand for power fluctuates considerably over time. On a daily basis it reaches it peak in mid-afternoon and is at its lowest point late at night. On hot summer days the peaks are much higher than they are at other times.
To remain in balance the grid must have the ability to meet the demands of those peaks. The usual approach of the grid managers is to add generating capacity as demand increases and to reduce it as it decreases. The generating resources connected to any particular grid vary greatly in their nature and the cost of the power they produce. They use different sources of power, gas, coal, water, solar, wind. They have different capacities and thus economies of scale. They are of different ages and employ different technologies. All of these factors determine the cost per megawatt of power produced. Grid operators start out early in the day using the cheapest sources of power. As demand increases they bring more expensive sources online progressively. This means that a kilowatt hour (kWh) delivered to a customer at 2:00 PM is going to cost more than a kWh delivered at 2:00 AM. At times when the grid is under great stress this difference can be very substantial.
Here is an online example that allows you to observe the fluctuation is real time wholesale electric prices for the New England Independent System Operator.
ISO New England
There are periods when demand on a grid exceeds all of the available generating capacity. With traditional technology grid operators have limited options to meet the requirement of keeping the grid in balance. Rolling blackouts have been a necessary and very unpopular recourse.
The rates that end users of power are charged are determined by various laws and regulating agencies. After the catastrophic attempts at deregulation in the late 90s we now have a very patchy landscape. Some states still have traditional utility rate regulation for investor owned utilities. Others have various "deregulated" retail arrangements. In general non-profit coops and government providers are much more lightly regulated. Regulation is a topic I plan to write about in some detail at a later date.
During the heyday of an expanding power industry there was a strong effort to encourage consumers to use ever more electrical power. Live better electrically was a classical slogan. In addition to having charming ladies on TV demonstrating the latest in work saving appliances, rate structures that rewarded people for using more energy were common. The traditional means of billing was by the use of dumb meters. They simply record the cumulative amount of power used. Someone came around to read them on a monthly basis. The amount used during the previous month was calculated and multiplied by a single rate. The bill did not reflect anything about when the power was used and its relative cost.
Smart meters are now being installed by utilities. These are essentially a meter attached to a computer. They create the possibility of two way communication between providers and consumers. Many new things become possible with this technology. The utility will be able to determine how much power was used on a daily basis and at what time of day it was used. Customers can be billed on the basis of the variable costs for different times of the day. That would of course provide them with an incentive to shift as much of their power usage to off peak periods as possible.
At a simple unsophisticated level this can be based on fairly broad time blocks such as morning, afternoon, evening and night. However, the two way technology makes it possible for the utility to communicate real time price data to the customer. With the use of an online monitoring program they can follow the hourly cost of their energy usage. At present this information would give them the ability to make decisions about turning various power usages on and off.
Smart appliances are now making their appearance on the scene. They have built in networking capabilities. When connected to the smart meter they can be pre-programed to react to changes in rates. The clothes drier could be programed to turn off automatically if the rate per kWh goes above $x.xx and turn back on when it drops below that.
Even though there are not yet many smart appliances in use, a number of utilities now have a large installed base of smart meters and have instituted various smart rate schemes. Studies have demonstrated that active users of these approaches have been able to achieve significant savings on their electrical bills in the range of 20%-30%.
Smart pricing schemes have potential to accomplish useful goals beyond those for individual consumers. By spreading power demand more evenly over a 24 hour period overall reserve requirements for the grid can be reduced. This could result in significant avoided costs of the need to build additional generating capacity. Smart pricing by itself will not make much contribution to carbon reduction. Carbon sources used at anytime of the day make the same contribution to greenhouse gasses. However, if the need for additional generating capacity is reduced investment funds can be diverted to the development of clean renewable sources and older carbon based sources retired. Price incentives can be used is setting energy policy. Clean sources can be subsidized and dirty sources surcharged.
This is a very simplified overview of the prospects for smart pricing. What actually happens will be greatly influenced by politics and regulation. Many members of the public are not embracing smart meters and smart prices with open arms. The Enron wars left many people with great suspicion and distrust of utilities and regulators. However, we can be certain that this technology will play a role in the efforts to stay ahead of our many serious energy problems. A basic understanding of it should be useful in following the debate.