Utilities Are Slow to Make the Most of Smart Meters

Tuesday, February 23rd, 2010

Utilities are slow to make the most of smart meters — which measure not just cumulative electricity usage but when that electricity gets used — because consumers don’t understand the economics of electricity:

By making variable pricing plans possible, smart meters are expected to play a big role in getting customers to reduce their peak-hour energy consumption, a key goal of utility executives and policy makers. Electricity grids are sized to meet the maximum electricity need, so a drop in peak demand would let utilities operate with fewer expensive power plants, meaning they could provide electricity at a lower cost and with less pollution.

Utilities have run dozens of pilot tests of digital meters and found that people cut power consumption the most when faced with higher peak-hour rates. But utility executives and regulators have been reluctant to implement rate plans that penalize people for too much energy use, fearing that if customers associate smart meters with higher bills, they will stall the technology’s advance just as it is gaining traction. Only about 5% of U.S. electric meters are “smart” today, according to the U.S. Department of Energy, but that figure is expected to grow to about one-third in the next five years.

So, many utilities are trying an approach that is less controversial, but also less effective: offering rebates to customers who conserve energy in key periods of the day. By doing things like turning off clothes dryers and adjusting air conditioners on hot summer afternoons, customers earn credits that can reduce their electricity bills.
Pacific Gas & Electric Co., a unit of PG&E Corp., got a taste of the public-relations risk last summer when it installed smart meters in Bakersfield, Calif., as part of a broad upgrade in its Northern California service territory. When customers — who weren’t participating in any sort of experimental rate plan — received dramatically higher bills shortly afterward, they blamed the meters for what they assumed was faulty billing. The San Francisco utility investigated and concluded that the meters were functioning properly. It found that the higher bills were simply a case of unfortunate timing: An increase in conventional rates had taken effect just ahead of unseasonably hot temperatures.
Pepco Holdings Inc. recently did a pilot test in Washington, D.C., of three rate plans designed to gauge how customers respond to different price signals. One plan pegged the price, which ranged from a penny to 37 cents a kilowatt-hour, to the wholesale cost of electricity. One charged a “critical peak price” of 75 cents a kilowatt-hour during certain hours on a handful of days, and 11 cents per kwh at other times. The final plan gave customers 75 cents for each kilowatt-hour of energy saved and charged 11 cents per kwh for power used.

Results showed that people responded most when threatened with the 75-cent-per-kwh peak pricing. Those customers cut their overall energy consumption between 22% and 34%, depending on whether they also had programmable thermostats that could automatically change temperature settings. Customers offered rebates reduced their usage 9% to 15% — again, with the deeper cuts among those who had smart thermostats.

Despite evidence that sticks are better motivators than carrots, the utility intends to offer rebates in the future in an effort to change behavior. “Our general sense is that consumers would prefer a rate structure with no downside,” says Steven Sunderhauf, a program manager for Pepco. “From a purist’s standpoint, I may prefer critical peak pricing because it gets the boldest response… but using rebates will help people get comfortable with smart meters.”

Electricity demand varies tremendously throughout the day and throughout the year, but electricity capacity is largely fixed and very expensive — more than $1,000 per kilowatt.

So an off-peak kilowatt-hour — a constant kilowatt of energy usage from, say, 1:00 AM to 2:00 AM — costs the utility the price of one kilowatt-hour’s fuel, but a peak kilowatt-hour — a constant kilowatt of energy usage from, say, 3:00 PM to 4:00 PM, on the hottest day of the summer — costs the utility the price of one kilowatt-hour’s fuel plus an extra $1,000 to increase capacity.

Imagine getting that electricity bill in the mail in September! Instead, you get a blackout. And you pay high prices all year round, night and day.

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