Is "Smart Grid" in the Eye of the Beholder?

Kennedy Maize

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New Rate Structures Required

For Allan Schurr, vice president of IBM’s energy and utilities line of business, another potential purveyor of goods and services in the field, the smart grid (Figure 1), writ large, also requires “smart rates.” That will be a challenge to utilities and utility regulators. Utilities that have to make the investments to build the smart grid “focus on minimizing risk and consequently, utilities are often slow to adopt new technologies that have not been extensively proven on a large installed-base,” he said. “In addition, the many-faceted value of smart grid technologies has been difficult to quantify in a simple cost-benefit analysis, thus making comparative financial metrics difficult to achieve. Existing electric rate structures create further complications since state public utility commissions (PUCs) are responsible for ensuring that electric utilities under their jurisdiction provide service at a cost effective price.”

1. An IBM SmartGrid Model. Source: Department of Energy

How to solve the ratemaking and economic transparency problem? Schurr called for a rate approach outlined in a report by the Brattle Group, an economic consulting firm. According to Brattle, a smart rate yields “cost-based, forward looking information on the price of electricity that allows consumers to make wise decisions about how much electricity to purchase and when to purchase it. A review of default rate designs across North America reveals that prices paid by customers do not reflect the scarcity of capacity to produce energy at various times of day.”

A few small pilot smart grid projects are currently in place or getting underway. The pioneer purveyor has been Maryland-based CURRENT Group. CURRENT became involved by developing technology for broadband over power lines (BPL), which did not pan out as a viable business. So, CURRENT’s BPL business morphed into using the same technology and the ubiquitous “Internet protocol” (IP) to provide a level of intelligence on distribution grids. Xcel Energy, for example, is testing a grid network running with IP in Boulder, Colo.

Achieving widespread adoption of smart grid technologies, however defined, said CURRENT CEO Tom Casey (Figure 2), will require new incentives to build out a new system. “In general, under traditional regulatory models,” he said, “a utility’s cost is largely fixed and its revenue is the product of the number of kilowatt hours sold multiplied by the price per kilowatt hour. There is thus no reason to believe that a for-profit entity will (or should) spend money in order to earn less.” This is what Xcel calls “uncompensated demand destruction,” meaning that the company loses load and loses revenue as well, as a result of its infrastructure investment. That’s what many executives would describe as a “lose-lose” proposition.