Monday, November 29, 2010

What's Really Wrong With Media Coverage Of Smart Grid

You may have read Lisa Margonelli's article in the Atlantic. If you haven't, do so. As Smart Grid coverage in the popular media goes, it's pretty darned good. Of course, it should be, since Lisa is the author of an interesting book on the petroleum industry, and seems to know a thing or two about energy.
The problem is that it's a subtle argument, using statements from one side to make the point that the other side has done a poor job of making its case, and it's written by someone who the average person will see as an expert. Understand, I largely agree with her that the failure to engage consumers is the biggest problem Smart Grid faces. I'm going to be responding to statements in Ms. Margoli's article a lot, but I don't want to pick on her. It's just that her article brings together a few common media misunderstandings, without making it clear that they're misunderstandings. It can leave the casual reader with the impression that an expert agrees with the positions she cites. Perhaps she does, which is a larger problem.
For example, she repeats the oft-stated misunderstanding that time-of-use rates are about the electric company being able to charge more for peak usage, and those customers who can't change their appliances to more energy-efficient ones, or who can't shift their usage are going to be screwed. The implication is, of course, that the utilities will be raking in profits.
Let's start be looking at why time-of-use rates make any sense in the first place. (Those of you in the electric industry can skip this next bit. It's a very simplified view for the folks who don't work with this stuff all the time.) Electricity can't be efficiently stored (yet), so it has to be produced in almost exact balance with consumption. In most industries, an imbalance between supply and demand does bizarre things to the price. Mismatch supply and demand in electricity, even for a split second, and really ugly and disastrous things happen to hardware. Voltage surges or sags, frequencies shift, and efficiency goes right down the toilet, just before the lights go out.
In order to do this just-in-time delivery balancing act, the generation industry has to run different kinds of generating plants. Some are very efficient and inexpensive to run, but can't respond to changes in demand. Others can respond to load somewhat, but are more expensive to run. Some can respond pretty much instantly, but are the costliest to operate. Since the demand generally rises and falls in a fairly consistent pattern from day to day, with seasonal variations, time-of-use rates are a pretty good way to reflect the actual cost of the product at the time it is being used.

Let me expand on an analogy from Paul Centolella's Blog entry at the Harvard Business Review. To quote Paul:

Today most consumers are charged a flat rate for every kilowatt hour they consume. They are billed monthly. And, despite wholesale power costs that can be as much as ten times higher during peak hours than at other times, consumers have little idea which energy uses cost the most. This would be equivalent to receiving your grocery bill weeks after you visited the market and being charged the same price for each item, whether you bought chewing gum or caviar.
To my mind, this is a brilliant analogy. Paul uses it to point out the consequences of continuing on the path we're on. I'm going to use it to point out a common misunderstanding of where we are. Let's do a thought experiment:
You have a grocery store, where everyone who shops there pays the same amount for every pound of food they buy, whether it's fillet mignon, caviar and Dom Perigon or hot dogs, peanut butter and Pabst Blue Ribbon. Now in order for the grocery store to stay in business, it has to cover it's costs for all the food purchased, so the single price per pound will be the average cost of all the food purchased, plus enough to cover operating costs like paying cashiers and the guy who has to mop up the mayo spill on Aisle 3. What would happen?
As Paul points out (in more industry-specific detail than I will here) people will buy more fillet, caviar and champagne than they otherwise might. This creates two problems.

  • Because people will buy more fillet, caviar and champagne when they pay the same price regardless, the average is higher than it would be if each item was priced based on its cost.

  • Because everyone is paying a higher average price, those folks who do just fine on hot dogs, peanut butter and PBR are subsidizing the fillet, caviar and champagne consumers.
Looked at that way, the current situation sounds pretty outrageous, doesn't it?
Here's another consequence that you won't see touted in the press anywhere, if the time-of-use rates are set properly, the utility company won't make any more than they do now. All you're doing is disassembling the average. Over time, the average will go down as the fillet eaters only eat fillet when they need to, or are willing to pay the real cost of it.
In short, time-of-use rates are part of doing what Lisa suggests in her blog; “...make cooperation between utilities and their customers part of the contract.” Now I don't want to take away from Lisa's point that Utilities have done a poor job of engaging consumers in this discussion. I think my immediately previous posting makes that point. I'm only saying that she misses that time-of-use rates are part of that contract negotiation.
Now we come to the one point in her article that is really a problem, to my mind. Let's take a look at her suggested solution, in light of our grocery store analogy.

For the first five years after installation, the utility has to charge the consumer the lesser charge--either calculating by time of use or by the old utility contract of static pricing. Utilities, however, are given the option of making more regulated profits by reselling power to other utilities, giving them a clear incentive to help their customers use less power or less expensive power by helping them change behaviour or buy more efficient appliances. (And utilities could use the low-interest publicly guaranteed credit lines they use to build power plants to instead invest in their clients appliances--passing along the low interest rate of course.) Consumers, given the option of buying cheaper power at less popular times, would be able to--without paying a penalty (yet) for using more expensive power.
So what happens to our hypothetical grocery store under this scenario? Well, they can charge for any item either the cost-based price, or the average, whichever is lower. Or to put it another way, their prices are capped at an average cost. They can't cover their total costs if they do that. Ah, the argument goes, but they can make more money by selling to other grocery stores. What happens when those other grocery stores try to sell to their customers on that same basis? Those other groceries can't cover their costs (which now include food that the first grocery store is selling to cover its costs). Meanwhile, consumers have precisely zero incentive to change their food-buying habits, except for whatever (non-price) incentive that the grocery stores can figure out.
I have a hard time seeing where they'll be able to fund incentives if they can't cover their costs. The low interest rates that could be passed on to consumers is based on the assumption that utilities (unlike other industries) will always be allowed to cover their costs. Take that away, and the market will treat utilities like any other business, and those advantageous interest rates will evaporate. The point seems to be, as she put it giving consumers “...the option of buying cheaper power...without paying a penalty (yet) for using more expensive power.”

Where is there a “penalty”? Paying fillet mignon prices for fillet mignon isn't a “penalty” at the grocery store, so why is it a “penalty” at the electric meter?
I'm not saying that these problems can't (or shouldn't) be resolved. They have to be resolved, and they have to be resolved in a way that, as Ms. Margonelli's article points out, gives consumers real control. However, they have to be resolved in a way that works economically, top-to-bottom and across the board. In short, we have to deal with all the realities. Otherwise, we're just going to shoot ourselves in the foot, or maybe higher up.
The article also touches on privacy issues, something that's near and dear to my heart, but that will have to wait for another entry.

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