Energy Efficiency & Climate Change Law

On February 7, 1964, few Americans had yet to hear of a band from Liverpool as it was boarding PanAm Flight 101 to make its way across the Atlantic. The rest was history two days later after John, Paul, Ringo and George first appeared on the Ed Sullivan Show in New York City.  Although it may not become an overnight sensation like The Beatles, the term "smart grid" will soon be known in households across the country because the energy savings that it generates will be music to the ears of anyone who pays a utility bill.

Put another way, in the near future, Americans will look back at the time before the smart grid and perceive it to be just as primitive as Rock and Roll before The Beatles, or the days preceding the internet and pocket-sized cellular phones.

So why do we need a "smart" grid, what is it, how is it a game-changer and why is it not yet deployed in homes across America?

Gordon Gekko on his state-of-the-art cellular phone, circa 1987

Part I. Why the Need for a "Smarter" Grid?

As discussed more in depth in Part II below, smart grid technologies shift or reduce demand for electricity. This is important for the following reasons:

Through powering on your computer when it is plugged into an outlet, you complete a circuit that connects your computer to the wires that serve your house or office to the larger wires that serve the community and, ultimately, to a network of high capacity wires that deliver power over great distances. This network is referred to as the "electric transmission system" and, as a whole in the United States, is commonly known as the "national grid."

The national grid is organized into a highly fragmented system because it was developed over decades under the supervision of numerous national, regional, state and local bodies with divergent interests. This balkanized system is similar to the roadways of the United States that existed prior to the construction of the interstate highway system during the 1950′s. The antiquated character of the national grid, which leads to unreliable and inefficient delivery of electricity, will only intensify into the future because electricity demand is projected to outpace construction of new transmission four-fold (source: U.S. Dept of Energy).

Although the Obama Administration has stepped-up efforts to build needed transmission, utilities routinely run into "not in my backyard" (NIMBYism) complaints from residents living in proximity to proposed transmission lines. This can tie up the construction of new power lines for years.  

Even if NIMBYism does not delay construction, the soaring costs of building the lines is yet another hurdle.  In California alone, the cost of building new transmission lines to meet the state’s goal of generating one-third of its electricity from renewable sources by 2020 is projected to cost $15.7 billion.  As the price of commodities continues to increase (while credit markets remain dry), so do these construction costs.

Part II. Description of "Smart Grid" Technology

Through the use of "smart meters," which are fitted with information and communications technology, homes and offices will be able to send data to, and receive data instructions from, their utility.   In conjunction with "smart appliances," the smart meters will enable appliances to switch to a different, electricity-saving mode, thus allowing consumers to use electricity when prices are lower.

By shifting or reducing electricity demand, smart grid technology will conserve electricity and lower costs and harmful greenhouse gas (GHG) emissions, particularly when electricity demand is at its height (i.e. late afternoons).   During these "peak" hours of energy usage, electricity is most expensive and polluting because utilities operate "peaker" power plants to keep-up with the high demand. The need to generate electricity from these additional power plants, which run on coal or other fossil fuels that emit harmful GHGs such as carbon dioxide (CO2) into the atmosphere, increase the utility’s operational costs.

Part III. How Smart Grid Technology is Transformative

In addition to saving money and reducing GHG emissions, smart grid technology is also expected to bolster the grid and make it more efficient. It will provide utilities with the ability to locate problems on the grid and potentially prevent blackouts (i.e. coupled with other factors, a tree that fell in Walton Hills, Ohio – a town of 2,400 people – led to the blackout on August 14, 2003 that affected approximately 50 million people in the Northeast, Midwest and Canada).

Further, development of the smart grid will end the need for estimates of energy use and meter readings, thus providing more reliable utility bills for consumers.

Part IV. The State of the Smart Grid

With current smart grid technology, it is estimated that the United States’ energy consumption could be reduced by 15 to 20 percent.   Recognizing the potential impact of this technology, the British government recently mandated that all homes within the United Kingdom must be equipped with smart meters by 2020.   In order to achieve this mandate, the U.K. will launch an £8 billion ($13.15 billion) program tomorrow.

On the other side of the Atlantic, the Obama administration announced in October that it will award $3.4 billion in funding for grid modernization through Smart Grid Investment Grant awards, which is expected to be complemented by $4.7 billion in private money. These investments are sorely needed because few American homes or offices currently use a smart meter and the first smart appliance was released on the U.S. market only this past month (General Electric began distributing a hot water heater that can link into smart meters). These appliances are expected to quickly flood the U.S. market at a rate only second to that of Beatles albums in the mid-1960′s.   For example, Whirlpool plans to make one million smart dryers by 2011.

Despite the Obama Administration’s investment in smart meters and the forthcoming wave of smart appliances into the U.S. market, hurdles to wide-scale deployment of smart grid technology remain in the United States:

Hurdle #1: Electricity pricing arrangements do not currently incentivize the use of smart grid technology

Currently, most Americans pay essentially the same price for electricity in peak hours as they do during non-peak periods. However, if utilities were to charge an additional fee during peak hours of operation (referred to as "real-time pricing," "critical peak pricing," or "dynamic pricing"), then consumers would pay more attention to when they consume electricity.  

In Illinois, 8,000 out of 131,000 ComEd customers equipped with smart meters will participate in a real-time pricing program.  In California, just one percent of smart meter-equipped homes in California have real-time pricing.  This figure is not expected to grow in the next decade because Gov. Arnold Schwarzenegger signed a law in October, S.B. 695, that prohibits the the state’s Public Utility Commission from implementing real-time pricing until 2013 at the earliest, and forbids mandatory real-time pricing until 2020.

Failure to establish this kind of pricing arrangement would likely make the installation of smart meters uneconomical.

Hurdle #2: Concerns that consumers may bear unnecessary costs

Certain consumers resist smart grid technologies out of concern that they might provide utilities with the ability to monitor and adjust how electricity is being used.  For example, in Bakersfield, California, residents sued Pacific Gas & Electric for overcharging.   PG&E said that the meters were accurate, and that any increase was caused by other factors.

Further, an article in Forbes Magazine argues that only utilities, not consumers, will realize meaningful economic benefits from the deployment of smart grid technology.  However, utilities and consumers alike are expected to save as much $20.4 billion by cutting back on electricity use.   Thus, establishing a smart grid – which will reduce energy demand – will cost less than constructing new "peaker" power plants that would be necessary to keep up with increased demand for electricity.  These costs would likely be passed along to the consumer.  

Finally, although direct economic savings are the primary driver for consumers when deciding to furnish their home or office with smart grid technology, the argument made in the Forbes article fails to acknowledge the other advantages of smart grid, including reduced GHG emissions and a reliable supply of electricity that prevents costly blackouts.

Hurdle #3: Security risks

According to CNN, smart meters could be hacked by someone with training in electronics and software engineering and $500 worth of equipment. The attacker could potentially take control of millions of meters and shut them off simultaneously or disrupt the load balance and cause a blackout. However, to address this issue, the Federal Energy Regulatory Commission proposed a rule that would provide standards for protecting the smart grid from hackers.