‘Smart’ Grid: New Critics of a Bad Idea (Part I of II)
Possibly the most fascinating aspect of the Smart Grid is the absense of an economic rationale. But industry incentives being what they are (concentrated benefits, diffused costs), many have bet on much of it being built. Boondoggles must pass political tests, not economic ones.
But guess what? People are finally starting to wonder if this smart grid is worth the trouble. Intervenors, at last, are turning up at state proceedings. For a good sample of the issues and alternatives, look at Synapse Energy Economics’ July 8 filing at the New Jersey Board of Public Utilities on behalf of the state Department of Public Advocate. Synapse is possibly the best firm in the business to represent efficiency or environmental interests, but they stand with the skeptics on smart grids.
The utilities have yet to find consultants who can make an easy case for the grids. Advanced Metering Infrastructure (AMI) by itself recovers only 50 to 80 percent of its costs if all it gets used for is automated reading, data transmission, and service initiations and terminations. (See Brattle Group’s The Power of Five Percent, at p. 6.) Getting a positive cost-benefit figure requires time-varying rates for small customers and ways they can react to them, or giving their utility power to do that for them.
California is in the midst of distributing smart meters to everyone over the next few years, but it has already made certain that the necessary rate reforms and controls rate and controls won’t be there. First, the state just got a law that prohibits any mandatory form of time-varying pricing, with or without bill protection, prior to 2013. Mandatory real-time pricing without bill protection has to wait until 2020. Utility-controllable thermostats (originally deemed necessary for a positive cost-benefit figure) were removed from the state’s regulatory options a year ago by public protests.
But let’s say that redesigned rates somehow come to be. Then the increase in consumer bills to pay for the meters will be counteracted by reductions due to peak shifting. The actual levels and persistence of these adjustments are far from clear. The purported evidence for responsiveness comes from controlled experiments in which self-selected consumers got all the hardware for free and were rewarded for their participation. Brattle calculates that a reasonable shaving of the peak under smart metering will save about $3 billion a year nationwide in avoided generator investment ($2.4 billion) and operation ($0.6 billion). Relative to almost any dimension of the industry, this is a trifling figure. Edison Electric Institute (at p. 17) says that total investment by corporate utilities amounted to $84.2 billion in 2008 (these figures do not include IPPs).
Raise that to $112 billion to account for the 25-odd percent of power that comes through municipals and co-ops, and assume that about $40 billion of it goes to build transmission and distribution. Discounting at 9 percent on a 20-year horizon, Brattle calculates the present value of the savings at $35 billion, $28 billion if we look only at generation investment. After the smart glacier comes and goes, the detritus is equivalent to a four-month moratorium on generator construction, and that happens only once.
Things get better still once we realize that these are only figures from the utilities’ side. The smart grid’s promise only materializes after small consumers buy a bunch of their own equipment – flashy thermostats, premium-price appliances that can talk to the grid, controllers, assorted communications gear, etc. Add a few hundred bucks of costs like these, multiply them over, say, 80 million homes and small commercial units, and then use the same logic as environmental intervenors to calculate the “societal” cost, also known as the wealth loss to ratepayers. The utility? Unlike consumers, it gets a regulated return on its investments, and possibly even stranded cost recovery on unamortized equipment that the smart stuff replaces.
But as long as we are talking societal, exactly where is the smart grid’s environmental contribution? Just about everyone agrees that its main effect will be to time-shift peak consumption, with little if any effect on total power use, i.e. no carbon consequences. Synapse notes that there may be benefits from scaled-down versions of smartness – automated meter reading without advanced communications may be effective, and there surely are circuits that could benefit from smarter technologies. For cutting carbon they recommend mandated efficiency measures. The rollout of everything to everyone doesn’t help much, even assuming that it works and is secure. The smart grid does have one virtue – it’s something big and durable for utilities to spend on and manufacturers to produce, which is looking more and more like the entire point of the program.
Note to critics: If any of the figures here are wrong, tell me and I’ll cheerfully acknowledge it. Again: check the aforementioned reports from the Brattle Group and from Synapse.