“Regulators who don’t approve smart stuff are by elimination reducing themselves to certificators of dumb stuff. When nuclear optimism peaked, backers said that its power would be “too cheap to meter.” The bill for the smart grid is turning out to be too confusing to meter, but like in the nuclear heyday, the momentum is irresistible.”
I have some kind words for the California Public Utilities Commission’s Division of Ratepayer Advocates (DRA), its in-house department charged with representing small consumers in rate proceedings.
DRA has long been agnostic about the benefits of smart meters. But with the release of “Case Study of Smart Meter System Deployment: Recommendations for Ensuring Ratepayer Benefits,” the issue of high costs relative to benefits is on the table.
Better late than never.
Complexity Unbound
DRA’s lightly redacted public version analyzes the gap between anticipation and reality in Southern California Edison’s “Advanced Metering Infrastructure” (AMI or SmartConnect) rollout program.
The numbers are interesting, but DRA’s big point is that the CPUC has hardly any idea about what it does or doesn’t know amid the hyper complexity of smart meter costs and benefits.
AMI is now the subject matter of lots and lots of dockets, many of which appear to have little to do with it. By actual count, the commission must track more than 130 different costs and 50 projected benefits, probably not all well-defined.
Remarkable Estimate
The basic value of AMI has long been far from certain. In a 2005 response to the commission’s request for a “business case,” SCE concluded that on balance it would not be cost-effective, save for some programs for customers who already had smart meters. The company came back in 2007, and this time the regulators authorized $1.63 billion for implementation on the basis of a remarkable estimate.
Specifically, over the 24-year duration of SCE’s program, the present value of net benefits would be the princely sum of $9.2 million. (Some other claimed benefits like reduced power theft were thrown out by agreement.) The commission authorized the $1.63 billion, but the business case includes another $1.58 billion of post-deployment costs not authorized but in the business case calculation.
DRA wrote page after page on the funding complexities, some already authorized in non-AMI dockets and some possibly duplicative. It concluded that it would be “practically impossible to track most post-deployment costs given the cost recovery processes adopted for SCE.” (at 25) The same, of course, holds for benefits (the meters are largely installed) that should be built into lower rates but don’t seem to be there yet. “(T)o the extent deployment period capital benefits are reflected in rates, these benefits appear to be much lower than forecasted in the business case.” (at 21)
To further complicate things, SCE’s claimed benefits include reduced generation investment, but its ongoing general rate case does not appear to include those reductions. After pointing out numerous funding requests in other areas that are really for AMI, DRA summarized that “(t)he full cost of SmartConnect will be more than double the $1.6 billion approved for deployment costs.” They hardly needed to note what that does to the $9 million.
What’s Up Now?
What’s being bought for the money is impossible to tell now, because the commission never asked for an explicit list of deliverables associated with those funds. DRA claims that SCE is loading deployment costs into higher rates but not yet booking benefits into reductions.
The company estimates savings during deployment at $35 million that hasn’t turned up in rates (actually, balancing accounts. Don’t ask.), while those rates already contain over $345 million in meter-related capital expenditures, 75 percent of the budgeted total.
Other benefits have also been slow to materialize. The business case projected over 386,000 customers enrolled in one or more demand-response programs by the end of 2010, but the company reported no participants while recording between $15 and $41 million in DR-specific costs.
Participation in the company’s Peak-Time Rebate program is 63 percent lower than estimated, customers taking time-of-use rates are less than 1 percent of the estimate and no customers have enrolled in the Critical-Peak Pricing program. (at 38).
Nuclear Power Redux
Has anyone noticed the similarities between smart metering and nuclear power?
The latter started with “turnkey” reactors built by outsiders and sold to utilities ready for operation, and the cost trends looked favorable. A variety of economic and political events ultimately put most nuclear projects in the hands of utilities that were unqualified to manage the complexities of construction, were regulated by agencies of questionable competence and knew that they could recover the bulk of their costs no matter what, save for a few imprudence proceedings. Booking smart meter costs before benefits materialize is just CWIP again.
Smart meters have become big for a reason: If utilities are going out of the generating business and into “electric services,” their managements need to rationalize some very big investment that will replace generation in rate base. Smart grid stuff is even better than nuclear because it is a technology whose possible outputs are limited only by the imagination, often hard to value and accompanied by an almost infinite list of potential cost addenda.
Conclusion
Regulators who don’t approve smart stuff are by elimination reducing themselves to certificators of dumb stuff. When nuclear optimism peaked, backers said that its power would be “too cheap to meter.” The bill for the smart grid is turning out to be too confusing to meter, but like nuclear in its heyday, the momentum is irresistible.
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Good article, Robert.
In the U.S. the bulk power markets are already very intelligent, thereby removing a lot of the putative benefits of the “smart” grid. Look, for example, at the PJM interconnect, which prices more than a dozen products (energy, capacity, ancillary services of many kinds) over 2500 locations at 30 minute intervals or less.
In France, many years ago they came up with a time of day pricing scheme that was simplicity defined. Houses, businesses and factories had a red light and green light on the wall somewhere, courtesy of Electricite de France. When the green light was on (most of the time) rates were “normal.” When the red light was on a peak surcharge was added. That is so much less expensive and gets about 80% of the benefits of the smart grid (that is 80% of the 20% that is left after the smart bulk power markets generate most of the benefits for consumers).
Lastly, and this is just speculation from my cynical side, I would not be surprised if the distribution utilities were trying to use the various smart grid programs to push through stealth rate increases. The local utility in DC tried that a number of years ago. funny thing about that, people rarely volunteer to pay more.
This is a very important post, with many implications, most of them ominous, for future electricity. I’ve never understood the “need” for smart meters because I’ve assumed that electricity production and transmission were for the public good, that electricity at scale was a reason for reduced costs, and that electricity should be made abundant, secure, and reliable. What does it mean to say that “utilities are going out of the generating business and into “electric services?” Haven’t they always been? What does it mean to say utilities management needs to rationalize big investment that will replace generation in rate base.”
Maryland has begun wholesale installation of smart meters, with no good explanation about how the cost will benefit consumers, either with reduced utility prices or better services. How can these con men be allowed to play their high casino with something as important as electricity?
re utilities getting out of the generating business, it’s a consequence of two factors. First is the rise of non-utility generation that has raised non-utility power production to about 40 percent of the total. Utilities generally buy this power on a passthrough basis and get no returns on it. Second is the maze of state and federal policies that are intended to encourage utilities to push demand management and efficiency, so they can’t try to grow demand for their product like they did in the old days. “Electric services” means that what people actually value is not the kilowatts themselves, but the motive power, light etc. that comes with their use. Utilities are thus trying to make money by finding ways to profit from investments in demand management and the like, which is what the Smart Grid is about. As noted, many utilities are losing the generation parts of their rate bases, whether due to competition or divestitures, and need a large block of capital to replace it on which regulators will allow them to earn “fair” returns. The Smart Grid is that block.
“In a 2005 response to the commission’s request for a “business case,” SCE concluded that on balance it would not be cost-effective, save for some programs for customers who already had smart meters. The company came back in 2007, and this time the regulators authorized $1.63 billion for implementation on the basis of a remarkable estimate.”
There’s a little bit more to this story. SCE originally prepared over 50 business cases, with widely varying assumptions about deployment costs, customer participation in demand response programs, and so forth. None of the business cases suggested that AMI would be a cost-effective investment for the company.
This did not sit well with the CPUC. Pacific Gas and Electric had prepared comparable business cases, with similar assumptions, that indicated that AMI would prove to deliver high net benefits. “Why should SCE be any different?”, they reasoned. The CPUC basically said that SCE’s directors were a bunch of luddites and told them, in no uncertain terms, to get back to it and come up with a business case that worked.
SCE came back, as you write, with the “Smart Connect” business case, and things have proceeded from there. This is all in public records. The story of how the CPUC disregarded dozens of business cases and ordered SCE to make one that proved AMI’s benefit would be an interesting piece of investigative journalism.
Guillermo — Thanks very much for the “50 business cases” point. My bet is that even if an investigative reporter went after the topic and found some of the documents, they would be so heavy with redactions (for competitive reasons, of course) as to be worthless.
We currently have an incomplete electricity grid, even if you live within the area covered by the PJM. While the PJM is probably the best example of a free-market grid in the world, there is no incentive right now for consumers of electricity to save money by timing when they use appliances. Right now, consumer electricity bills are based off of how much electricity one uses and it doesn’t matter when one uses the electricity. So, there’s no incentive for residential consumers of electricity to save money by using appliances at night. If the electricity bill reflected the price of electricity at the time of use of the electricity, then consumers could save money by timing when they use major appliances.
The problem is that this requires a major re-writing of state laws related to the electricity grid, and this will take a long time to implement across the U.S. In those places that adopt policies that charge consumers based of the price of electricity at the time of use, the cheapest form of a ‘smart appliance’ would be an app on one’s phones that tells them the price of electricity (along with a color code to say whether the number is high, medium or low) so that the person can turn the appliance on when electricity is cheap.
But in addition to the app on the smart phone, the company (who meters the electricity that each home uses) would need to change out the current meters with meters that also measure the price of electricity at the time of use. This will cost money.
Companies like Duke and PG&E have already conducted trials of ‘smart meters’ in order to figure out if the benefits of smart meters outweigh the cost of implementing smart meters.
Here’s a link to a website with data from 30 companies who have done trials of smart meters.
http://www.emeter.com/smart-grid-watch/2012/building-a-business-case-for-smart-meters/
The benefit to cost ratios vary all over the place, but generally the values are greater than 1.0. (Though, it’s not clear to me what value of a discount rate was used to account for the time value of money when calculating the ratio of benefits to cost.)
The important point with ‘smart meters’ and ‘smart apps’ is that these programs should be adopted on a voluntary basis. Consumers should have the option of joining the ‘smart meter’ program as a way of saving money. And for some people, smart meter and smart appliances will yield decent to good rates of return on investment, even if they have to pay part to all of the upfront capital cost of changing out their existing electricity meter.
I agree, Eddie, that adoption should be voluntary. But it’s not at all clear that values are greater than 1.0, soup to nuts. Moreover, I think the economic rationale is morally questionable, if not corrupt.
Both you and Don rather blithely assume that time of use consumer price differential is a good thing. I think it deplorable, and hardly “simplicity defined,” which, for me, would be defined with a straight price per kWh.
This kind of sanctioned tinkering, “logical” as it seems to be (since the highest cost is typically for highest demand periods), is the camel’s nose under the tent for all kinds of Pandora-like mischief, as you, with the author of this post, imply.
We should not morally go down this road. For differential pricing is highly regressive, hurtful to the least economically flush among us and particularly small businesses. DEMAND IS NOT RANDOM!! There are sound reasons for peak and ebb demand, since they are generally congruent with human life cycles–which should not be penalized.
And since electricity is so fundamental to modern society, its costs should be socialized much in the way as the costs of providing clean air and water are. With a straight price per kWh of use, consumers will still have the choice of reducing their demand, as they do now. .
Consumers aren’t stupid: they don’t need a glowing red or green globe to tell them that, on the highest summer days, the cost of electricity is going to increase if they turn on their air conditioning system. Ditto for those who use electricity for heating on the coldest winter nights. A few years ago, during a MDPSC session, one of the state’s utilities unveiled a globe that would do just has Don described. The ensuing laughter from the audience, at first a few titters, which ultimately cascaded into howling har-de-hars, was instructive. The PSC put the proposal on hold.
Economists, engineers, faux environmentalists, regulators and politicians who attempt to make people think that electricity must be a scarce resource should be put in stocks. For nothing could be further from the truth, particularly in a land with a GDP of $15 trillion.
Jon,
I’m not arguing that the goal is to save electricity.
The goal is to save people money on their electricity bills. I’m arguing that one way to do that is if people can opt into programs in which their price of electricity follows the actual price of electricity on the market. Right now in the PJM, the price of electricity changes hour-by-hour, but this changing price is not reflected in consumer bills. Advocates of free markets should be in favor of increased levels of demand response (just as we have successfully implemented supply response into markets like the PJM, i.e. electricity generators get paid based off of the actual price of electricity in the market or based off of the day-ahead price bidding.)
The problem is that the trend for demand response is going in the opposite direction. Companies like Reliant Energy are trying to get people to sign up for flat rates for 6, 12, 24 months. This means that consumers pay a flat rate regardless of what the actual price of electricity is when they use it.
I don’t want to ‘socialize’ away other people’s bad habits. If I run my washing machine at night, I shouldn’t have to pay for somebody else running their washing machine during the day when electricity prices are typically higher. The way to avoid the ‘problem of the commons’ (in which everybody turns up their AC high during the day in the summer because those who don’t are subsidizing their use of running the AC) is to have people pay the actual price of electricity when they use that electricity. The analogy is with gasoline…what if we were forced to purchase gasoline at the same price throughout the year…even though more people use gasoline during the summer than the winter. This would increase the yearly average price of gasoline because people driving in the winter are subsidizing the driving in the summer.
What I’m saying is that our electricity market is still far from being a free-market, even in places as advanced as the PJM. Smart meters (if they can be shown to yield positive rates of return on investment) are one way of increasing the degree to which we have a free market for electricity.
The point about Reliant isn’t right. People in most of Texas have a choice of electricity retailer and Reliant is one of many. Right now, just under 60 percent of households have left their utility-affiliated suppliers for competitors. Currently a residential customer in Houston can choose among 42 different suppliers who offer a total of 266 plans. Each is responsible for arranging its own mix of bulk power, and is free to charge any type of rate that it thinks will be profitable and competitive. Some offer fixed rates, some are fuel-price sensitive, some will help you out by buying you a setback thermostat, etc. In short, you pick your supplier and if you want time-varying rates you can get them. You are not subsidizing any other type of retail customer. Reliant thinks it can make money by pushing fixed rates, other suppliers think otherwise, and you can choose among them. What’s not to like?
For a list of suppliers and their plans, go to the site maintained by the Public Utility Commission of Texas http://www.powertochoose.org/_content/_compare/compare.aspx
Thanks, Eddie, for this good explanation of your position, which I now better understand. But I don’t for a minute believe those behind smart meters are out to give consumers a means to save on their utility bills. As you say, the electricity market is not a free market, and those in charge, including the regulators, have become beholden to the machinations of crony capitalism and politicalization, where consumers are to be milked (bilked) with continual and escalating “hidden costs,” particularly under the cover of smart metering. The very name should give people pause.
However, even if I could believe that smart meters would ultimately be used the way you intend, I still wouldn’t support your position. As I’ve said, electricity should flow as freely as possible, irrespective of routine circumstance and times (earthquakes and hurricanes are another matter). We really are “electricity independent” in this country, not reliant on supply from other nations (although we may choose to import from Canada and Mexico). In this, electricity generation and transmission differs from our use of gasoline for transportation, where external conditions can affect available of supply (and condition price). Even here, though, since gasoline is so important to our general welfare, that the price should be the same for all, as adjusted for the seasonal supply. Why should anyone pay more for gasoline at any time of day, even during rush hour, when many cars are on the road?
I would agree that as a general proposition for most goods and services in the economy, differential pricing makes sense, allowing sellers to recover costs while encouraged to make a profit. Consumers should expect to pay more for premium ice cream or a villa on the Riviera.
But let me again state that demand for electricity is not random overall. If I must work during the day, I must wash my clothes at night–if I want clean clothes. That’s not exactly a choice between clear alternatives. Electricity should be made so abundant that no one has to ration his or her time in order to get it more cheaply. For me, it should be as accessible as air or water–and priced accordingly.
As I write, the more it appears, even to me, that I probably don’t completely favor a market approach to electricity; rather, I see it as I see police, the military, air and water: things so important to all that they shouldn’t be left to the vicissitudes of the market. But then I don’t want what we had with AT&T and an essentially monopolized phone system, either. There’s got to be room for a market operation with sufficient incentives for innovation.
All this is very complex. And likely others have written volumes about it. Once again, thanks, Eddie, for stimulating my thinking.
Jon,
Thanks for sharing your thoughts.
I think we can agree on a few things:
1) Some, but not all, of the utilities wanting to implement smart meters are doing so because they operate in a controlled (not free market) where if they can convince the local regulatory agency that it’s a good thing, then they can implement the program and obtain a guaranteed ~12% rate of return on investment by being able to raise electricity rates if the program fails. This is not good for consumers. Luckily, there are at least some places in the US in which there is a half-free market for electricity, one in which power producers are forced to compete in an electricity audition.
2) Cheap electricity is a good thing
But it appears that you don’t trust in the laws of supply and demand when applied to many products (gasoline, electricity, etc…) It appears that you are arguing for government intervention via price controls. (i.e. keeping the price of gasoline the same in the winter and the summer, regardless of supply and demand.) Any of the main contributors to this blog can do a better job than I can in explaining the problems with price controls, so I won’t attempt to explain why price controls are bad.
What I would like would be for you to admit that (by your wanting to have the government implement price controls) you are taking away my freedom to chose an electricity company that sells electricity based off of the actual hour-to-hour price of electricity.
I think that we would have naturally developed companies that operate this way (or I would have started one myself) had it not been for the rules imposed by others people (like yourself) that make this illegal.
You may think that price controls will be good, but you are taking away people’s freedom to chose. I am strongly influenced by thinkers like Milton Friedman. I think that free choice is the best way to get cheap electricity. I also think that there can be market-orientated ways of dealing with pollution generated at power plants. Unfortunately, I am but a part of a minority constituency in this country who trust in the free-market.
So, I welcome any thoughts from you on what might convince you to trust more in the free market.
Best,
Eddie
Eddie, I have no desire for price controls. None. Quite the contrary, for they almost never work. What I want is a variety of choices, choices that do not exist within the essentially monopolistic model of electricity production and generation today. If you want to be billed by time of use, fine. If I want to be billed at a single usage rate, that should be fine, too.
I do trust the laws of supply and demand with regard to gasoline, and most other things–when the market is unfettered and the playing field generally level. What I don’t see here, however, with gasoline, is the time of use application you seek for electricity, except for seasonal adjustments in price. When I go to the pump, I see the price per grade listed as the same for everyone. This is all I’m seeking for electricity.
Therefore, I want electricity produced by genuinely competitive processes, and regulated to ensure the lowest cost because the supply is so abundant and the transmission so accessible. Having a @#% smart meter is for me a pretentious, sleight of hand distraction from the real time achievement of such a policy. And in most cases, it will be used by the usual bunco artists to enrich themselves at public expense while providing no real benefit.