The Smart Grid Needs Smart Regulations

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The reform needed to encourage consumer energy management: eliminating the single fixed retail rate for electricity. Until dynamic rates that reflect current market conditions are implemented, smart-grid technologies such as smart meters and smart appliances, and home-energy management systems like those being developed by Google (GOOG) and Microsoft (MSFT), will have little effect in altering consumer power usage. Customers will have no impetus to shift their consumption to off-peak hours. A smart meter without a smart rate schedule is not smart at all.

Just because the cost of electricity per kilowatt-hour will jump doesn't mean a customer's bill has to rise. If a single customer is willing to shift demand from peak to off-peak (when more, and thus cheaper, supply is available), that change can cut costs for all parties, including the utility and every other customer. But today those savings are not passed on, providing no incentive to curb energy use. The win-win-win (for the utility, the consumer, and society at large) will not be created until dynamic prices are introduced.

Fifty Public Utility Commissions

The elephant in the room in initiating what will be a paradigm shift in the electric power market is that the federal government can't currently address these regulatory issues. The fact is that each state's public utility commission (PUC) regulates the retail price of electricity and rate of return a utility will earn. Therefore, these changes cannot be made with the stroke of one pen but will need approval by 50 different PUCs. The good news is that PUCs are responding to the Energy Dept.'s statements about the need to explore dynamic pricing and new business models that reward demand-response initiatives. As an example, the Ohio PUC recently announced it will give Duke Energy (DUK) incentives to put energy-efficiency programs in place.

This is the promise of the smart grid: moving from demand destruction to value creation. While utilities may be loath to reinvent a business model that has served them for decades, the revolution in information technology that has transformed other industries—such as desktop computing, enterprise networking, and wireless communications—will have a similar effect on the electric-power business. The smart grid, which in large part sits at the intersection of energy, IT, and telecommunications, is a market that, according to John Chambers, CEO of Cisco Systems (CSCO), "may be bigger than the whole Internet."

At Greentech Media, we interact every day with startups and utilities that envision energy marketed less as a commodity and more as a suite of services. Just as cell-phone plans now bundle voice, SMS, and data, the smart grid will lead to energy-pricing plans that include basic service plus add-ons such as smart charging of electric vehicles during off-peak hours, distributed renewable energy services, and countless other new services and applications. The Energy Dept. stimulus represents a massive investment in the smart grid, but technology can only take us so far. There's plenty of money to be made, but we can't go from iPhone to iHome, from Facebook to Gridbook, without the right state policies.

David J. Leeds is a smart grid analyst at GTM Research. For more information on smart-grid technologies and applications, read The Smart Grid in 2010, a free report published by Greentech Media.

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