Smart Meters Are Here, Will Smart Prices And Devices Follow?*

Fereidoon P. Sioshansi** (

Energy prices vary.  Oil prices go up and down, as do natural gas prices, especially during cold winter spells.  Even coal prices fluctuate from time to time, however sluggishly.  But when it comes to electricity, prices fluctuate a lot, and not just daily or seasonally but hourly.  During peak demand hours, when supplies are tight, prices can spike.  By contrast, during off peak hours and during certain times of the year when supplies are plentiful and demand low, prices could be extremely low – occasionally going negative, for example when there is an excess of renewable energy generation.

Figure 1. A kWh costs a fortune on a peak summer afternoon

California typical summer peak loads, 2006 data during heat wave, MW

Source: David Hungerford, CEC

Figure 2. Who’s smart and who is not, number of customers of large US utilities with smart meters, in millions

Source: The Wall Street Journal, May 19, 2010, based on FERC data

Yet the great majority of consumers in most parts of the world – especially small residential consumers – remain on flat rates that do not reflect the actual costs of generating and delivering power.  This well-known problem was not easy to address with the old utility infrastructure, namely the ubiquitous spinning disk meters that, like the incandescent light bulb, are relics of the Thomas Edison’s days.  As it happens, the cost of smart meters – the kind that can keep track of variable rates and usage by time of day – has plunged in the last few years to the point where many utilities are replacing their old meters with the digital variety.  In California, for example, all three investor owned utilities are installing smart meters on all customer premises by 2012.  The federal government has been providing significant funding to utilities around the country for installing smart meters.

This opens the door for introducing cost-reflective prices – i.e., prices that either follow the actual wholesale prices plus a margin to cover transmission, distribution and overhead, or prices that vary within certain time periods, say peak, shoulder and off-peak, or critical peak prices (CPP), that remain flat most of the time but rise on certain critical days.  While there is some apprehension that consumers would find variable pricing schemes confusing, the experience with mobile phones, which typically have on-peak and off-peak rates and other features, suggests that consumers can handle the added complexity if given adequate time and explanation.

Once consumers get used to the idea that a kWh at 2 pm on a hot summer afternoon is different than a kWh in the middle of the night – in this case the former costs a lot more – one can expect that some discretionary consumption would shift to off peak hours.  At least that is what the theory tells us.

For this to happen, and happen seamlessly and with little effort, we need smart devices – that like the new meters recognize the variable prices and adjust their usage automatically or through instructions from the customers and/or an intermediary.  For example, a central air conditioner may cycle when prices are high as would a pool pump; refrigerators would delay ice making and defrosting and clothes dryers may switch to tumbling without the heat cycle.  Manufacturers of white goods including General Electric, Whirlpool and others are belatedly getting the signal – no pun intended – that they need to include simple intelligence into their products for such trivial types of energy management to become routine.

Figure 3. Powerful devices waiting for the price signal

Maximum power consumption of typical consumer devices in home, in Watts

Source: The Wall Street Journal, May 19, 2010, based on GE data

But the more important question is why would anyone wish to use a clothes dryer on a hot summer afternoon when you can have the clothes dried for free by simply hanging it in the sun?  That, of course, would be smarter than any smart meter, smart pricing scheme or smart device can deliver – and far less expensive or complicated.

This brings the frequently ignored issue of motivating individual consumers to use energy wisely, sparingly, perhaps even frugally.  As everyone knows, efficient utilization of energy is the cheapest and easiest way to address concerns about dwindling energy supplies, energy security and climate change.  And it can be as trivial as turning off the lights in unoccupied rooms, empty office buildings or shopping malls after closing hours.  But implementing such simple measures is not as trivial as it sounds.

Figure 4. Why so much energy?

US energy consumption by major sector

Source: Lawrence Berkeley National Laboratory

For example, as every parent knows, getting teenagers to turn off the lights, the TV, the computer and other electricity consuming gadgets takes vigilant discipline.  In private homes, however, the resulting savings directly flows to the bottom line.  In commercial settings where energy savings do not directly flow to individual occupants, motivating good energy utilization behavior is considerably more complicated.  In the case of an estimated 4.8 million large and small commercial buildings in the U.S., the simple question of who is responsible for turning off the lights at the end of the day turns out to be no one in particular.

The problem has not escaped the attention of the US Environmental Protection Agency (EPA), who, among other things, is behind the highly successful Energy Star program to highlight the energy efficiency of major appliances.  In April 2010, the EPA launched a new program called Working off the Waste to encourage reduced energy consumption in the US commercial building sector where an estimated 30% of the energy is currently inefficiently or unnecessarily consumed.

EPA’s new program, copied from a popular TV show on NBC network called The Biggest Loser, which recognizes the greatest weight loss among obese contestants, starts off with a competition among 14 major commercial buildings to see who can cut the biggest amount of energy waste.  The contestants, major retails stores, shopping malls, office buildings and residential dormitories, are required to turn in details of their energy usage from Sept 2009 to August 2010.  The winner will be the building with the largest percentage energy drop.

While installing efficient appliances and sophisticated energy management systems helps, simple behavioral factors and operational changes – things like turning off the lights, the escalators and the circulation system – are expected to be the big winners. And behavioral factors, once they are adopted and become the norm, can outlast the buildings.


* This article is excerpted from the June and July 2010 issues of EEnergy Informer.

** Menlo Energy Economics.

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