Friday, May 01, 2009

"Smart" Metering Questioned

Rebecca Smith's April 27 Wall Street Journal Article, Smart Meter, Dumb Idea?, surfaces utility consumer issues that have been percolating below the surface of the "smart meter" wave that is heavily promoted by utilities, deregulation advocates, and some environmental groups. The opportunity to sink billions into universally deployed new electric meters may be very attractive to utilities in states like New York where the PSC discourages utilities from investing in power production facilities. Having failed to achieve hoped for returns in their less-regulated holding company affiliates, utilities may want to sink capital into meters so as to earn a regulated return of 10% or so from ratepayers that they have not come close to achieving in their Enronian subsidiaries they were allowed by the PSC to form as a trade-off for getting out of the power generation business.

Deregulation enthusiasts, including Jon Wellinghoff, Chairman of FERC, tout smart meters as a market based solution to correct manipulated markets.See, e.g., Wellinghoff and Morenoff, Recognizing the Importance of Demand Response: the Second Half of the Wholesale Electric Market Equation. The notion is that high prices in wholesale spot markets will be moderated if customers reduce their demand for electricity in response to spiking prices at hours of peak pricing (typically summer afternoons and evenings when air conditioning is used). The "smart" , meters allow a pass through of hourly price spikes intended to cause customers to reduce usage or shift it to non-peak hours, and thereby tame the spot market price spikes. Assumptions that raising prices so high consumers will resist by not using air conditioning when they need it, and that this will fix the fundamentally flawed wholesale spot markets, lower costs and avoid the need for regulators to establish reasonable rates, are naive at best. This "demand response" theory -- in vogue as a substitute for traditional regulation -- implicitly incorporates questionable assumptions
  • that the wholesale spot markets, essentially deregulated by FERC, set the "right" price for all electricity not matter what it costs or how it is bought,
  • that the spot markets operate competitively, without gaming and without the exercise of market power, and
  • that spot market prices are determined by supply and demand.
The promoters of smart meters and demand response antidotes to market manipulation also the plight of people who need electricity at peak times who cannot afford to pay sky-high prices without enduring hardship.

Smart meters may also have environmental downsides. In some areas and situations, shifting electric usage from peak times, when more natural gas is burned to meet incremental needs, to off-peak times when more coal may be burned, could backfire for those who want cleaner air.

Many consumers cannot adjust their usage. More than half the households in the country have someone at home all day and many of them, particularly the elderly and those with respiratory problems, will need air conditioning on hot days for health reasons. Many households lack the ability to pay more for electricity. See Not so Smart? High Tech Metering May Harm Low Income Electricity Customers. Other concerns include the potential for remote shutoffs as a collection measure (not possible in New York because of HEFPA requirements), privacy, and cost effectiveness in comparison with other investments. Barbara Alexander's paper on "smart metering" emphasizes the lack of evidence to justify widespread, costly investments in universal residential real time metering, and flags many important consumer issues:
The push to install more expensive smart meters (and their associated communication and data storage systems) and consider more “real time” or volatile electricity prices for residential electric customers has the potential for significant harm to many residential customers and particularly to limited income and payment troubled customers. Almost no jurisdiction has acknowledged the potential adverse impacts on these vulnerable customers who must have essential electricity service to assure household health and safety. Nor has any jurisdiction specifically ordered an analysis of proposals for dramatic changes in the pricing of electricity on limited income or payment troubled customers. * * * *
It would be unfair and poor public policy to leap into new metering technology and new methods of pricing essential electricity service to residential customers without a careful analysis and access to factual information on the impacts of such proposals on customer bills and usage patterns. The lack of such information is particularly glaring for low income customers. * * * *

Wholesale market structure and pricing mechanisms are still being vigorously debated and to rely entirely on such immature and potentially “wrong” price signals to customers who rely on essential electricity services for minimum health and safety standards should raise red flags and longer term analysis prior to embarking on expensive new metering and rate design programs.
Fortunately, the New York Public Service Law protects New York's residential customers by making real time pricing and time of use pricing strictly voluntary. See New York Residential Real Time Pricing Experiments Must be Voluntary.

The cost effectiveness of major investment in smart metering, compared to other measures, such as adoption of inclining block rates, or energy efficiency measures to reduce usage, needs to be closely examined. See PSC Requires More Study Before Allowing Major Investment in "Smart Meters". According to a recent PSC Press Release,
More than half of the costs of installing AMI can be offset by a reduction in traditional
utility costs of operations or improved services, such as avoided meter-reading costs, faster outage detection and improved customer service. A projection of benefits from the demand response enabled by the AMI system must be included to bridge the benefit/cost gap based on what is recoverable from AMI-operational savings alone.
To address the lack of cost effectiveness, the PSC now wants to use federal stimulus money to support massive replacement of utility meters - many of them already digital and capable of remote reading - with new, more expensive "smart" meters. The PSC invited utilities again to submit new proposals to subsidize the meter installationsto with federal stimulus money. The utilities are happily responding. See National Grid Responds to New York State Public Service Commission Request for Projects Suitable for Federal Stimulus Funding - Potential Projects Bring Smart Grid Technology and Enhanced Reliability to Upstate New York; National Grid seeks $240 million in stimulus funds to build advanced grid in, near Syracuse. Many details of the proposals have not been made public by the utilities in their recent filings with the PSC. See Utility wants to keep plan secret.

See the Comments and Reply Comments of NASUCA to U.S. Department of Energy requests for information regarding "Smart Grid" initiatives. In their Reply Comments, NASUCA stated:
"First, the consumers are the ultimate owners of their energy consumption data. The establishment of privacy protections for personal energy information is critical, and the issue must be resolved in favor of the highest degree of consumer protection.

Second, consumers should have the choice to participate in any advanced metering program or in any dynamic pricing schedule that may involve data sharing arrangements.

Third, there are unique differences among electric consumers that must be considered for any Smart Grid deployment.

Fourth, investments made in Smart Grid technologies must be supported by a detailed cost-benefit analysis and subject to evidentiary proceedings and prudence review before costs are passed on to utility consumers."


Anonymous said...

You guys seem pretty far out to lunch. First of all, your "questionable assumptions" aren't all that questionable unless your definition of "right price" is some socialist BS about payment based on perceived need.

It sounds like you don't understand how the current billing system works, so I will explain it to you. Every household has a demand curve associated with it that changes based on things like temperatures. That curve is the best estimate of that households energy usage curve throughout the day. The meter on each house records the total usage over time and a meter reader reads the meter every month or so to get the total usage for the month. This total usage is then spread out over the month using the curve to assign KWH's to each hour in the month.

So, what does this mean to the smart meters debate? It means that people are already paying for all the KWH's they use every month and if they use electricity in a typical pattern they will see almost no change on their bill from the installation of a smart meter. Who will this affect? This will affect people who don't use power typically and it can affect these people by dropping or raising their monthly bill, depending on how their power usage varies from the ISO's best estimate of their usage pattern. Either way, under the smart meter the household gets a more accurate bill and a more just bill, because they will be paying for exactly what they use. The smart meter also has other benefits because it allows people to choose to change their electricity usage patterns and benefit from that change. As an example, if a household watches TV from 5 pm to 11 pm every night they will get a much bigger benefit from switching to an energy efficient LCD from their old, energy hog CRT television because all of the demand decrease will be concentrated in the peak hours from 5 pm to 11 pm.

Gerry Norlander said...

Real time pricing proponents assume that sellers whose bids clear the spot markets have offered their output at or close to their marginal cost; they think ISO/RTO markets are not gamed and yield prices at marginal system cost; and they think marginal system price is the "right price" to charge consumers for all kwh even if only 1% of the electricity is produced at that price. Each of those propositions should be questioned.

Substantial reform could be achieved with inclining block rates to make electricity cost more the more one uses. New York's policy has been to raise customer charges, making less of the total bill vary with the amount used, making payback periods for energy efficiency investments longer, and making the average cost per kwh decline the more one uses.

Anonymous said...

Marginal system price is the right price to charge. Any other system and you are just talking about re-allocating consumer and producer surplus, which isn't efficiency enhancing.

Inclining block rates don't make any sense at all because they punish people solely for using more electricity, which isn't a rational thing to punish people for. On the other hand, an LMP system charges people more for consuming more when other people are also consuming more, which actually makes sense. If you and 8 million other people all turn on your tv's at the same time of night in New York City, which maxes out the transmission lines into New York City and causes the ISO to have to ramp up some old fuel oil plant that was built in the 1940's and is expensive to run then you should be paying for that.

If you are supporting inclining block rates for some environmental reason, what you should be doing instead is lobbying for increases in the environmental charges on the fuel sources you don't like (i.e coal). This would be far more effective at changing the fuel mix and wouldn't break an already efficient system.

If you are supporting inclining block rates for some social reason like subsidizing low income electricity users I would recommend you practice charity on your own time and with your own dime. Giving someone something based on a perceived need instead of achievement is one of the more harmful concepts to be formalized in recent history and I want no part of it.

I would have to agree that there have been instances of the system being gamed, however as the games are uncovered they are fixed (i.e power is no longer allowed to be scheduled out of NY through Ontario and MISO into PJM) and the vast majority of plants do offer in the vast majority of their supply stack near their marginal cost. I also agree that there is some room for change in the non-energy portion of the bill.