Building a Smarter Grid

Earth Day is here and so today I continue my series of posts on climate change.  See my earlier GXS posts on Cap and Trade, Energy Spend Management, Local Sourcing and China’s Environmental Progress for related articles.  One of the important topics I have not discussed is the “Smart Grid,” which environmental advocates believe to be could have a significant impact on reducing greenhouse gas emissions.   When referring to a “Smart Grid,” the natural question many people ask is today’s electricity grid really that dumb?  There seems to be a consensus that the answer “Yes.”  In his book Hot, Flat and Crowded, Thomas Friedman referred to the US grid as “The dumbest big machine man ever made.”

Is Today’s Grid Dumb?

Major criticisms of the US electricity grid include the following:

  • Undifferentiated Pricing – Today’s electricity pricing is based upon a constant rate schedule that is independent of the generation source and system load.  Customers pay the same amount for electricity no matter how it is generated.  The energy source may be “fuels from hell” such as coal, oil or natural gas or “fuels from heaven” such as wind, solar or hydroelectric power.  Of course, the cost to generate power from these differing fuels varies widely.  Furthermore customers pay the same price per kilowatt during peak day-time or off-peak nighttime hours.   During day-time hours most electrical utilities have to keep costly (in both environmental and economic terms) reserve capacity online to accommodate surges in power demand.   However, pricing models do not incent customers to reduce consumption during peak loads.
  • Unidirectional – Today’s Grid is unidirectional both in the way it distributes electricity and information.  Electrical power is generated in centralized plants then distributed over wide area transmission lines to local residential, industrial and commercial sites.  Most electrical plants leverage coal or nuclear power.  However, today various clean technologies exist, which allow non-utilities (e.g. households or small businesses) to generate significant quantities of power from wind or solar sources.  Although the generation technology exists neither the commercial model nor the transmission capability are available for producers of renewable energy sources to distribute or sell power to other sites.  Furthermore, information sharing is significantly limited as there is no two-way communication between a customer and utility.  When power in a house goes out most consumers have to phone the electric company to let them know.
  • Discourages Conservation – Today’s electricity grid was designed over 100 years ago to provide cheap, reliable, ubiquitous power.  The business model for electric utilities was also designed almost 100 years ago with a different set of economics than are appropriate today.  In fact, today’s regulatory framework perversely incents electrical utilities to increase consumer consumption rather than reduce it.  Utility pricing is regulated by Public Utility Commissions (PUCs) which generally allow rate increases only to recover the costs of capital expenditures.  In other words, the easiest path for utilities to make more money is to build more power plants and power lines that enable them to sell more electricity to customers.   Of course, to justify the capital investments utilities must motivate consumers to increase consumption.
  • Inaccurate Accounting – Despite the close regulation of state and federal agencies, critics of today’s grid argue that electricity pricing does not account for the true costs to deliver the service.   Today’s pricing ignores what economists refer to as “externalities” such as the long term health consequences of polluting the air, poisoning the rivers and intensifying global warming.  These costs burdened to future generations are not accounted for in the prices paid by consumers or industry for electrical power.

Time - Blackout

Blackout of August 2003 – Source:

What is a Smart Grid?

To overcome the challenges outlined above with today’s electrical grid, leading politicians and environmentalists have called for the construction of a Smart Grid.   Smart Grids have a number of key tenets that provide more secure, reliable and environmentally friendly electricity for consumers:

  • Time-Based Pricing – During periods of high demand (e.g. a hot summer day) consumers will be charged higher pricing for the use of electricity.  The Smart Grid would enable utility providers to emulate telecommunications companies in charging for peak and off-peak voice or data usage.  The idea of demand-based pricing is to force consumers to be more participatory in choices about energy utilization.  By charging a higher rate during peak hours, consumers will be more inclined to think twice about shutting down electronics which are not in use or running the drying machine at 6PM during peak loads.  The Smart Grid will compensate consumers for their efforts to save energy thereby leveling demand peaks via the “invisible hand of free-market capitalism.”
  • Smart Appliances – The Smart Grid would be able to communicate with a new generation of smart appliances.  The Grid could program these devices to shift electricity loads from peak hours when power generation costs are highest to off-peak times at night.   If utilities are experiencing peak loads during day time hours, the Smart Grid could adjust home thermostat up or down very slightly.  The Grid could instruct water heater, refrigerator and air conditioner off for short periods of time – so short you do not even notice.  The Smart Grid could be dynamically configured to run energy-intensive appliances such as a dishwasher or dryer only at night when electricity prices fall below a center cost per kilowatt-hour.
  • Renewable Sources – Households and commercial office buildings could install solar panels, fuel cells or micro-turbines to generate power.  Power from renewable sources could be consumed at the point of origination if the economics are favorable.  Alternatively, the power could be distributed onto the grid for resale to other customers.  Additionally, the advent of new highly efficient storage mechanisms such as electric cars will allow customers to temporarily store then resell electricity.  An electric car battery could be fully charged overnight, off-peak at low cost.   The next day any excess electricity not used in the morning commute could be uploaded and resold to the grid during peak hours.  Generators of distributed power sources on the Smart Grid would be compensated for the energy they produce.  The two-way electricity flow and associated marketplace have been referred to as the “democratization of energy.”
  • Self-Healing – The Smart Grid will have the capability to perform a risk assessment to identify the equipment, transmission lines and power plants most likely to fail.  Human operators or the grid itself can then take corrective action to mitigate risks.  Power quality in general will be improved to limit the intermittent power outages that cost US businesses over $100B per year.  The Smart Grid will also be more secure to resist the threat of cyberattacks.  In April 2009, cyberspies from China and Russia penetrated the US electrical system leaving malicious software tools behind that could be activated in the event of a political conflict.  Needless to say, the ability of foreign enterprises to assume control of nuclear power plants or the infrastructure supporting critical transportation corridors and financial markets could wreak havoc with the American economy.

Us 3 power grids

3 Major US Electrical Grids Today – Source: US Department of Energy

There are several other benefits of Smart Grids that I haven’t listed above.  There are also a number of noteworthy challenges with upgrading the electrical system to this new architecture, including how the various energy providers will share high volumes of information with one another.  More about the B2B integration challenges of the Smart Grid in my next post…

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