COLUMN-Overcoming objections to smart electricity tariffs: Kemp

Thu Jun 20, 2013 7:48am EDT

(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON, June 20 (Reuters) - By the end of 2015, more than 70 million smart electricity meters will have been installed across the United States.

Britain, Australia and other countries have also embraced the concept of a smart grid, with smart metering at its core, though the rollout of the actual meters is further behind.

By the end of 2013, smart electricity meters will have been installed in every home in the Australian state of Victoria, including the city of Melbourne.

Smart meters are central to the vision of a 21st century electricity grid that will maintain or improve reliability while obtaining 30 percent or more of its power from renewable sources such as wind and solar.

Unlike traditional accumulation meters, which simply record the total amount of electricity used and must be read manually, smart meters will record the time of use in hourly or shorter intervals, and each will have its own communications link enabling it to be read remotely by the utility.

The more advanced meters will monitor power quality and warn the utility when there is a blackout or voltage drops, so that it can take corrective action more quickly.

For customers with their own solar panels or wind turbines, who sometimes generate more electricity than they use and sell the excess back to the grid, smart meters will record the time and volume of sales, so they can be credited against the customer's electricity account.

In future, smart meters will help adjust demand as well.

In the existing grid, supply and demand are balanced almost entirely by changes on the supply side. Generation follows load, as electrical engineers say.

"Consumers can turn on the switch or plug in any device at anytime, anywhere, and draw as much as they want, for as long as they want it," Fereidoon Sioshani wrote in a collection of essays ("Smart grid: integrating renewable, distributed and efficient energy" 2012).

Using smart meters, demand response programmes and dynamic pricing will push customers to change their consumption to adapt to the available supply, including from renewables.

Eventually some meters may be able to communicate with appliances in the customer's home to turn down the air-conditioning a few degrees or switch off the refrigerator for a few minutes to help cope with times of peak demand when the stress on the electricity grid is greatest.


Installing smart meters will cut meter-reading costs. But the real gains will be realised only if the new meters are used to impose smart tariffs that give consumers a strong financial incentive to change their consumption patterns.

Policymakers have embraced smart metering eagerly, but dynamic pricing is much more controversial.

Many consumer advocates and politicians are fearful of dynamic pricing, under which customers could pay perhaps 10 times as much for electricity during peak periods, in a bid to make them curtail non-essential use.

"Customer acceptance and participation ... are among the biggest and most challenging pieces of the smart grid puzzle," according to Sioshani, who runs Menlo Energy Economics, a consultancy specialising in smart metering and demand-response programmes.

"A number of smart metering implementation projects have already encountered significant consumer backlash."

Concerns centre on low-income consumers, who spend up to 15 percent of their income on electricity and gas, as well as for disabled and elderly customers trapped at home, who may not be able to turn off medical devices and air-conditioners.


Most customers currently pay the same for each kilowatt regardless of when it is used. But the cost of supply varies enormously according to the time of day, time of year and how much other demand there is on the grid.

The grid holds massive amounts of reserve capacity to meet peak demand periods that occur during only a few hours and days of the year. In the United States, half of all power generating capacity is idle on average, and 10 percent is needed to meet demand on fewer than 100 hours per year.

The traditional grid relied on uncorrelated loads. Not all customers would draw power for cooking, boiling water or using other appliances at exactly the same time.

Customer demand has always peaked at certain times such as early evening when customers return home from work and start preparing the evening meal. But those peak have become much more pronounced in recent decades following the widespread installation of air-conditioners and electric space heaters.

Air-conditioning and space-heating loads are far more correlated. If temperatures have risen enough to encourage one customer to switch on an air-conditioning unit, there is a high probability the neighbours will also have switched on the AC, and the resulting surge in demand is enormous.

In the United States, peak demand usually occurs on summer afternoons, when air-conditioning is working hardest. In Britain, it occurs during the winter in the early evening, when lighting and heating demand is greatest.

Holding enough spare capacity to serve loads during these peaks is expensive. Under flat-rate pricing, customers with especially peaky load profiles (such as those with air-conditioners) are cross-subsidised by customers with flatter profiles (such as those without). The cost of serving expensive peak loads is spread across all customers throughout the year.

By contrast, dynamic pricing employs aggressive price signals to prod customers into shifting some of their load to off-peak periods. Pilot projects show some customer load can be shifted depending on the aggressiveness of the price differentials.

If dynamic pricing could be rolled out to large numbers of customers, grid capacity could be used much more efficiently, with less generation and transmission capacity held in reserve. Cost savings could be passed on to customers. Peak prices might be higher, but charges at other times would be lower than under a flat-rate system.

From the second half of 2013, customers in Victoria state will be offered a choice between traditional flat tariffs and new flexible pricing, where they will pay different rates for electricity at different times of the day. Flexible pricing will remain voluntary, for now. (here)


As more renewables are integrated onto the grid, pressure for a widespread shift to dynamic pricing will intensify. Unlike generation from fossil fuels, renewables are far less predictable and will need their own back-up power for when the sun goes behind a cloud or the wind stops blowing.

Unless grid operators can flatten the peaks, they will need to hold staggering amounts of reserve capacity to cover the possibility that renewables are not available at a peak time. Flat-rate pricing will become totally uneconomic as the proportion of renewables increases.

Like any shift in tariffs, dynamic pricing will create winners and losers. Customers whose load profiles are more peaked than average will lose. Customers whose load profile is flatter than average stand to gain. Losers will lobby hard to maintain the status quo.

But advocates of dynamic pricing can point to the unfairness of forcing all customers to subsidise the electricity use of those with the highest peak loads. Each customer should pay the costs associated with supplying his business or household, and those who cost more to serve should pay more. Poorer, older and disabled customers at risk from the system could receive special rates.

Attacking the unfairness of the existing cross subsidies may be the most promising route to overcome resistance to dynamic pricing. Customers are already accustomed to paying dynamic prices for air fares, hotel rooms and some sports events.

But access to electricity is much more fundamental. Proponents of smart meters and dynamic pricing will have to work hard to convince consumers that "under dynamic pricing, customers do not have to pull the plug on major end-uses, live in the dark or eliminate all peak usage in order to benefit," according to Ahmad Faruqi in an essay on the "Ethics of dynamic pricing".

Faruqi works at Brattle Group, another consultancy that supports smart meters.

"(Customers) simply have to reduce peak usage by some discretionary amount that does not compromise their lifestyle, threaten their well-being or endanger their health," Faruqi claims.

Nonetheless, smart grid supporters have a long way to go. While 5 percent of U.S. customers already have smart meters, fewer than one in 10 of them are actually on a dynamic tariff. (editing by Jane Baird)

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