(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, June 20 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
"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.
PEAKY POWER PROFILE
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
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)
HIDDEN CROSS SUBSIDIES
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
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
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
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)