Tuesday, March 09, 2010

Old School vs. New School: The Case of the Smart Grid and Real Time Electricity Metering

All change is bad. The Smart Electricity Meter roll out offers a test of this claim. These meters provide us with real time information about our minute by minute electricity consumption. In a world where we are glued to our Iphones and Blackberries, shouldn't such information be useful and improve our quality of life? After all, these $100 meters will replace the antiquated monthly electricity bill. Like Star Trek's Captain Kirk, you will now be an informed captain of your own ship!

To paraphrase Sy Sims, an educated consumer should be a better customer. But, the NY Times is reporting that a revolt is breaking out. The first guinea pigs of the smart meter roll out are complaining that they are being price gouged. The utilities are countering that the bills are high because of weather shocks not a malfunctioning machine or a corrupt machine.

Economists are hoping that these devices will spread quickly across all households. If households had real time access to information about their consumption of electricity, then electric utilities could offer special incentive programs to such customers to shift their daily consumption. Leading economists continue to explore how households change their behavior when they face critical peak pricing . So imagine if your utility sent you a letter saying that it would send you a check for $100 each summer month but in return you must agree to face much higher prices per kWh when electricity is at peak demand. Armed with your smart meter, you would know when these "peak periods" were taking place. Such a contract would help the utility because if it signed up enough people, this would reduce the likelihood of a blackout and it might need to build less electric utility capacity to meet anticipated demand.

Now there are two research questions here; 1. selection --- who would sign up for this program? If I plan to be in Paris all summer, then I will sign up for this program and receive the $100 check but true aggregate electricity demand doesn't decline because of this program because I would have been out of the country if they had or had not given me the check. 2. Treatment --- facing the high price for electricity at peak times --- how do people change their daily routine? Do they go for a swim at an outdoor pool rather than cranking the AC while watching their plasma TV? Price signals can play a useful role in our society when we allow them to reflect scarcity!

This backlash against the smart meters is ugly. The utilities should have rolled out these devices in areas where people support conservation goals and trust the electric utilities. This group of "guinea pigs" would have offered valuable lessons on perfecting this new technology. Instead, we now have a paranoia brewing.