Racking Up Smart Grid ROI

Ken Silverstein | Jun 21, 2010


Getting consumers to learn how electricity is priced could lead to efficiency and conservation, resulting in lower rates.

But do those benefits outweigh the costs? Will investors step up?

The issue is now before a multitude of state regulators who must decide how the assets that make up the intelligent utility will get financed. Utilities oftentimes are making investments after getting regulatory approval to pass the cost to consumers - just as power plants are handled. Constructing a two-way grid might cut down on peak consumption and avoid expensive infrastructure build-out.

"The bottom line on energy efficiency is that return on investment comes through as we work with regulators to get good incentives in place," said Chris King, chief regulatory officer of eMeter. "We see the bigger returns in smart meters and demand response. Utilities are asking for cost recovery of these assets and they are putting together business cases to show both the costs and benefits."

Some utilities are presenting compelling evidence to illustrate that their operational savings have the potential to exceed their cost of deployment, he says. But a majority of them demonstrate benefits by discussing the reduction in harmful emissions and the reduced cost of power to consumers over the long run - an investment that bears fruit over 15 or 20 years.

Utilities must then be able to put the cost of that investment into their rate base, King noted, so that they can grow their earnings base and attract new shareholders. Regulators comprehend this and are supportive, while maintaining a healthy skepticism. They want concrete proof.

One expectation here is that demand for electricity will steadily rise over time. That demand will push prices higher unless matched by new supply - or utilities encourage their customers to use less or shift their use to off-peak hours.

"The future of controlling those electricity rates is dependent on managing peak windows," added Gary Fromer, chief executive of CPower. "With the right incentives and the right tools, we can manage this. As we eat into that, demand response not only becomes a reliability tool but also an economic one."

Thus the need to encourage investment in two-way communications and demand response programs, which can preclude massive outlays of capital for new power generation.

Consider that a new generation unit may run close to $1 billion or a retrofit for an older one could cost hundreds of millions. If that cost is passed through to end users, it then pits shareholders who expect fair returns against consumers, who dislike huge rate hikes. "The smart grid with demand-response functions is the perfect hedge for utilities," said Sandy Williams, partner with Foley & Lardner.

"The new business model for electric utilities must consider the advanced needs of the consumer, the ability to make the grid smarter and more responsive and at the same time build value for the shareholders," said Gregg Edeson, a manager of PA Consulting Group's global energy practice.

Utilities are taking different approaches to grid smarts. Some are investing in transmission lines that redirect power flows when congestion is about to occur. Others are investing in meters that enable their reach inside consumers' homes to curtail consumption. All are asking state regulators to fold capital costs into rate bases.

The transition to a society that uses electricity more wisely won't occur overnight and as such, the payback will take a while. But those benefits will come, which is why most state regulators are incorporating incentives. Investments in the intelligent utility are already resulting in greater reliability. Over time, they will also lead to greater energy efficiency as consumers adapt.

"The smart grid is not only about peak shaving or peak shifting," said Joel Gilbert, founder of Apogee Interactive in Atlanta. "It is also about providing information to customers so they can measure and manage their energy efficiency efforts."

This article by Ken Silverstein, editor-in-chief of EnergyBiz Insider, first appeared in the May/June issue of Intelligent Utility magazine.  


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