Levine 1

WWS 402: Renewable Energy and the Electric Grid

Professor Harold Feiveson

Demand Response and Advanced Metering: Modernizing

the Electric Grid
Josh Levine
03 MAY 2011

This paper represents my own work in accordance with University Regulations.

Josh Levine
 Levine 2

Table of Contents
I. Executive Summary……………………………………………………………3
Introduction to Demand Response and Advanced Metering.……………………………..4
The Need for Demand Response...………………………………………………………..5
II. Demand Response: Current Methods and Results …………...………..........6
Direct Control Demand Response..….……….…………………………………………...8
Price Based Programs….………….….…….………………………………………..…..11
Time of Use Pricing………………………………………………………………..12
Critical Peak Pricing………………………………………………………..……...13
Real-Time Pricing…………………………………………………….……..……..15
III. Smart Metering: An Overview…………….…….…………….………..…...16
Benefits of Smart Meters: Utilities, Consumers, and the Environment..…..………..…...19
Roadblocks to Smart Metering Infrastructure……………………………...………..…...21
IV. Principal Findings………………………………………………………….…25
V. Appendix A: Demand Response Load Curves...............................................27
VI. Works Cited…………………………………………………………………...28
 Levine 3

Executive Summary

Demand Response and Advanced Metering are two aspects of what is termed the
“Smart Grid.” Demand Response reduces demand for electricity, especially at peak
hours, when it is the most expensive to produce and supply. Advanced Metering brings
21st century computer technologies, online software, and wireless connections to the
electric industry. These meters are capable of providing real-time pricing, sending two-
way communication between consumers and utilities, and regulating energy usage
automatically throughout the home. Advanced metering is a fundamental part of the
smart grid and necessary for smart demand response.
A multitude of Demand Response programs have been used in the US for some
time, but their potential impact has increased significantly with the introduction of
advanced metering infrastructure. The ability to see real-time data and automate energy
usage at the residential and commercial levels is extremely promising. Regulatory
hurdles and inertia, however, have impeded progress in this area. Consumers have been
used to buying averaged electric rates instead of paying higher rates during evening hours
when demand is high and lower rates during early morning hours when demand is low.
Changing the current pricing scheme will inevitably result in lower electric bills for some
and higher ones for others.
A couple other regulatory hurdles have also impeded the implementation of
demand response. Third parties have been largely shut out of the market as demand
response has been considered a utility program. Opening up the market to more
competition will allow for better technologies at lower costs. The utilities also do not
stand to gain from demand reduction since it translates to lower revenues. A shift in the
regulatory structure which incentivizes demand reduction will be needed for large-scale
implementation.
Implementing Advanced or Smart Meters also costs money and consumers have
balked at paying for their installation. This is probably due in part to the general public’s
relative ignorance about how electricity is produced and supplied. In addition, new DR
programs are beginning to shift from utility controlled programs whereby the utility has
the contractual right to reduce consumer’s energy usage to consumer based programs
which give the consumer the autonomy to effectively control energy usage. This change
seems to be more promising for future implementation and consumer satisfaction.
Demand Response programs and advanced metering infrastructure are
economically beneficial investments. Instead of paying interest on capital investments in
peak plants and transmission lines, we can reduce energy usage nearly effortlessly.
Ultimately, the implementation of the Smart Grid will reduce black outs and their
associated costs, reduce energy usage, promote green appliances, and benefit consumers,
utilities, society, and the environment.
 Levine 4

Introduction to Demand Response and Advanced Metering

Demand Response (DR) programs aim to lower the demand for electricity,

especially at peak hours when electricity is extremely expensive to produce. Benefits

range from a lower impact on the environment to better service and cost savings to

consumers to more efficient and cost effective utility operations. Demand Response

(DR) has been around for some time, but it has recently taken on new significance in the

US. At the national level, Congress passed the Energy Policy Act of 2005 and “directed

the Federal Energy Regulatory Commission (FERC) to develop a comprehensive national

assessment of the size and scope of electricity DR resources and advanced metering1.”

Throughout the country, local trials with demand response, smart meters, and more

broadly, the smart gird have shown promising results. Xcel energy in Boulder, Colorado

has installed a “comprehensive system that includes a digital, high-speed broadband

communication system; upgraded substations, feeders and transformers; smart meters;

and Web-based tools available through MyAccount” – aimed at turning Boulder into a

“Smart Grid City”2. Austin Energy in Austin, Texas has also installed Smart Meters and

has plans to implement more Smart Grid technologies like web-based management of

smart consumer appliances and real-time online meter readings3.

Smart or Advanced Meters bring 21st century computer technology to the

electricity industry; these meters are capable of communicating with “in-home displays to

1 Cappers, P., Goldman C., and Kathan, D. (2009). “DR in U.S. Electricity Markets: Empirical Evidence”,
Ernest Orlando Lawrence Berkeley National Laboratory, June, 2009, Page 9.
2
"SmartGridCity - Frequently Asked Questions." Xcel Energy. Xcel energy, n.d. Web. 24 Mar 2011.
<http://smartgridcity.xcelenergy.com/learn/frequently-asked-questions.asp>.
3
"Austin Energy Smart Grid Program." Austin Energy. Austin Energy, n.d. Web. 24 Mar 2011.
<http://www.austinenergy.com/about%20us/company%20profile/smartGrid/index.htm>.
 Levine 5

make consumers more aware of their energy usage4.” The development of Smart Meters

is crucial to the implementing of real time pricing. Furthermore, advanced meters can

help consumers reduce their energy usage by utilizing automated controls that will adjust

energy usage in reaction to electricity prices. The obvious benefits have helped increase

market penetration with nearly 9 percent of residential customers and 7 percent of

nonresidential customers having some form of an Advanced Meter5. The American

Recovery and Reinvestment Act (ARRA) granted through the Department of Energy

$817 million in Advanced Metering Infrastructure grants.

The Need for Demand Response: Energy/Environmental Savings, Grid Reliability,

and Better Capital Allocation
Most consumers pay an average rate regardless of the time of day. Electricity,

however, is not produced this way. At peak demand times, generally between 3pm and

8pm, producing electricity becomes very expensive. Utility companies are required to

build extra peak power plants to satisfy demand during these hours, and even more are

required during the summer when peak demand is extremely high. To put this into

perspective, one need only look at the costs. In California, electricity usage exceeds

45,000 MW only .65% of the time annually6. This requires California’s ISO to build

more transmission lines and peaking plants to meet demand that occurs less than 1% of

the time. This is obviously an inefficient allocation of capital. A utility company, for

instance, may have to pay for a new peak plant simply to satisfy demand that takes place

4 st
NETLE Modern Grid Strategy: Powering our 21 -Century Economy. “Advanced Metering Infrastructure”,
Conducted by the National Energy Technology Laboratory for the U.S. Department of Energy, February
20098, Page 5.
5
Federal Energy Regulatory Commission. “Assessment of Demand Response & Advanced Metering”,
February 2011, Page 9.
6
Electricity Advisory Committee, “Smart Grid: Enabler of the New Energy Economy”, December 2008,
Page 7.
 Levine 6

less than 100 hours throughout the year. California’s ISO estimates that 15 hours of well-

targeted demand response alone could reduce 5 percent of the CAISO’s peak load and 55

hours could reduce 10 percent of its peak load7.

Demand response programs are needed because they help increase energy

efficiency by lowering demand when it is most costly – environmentally and

economically – to produce electricity. They also can help utility companies better

allocate resources. Instead of paying interest on relatively dormant peak plants, utilities

can invest in modernizing their services. Finally, peak demand loads stress the electric

grid and can sometimes lead to blackouts. When the grid goes down, society pays a

heavy cost. In the August 14 2003 Northeast blackout, over 50 million people were

affected. It took 96 hours to restore power, manufacturing was disrupted and the cost

was 11 deaths, looting, and an estimated economic impact of between $6-10 billion

dollars8.

Demand Response: Current Methods and Results

There are a multitude of demand response programs throughout the US. There

are two main types of demand response: incentive-based programs (direct control and

event-based programs) and price information programs. Direct control programs are

where utility companies sign contracts with consumers that allow them to reduce or

eliminate power for a contractually set amount of time per year. Direct Control programs

can contract with large commercial users or small residential consumers. Event-Based

programs are primarily constituted to help maintain the integrity and reliability of the

7
Goodin, J. (2008). California Roundup: Summary of DR Activity in California. 2008 National Town
Meeting on Demand Response, June 8.
8
North American Electric Reliability Corporation. “The North American Bulk Power System: A Reliable
Future”, PowerPoint Presentation, Slide 3.
 Levine 7

electric grid. Disruptions in the electricity supply cost American consumers an estimated

$150 billion a year9. Event-based programs either give utility companies full control over

power reduction to a given consumer or send out alerts to which consumers can shift their

demand to help keep the integrity of the system. These programs use monetary

incentives to compensate consumers for the inconvenience and these incentive-based

programs make up “about “93% of the peak load reduction from existing demand

response resources in the United States10.

Other demand response programs include pricing programs that give consumers

more accurate knowledge of the true cost of electricity and allow them to shift their

demand accordingly. As the President of NARUC has stated, “We have been used to –

for over 100 years – rates that are the same all day, every day. That’s not the way

electricity is produced11.” The current system has created information asymmetry

between consumers and the true cost of electricity. Advanced meters and cloud based

Smart Grid technologies have made possible the reduction of information asymmetry and

more consumer-friendly pricing programs. Cloud based programs simply refer to online

applications. These applications could offer consumers real-time pricing data, automated

controls over energy usage, and electronic bill pay. Smart appliances could take signals

automated through these cloud-based programs and become even more efficient.

Changing from our old meters to new metering infrastructure which utilizes wireless

9
Galvin Electricity Initiative, “Fact Sheet: The Electric Power System is Unreliable,” Galvin Electricity
Initiative. <http://www.galvinpower.org/resources/galvin.php?id=26>
10
Cappers, P., Goldman C., and Kathan, D. (2009). “DR in U.S. Electricity Markets: Empirical Evidence”,
Ernest Orlando Lawrence Berkeley National Laboratory, June, 2009, Page 10.
11
Kaplan, Stan M. Congressional Research Service. “Electric Power Transmission: Background and Policy
Issues”, April 14, 2009, Page 26
 Levine 8

networks and online applications to automate energy usage would encourage the

development of smart appliances and demand reduction.

The table below shows three different pricing schemes that demand response
programs can use to shift demand.

Table 1: Price Options

Time of Use (TOU) TOU rates are often tiered rates, which give consumers
Rates different prices for different times of the day, days in the week,
and seasons throughout the year. Unfortunately, the variety of
rates can make responding to them cumbersome and
confusing.
Critical Peak Pricing With CPP pricing, rates “include a pre-specified, extra-high
(CPP) rate that is triggered by the utility and is in effect for a limited
number of hours12.”
Dynamic or Real Dynamic pricing has become possible through the installation
Time Pricing of advanced meters and gives customers real-time price
information.

Direct Control Demand Response

The benefits that can be accrued from direct control demand response programs

are huge, especially when considered with large industrial or commercial consumers who

make up much of the consumption in the electricity market. In summer hours, HVAC

systems come close to making up one third of the total energy used. If direct control

were to be implemented in NYC, and a “utility were to cycle through blocks of 20% of

all AC units and shut them down for 12 minutes apiece, demand would be reduced by

1,120 Megawatts, or two coal fired power plants13.”

While the benefits of direct control are indisputable in terms of how much energy

can be reduced and savings had through lower consumption and greater grid reliability,

12
National Action Plan for Energy Efficiency (2010). Coordination of Energy Efficiency and Demand
Response. Prepared by Charles Goldman (Lawrence Berkeley National Laboratory), Michael Reid (E
Source), Roger Levy, and Alison Silverstein. <www.epa.gov/eeactionplan>
13
"Ambient: Smart Grid: Demand Side/Direct Load Control." Ambient. Ambient, n.d. Web. 24 Mar 2011.
<http://www.ambientcorp.com/smartgrid_greener_dsm.html>.
 Levine 9

large-scale direct control DR programs will have to be user-friendly. Direct control

programs are often voluntary programs and they thus attract people who are willing to

reduce demand contractually at peak hours, deal with the slight inconveniences (if any),

and more importantly, the loss of autonomy. Especially at the industrial level, manual

direct control does not seem to be a viable large-scale solution. As the Institute for

Building Efficiency writes, “Facility managers are reluctant to reduce cooling loads if

doing so would decrease occupant productivity. Because conditions and criteria are

constantly changing, commercial buildings need to stay flexible by retaining control over

their equipment14.” Direct Control programs in the residential markets may face similar

problems. If the utility is given the power of autonomy over AC and/or water heating,

the consumer has to see a benefit that outweighs the costs.

ERCOT, which has extensive demand response programs, has over 73,000 Direct

Load Control (DLC) subscribers who are capable of a reported 119 MW of curtailable

load15. With 87,000 customers engaged in demand response, DLC programs constitute a

large portion of the total. It is, however, interesting that out of 1,048 MW of curtailable

load, less than 20% comes from DLC programs16. Others have implemented DLC

programs with success as well. The Toronto Hydro Electric System has a direct control

program called Peaksaver that cycles AC units off 15 minutes out of 30 minutes and

water heating systems for no more than 4 hours. The utility states that the small

14
Kelly, Smith and Michelle Quibell. Institute for Building Efficiency: An Initiative of Johnson Controls.
“Technology in Commercial Buildings: A Key to Scaling Up Demand Response.
<http://www.institutebe.com/InstituteBE/media/Library/Resources/Smart%20Grid_Smart%20Building/Iss
ue-Brief---Scaling-Up-Demand-Response.pdf>
15
Wattles, Paul. “Demand Response in ERCOT”, Good Company Associates. <
http://www.goodcompanyassociates.com/files/manager/demand_response_in_ercot__paul_wattles.pdf
>
16
Ibid.
 Levine 10

interruptions in service are not typically felt by consumers17. Another direct control

program by the Bonneville Power Administration in Ashland, Oregon was successful in a

voluntary trial with 100 households. It was able to reduce demand in the summer per

household by almost 2kW18. While this program was successful, there are reasons to

question that it could be applied on a large scale. First, as the BPA states, the community

of Ashland is tech-savvy and already a “green community” in that it uses less energy per

capita than other Oregon cities19. Also, while the program did not run into consumer

opposition in the trial, everyone in the program volunteered. It is hard to say whether or

not a broader consumer base would be amendable to direct control programs.

Advances in recent technology have allowed Demand Response programs to

become more automated. With the implementation of Advanced Meters and cloud based

control systems, consumers can set automatic price controls and when inconvenienced,

override them. The difficulty with automated direct control DR programs is that they

have higher upfront costs and require some consumer education to be successful. Large

industrial facilities can shed significant amounts of demand and ensure the reliability of

the grid. Furthermore, the cost savings to a large consumer is greater and perhaps more

incentivizing than a small consumer. That’s why “Industrial peak load reduction

dominates the demand savings in OpenADR programs and made up 55%, 58%, and 70%

17
"Frequently Asked Questions About PeakSaver." Toronto Hydro. Toronto Hydro Electric System, n.d.
Web. 24 Mar 2011.
<http://www.torontohydro.com/sites/electricsystem/electricityconservation/residentialconservation/Pag
es/peaksaverFAQs.aspx#wontimyemployeesmycustomersbeuncomfortableifyoucyclemyairconditioneroff
especiallywhenitshot>.
18
"Demand-Side Management Technology Avoids Grid Construction for Bonneville Power." Energy
Priorities, n.d. Web. 24 Mar 2011.
<http://energypriorities.com/entries/2006/04/bpa_ashland_goodwatts.php>.
19
Ibid.
 Levine 11

of customers’ demand in 2007, 2008, and 2009 respectively20” in California. Open ADR

is automated demand response whereby consumers can facilitate response to high prices

versus the utility. There are, however, higher upfront costs for installation of this

technology as of right now.

One issue is that certain industries that have retrofitted to greener technologies do

not benefit as much from these DR programs. In a sense, incentive-based DR that

focuses on large consumers may decrease the benefit of greening existing technologies or

retrofitting. Consumers who do not contribute to peak load because they don’t have, for

example, their AC running or don’t have an AC unit whatsoever, are not compensated.

Under price-based demand response, the utility does not pay a consumer to reduce

demand. The consumer reduces demand to save money. Under direct control the

incentive is to reduce a lot of demand under certain conditions and to be rewarded for

reducing peak load. With the price-based system the incentive is calculated by looking at

the cost of current consumption (regardless of the level) and determining the benefit of

reducing energy usage. All in all, the role of direct control DR programs seems to be

shifting from contractual agreements whereby a utility has the right to shut down power

to more automated and consumer friendly services. Ultimately, large-scale

implementation of demand response programs will require a change from utility run

programs to consumer run programs.

Price Based Programs

There are many different types of pricing systems that can be used to lower

demand by providing consumers more accurate pricing information. As was already

20
Kiliccote, S., Ann Piette, M., Mathieu, J., Parrish, K. “Findings from Seven Years of Field Performance
Data for Automated Demand Response in Commercial Buildings”, Lawrence Berkeley National Laboratory,
2010, Page 6
 Levine 12

stated, current pricing schemes are averaged so that consumers pay an average cost.

Demand and supply for electricity fluctuate depending on the time, day, and season of the

year. By providing more accurate information on prices, consumers will be incentivized

to use less energy when prices are high. For example, information feedback programs

alone have proven to reduce aggregate demand from consumers. One study done by

Hydro One in Canada, found that “customers reduced their electricity consumption by 6.5

percent based on information provided through an in-home display21.” The three types of

price-based programs that will be discussed in this paper are Time of Use (TOU), Critical

Peak Pricing (CPP), and Real Time Pricing (RTP) or Dynamic Pricing.

Time of Use Pricing (TOU)

Time of Use Pricing is the most complicated form of the three programs and

studies have shown that due to this, low participation and consumer satisfaction may be

the result. Time of Use pricing offers consumers the option to pay different rates

depending on the time of day, day of the week, and season of the year. Under this

scheme, consumers must be dedicated to checking peak prices and responding to them

accordingly. However, the amount of work needed to do this is high and the benefit is

low. One study done by Resource Insight, Inc found that shift in demand for TOU can be

minimal – in their study, “The residential TOU program participant is estimated to shift

3.52% of on-peak usage to off-peak in the summer period (June to September) and 1.88%

during the non-summer period (October to May)22.” This shift in energy usage is

minimal and not worth the investment to start the program. A PowerChoice Pilot study

21
Davito, B., Tai, H., Uhlaner, R. “The Smart Grid and the Promise of Demand-Side Management”,
McKinsey, Page 40
<http://www.mckinsey.com/clientservice/electricpowernaturalgas/downloads/MoSG_DSM_VF.pdf>
22
Tracey, B., Wallach, J. “Peak-Shaving/Demand Response Analysis: Load-Shifting by Residential
Customers”, Resource Insight, Inc, June 12, 2003, Page 7
 Levine 13

with TOU rates surveyed those who had voluntarily signed up for the program. One

troubling aspect of TOU rates is that they can be complicated to understand and “survey

response revealed that it clearly took some effort for participants to remember when

changes occurred23.” As the pilot study found, manual load shifting under TOU rates

does “take effort and have non-financial costs to occupants24.”

Regardless of this study, TOU rates do not seem to be extremely popular; one

“national EPRI choice study found that under the most favorable conditions that about

20% of residential customers would opt-in to a TOU program25.” If programs are not

efficiently organized and “there are costs to transact, then the participation level is

expected to be about 5%26.” Some studies have shown, however, that TOU rates do help

consumers reduce their energy usage. Still, relative to RTP or even CPP pricing, TOU

rates seem overly complicated and time consuming. In fact, in the PowerChoice Pilot

study, 30% of participants reported decreased comfort and convenience and 10% reported

the change in lifestyle causing tension within the household27. Smart meters and

automated controls would fix these problems, but once automation is possible, have a

tiered system as opposed to dynamic pricing schemes still seems burdensome and

inefficient.

23
Lutzenhiser, S., Peters, J., Moezzi, M., Woods, J. “Beyond the Price Effect in Time-of-Use Programs:
Results from a Municipal Utility Pilot, 2007-2008”, Ernest Orlando Lawrence Berkeley National Laboratory,
August 2009, Page 69
24
Ibid, Page 72
25
Tracey, B., Wallach, J. “Peak-Shaving/Demand Response Analysis: Load-Shifting by Residential
Customers”, Resource Insight, Inc, June 12, 2003, Page 7
26
Ibid, Page 8
27
Ibid.
 Levine 14

Critical Peak Pricing (CPP)

Utilities have implemented CPP pricing through voluntary programs where

households agree to reduce their energy usage during peak loads. The Southern

California Edison utility has a CPP program that provides energy savings for households

that volunteer to reduce demand. CPP events – times when peak demand is becoming

unsustainable in the system or when the price to produce electricity at those peak levels is

very expensive – are called between 9 and 15 times per summer28. CPP pricing has been

proven to be an effective method for reducing demand during peak loads. One California

Statewide Pricing Pilot with 500 participants found an average peak-load reduction of

13%29. Another California study found that when participants were equipped with

“programmable communicating thermostats” that they reduced their energy usage by

“25% and 41% for 5 and 2 hour critical events, respectively30.” This study does note,

however, the principal problem with all the studies on different pricing schemes. There is

a self-selection bias due to the fact that individuals volunteer for the program and may be

more price sensitive than the total population. It is important to keep this in mind when

looking for successful large scale business models.

Another issue that may arise with Critical Peak Pricing is that the incentive to

participate in the program may decline. With the introduction of more energy efficient

appliances, distributed storage, other demand response methods, etc, the peak load may

be too low to properly incentivize participation in the program. This flaw is pertinent to

28
"SCE - Critical Peak Pricing." Southern California Edison. Southern California Edison, n.d. Web. 24 Mar
2011. <http://www.sce.com/b-rs/large-business/cpp/critical-peak-pricing.htm>.
29
“Time-of-Use and Critical Peak Pricing: Considerations for Program Design and the Role of Enabling
Technologies”, Energy Insights: An IDC Company, < http://www.aeic.org/load_research/docs/12_Time-of-
Use_and_Critical_Peak_Pricing.pdf>
30
Herter, K., McAuliffe, P., Rosenfeld, A. “An exploratory analysis of California residential customer
response to critical peak pricing of electricity”, Energy and Resources Group, University of California at
Berkeley, October 7, 2005.
 Levine 15

all incentive-based programs as the more successful they are in reducing demand, the

lower the incentive they can offer, and the lower the demand would be to participate in

them.

Real Time Pricing

Real Time Pricing or Dynamic Pricing is proving to be the most viable, efficient,

and economical option. As the Brattle Group has stated, “Real-time pricing in all hours

is the most efficient…it achieves the optimum level of consumption in high-priced

hours31.” When compared to Critical Peak Pricing, which seems to be a good pricing

option, RTP has more savings. In a paper written by Daniel Violette and Rachel Freeman

at Summit Blue Consulting, their model found that “with the standard RTP program,

savings are about 3.5 times those in the scenario with the critical peak pricing program,

and similarly, savings in the scenario with the critical peak pricing program are

approximately twelve times those with only the callable DRR programs32.” In the full

RTP Scenario, they found that “97% of the cases showed savings.33”

Other trials have been conducted throughout the country. In Los Angeles, “The

Los Angeles Department of Water and Power (LADWP) saw electric consumption

reduced by more than 5 percent across its grid since installing the test-case smart meters.

A 14,000GWh reduction if implemented across all of California34.” In Florida, another

real-time pricing system was implemented by Gulf Power, which “achieved a 22%

31
Newell, S., Madjarov, K. “Economic Evaluation of Alternative Demand Response Compensation
Options” The Brattle Group, October 13, 2010, Page 17
32
Violette, D. Freeman, R. “Demand Response Resources (DRR) Valuation and Market Analysis: Assessing
DRR Benefits and Costs”, Page 7
33
Ibid, Page 6.
34
"Ambient: Smart Grid: Demand Side/Direct Load Control." Ambient. Ambient, n.d. Web. 24 Mar 2011.
<http://www.ambientcorp.com/smartgrid_greener_dsm.html>.
 Levine 16

reduction in average demand during high price periods, and recorded 96% customer

satisfaction with the program35.” ERCOT’s real-time pricing plans deliver over 400 MW

of curtailable load36.

The advantages of price-based systems are numerous, especially when coupled

with automated control. First, they react to supply and demand much better than

incentive programs can. For example, with more energy efficient appliances, peak

demand may fall. Incentive programs will be able to pay less for reductions in demand.

Second, incentive programs may actually de-incentivize the upgrading to new energy

efficient appliances. Consumers can save money by reducing energy usage without

changing to energy efficient appliances. Real time pricing, when combined with

automated controls, may help promote smart green appliances. These appliances would

be able to react to spikes in demand, for instance, on hot summer days by cycling off and

doing so in a way that will not inconvenience the consumer. Essentially, real-time

pricing with automation changes the equation: small energy savings can be justified by a

consumer because the cost to implement is extremely low.

Smart Meters: An Overview

Smart Meters are essential to modernizing our grid and are a key component to

the Smart Grid of the future. Smart Meters are capable of two-way communication

between the consumer and utility, which traditional meters are not. Traditional meters do

not provide data in real time, whereas smart meters would provide utility companies with

real time supply and demand information. Another issue with traditional meters is that

35
Ibid.
36
Wattles, Paul. “Demand Response in ERCOT”, Good Company Associates. <
http://www.goodcompanyassociates.com/files/manager/demand_response_in_ercot__paul_wattles.pdf
>
 Levine 17

they become less accurate over time. Smart meters can provide real-time pricing

structures, automated controls with smart appliances, and online data on price and

consumption. This new technology is starting to take off. According to McKinsey’s

report on Smart grid technology, “U.S. utilities alone have committed to the purchase of

over 40 million smart meters over the next five years37.”

Source: NETLE Modern Grid Strategy: Powering our 21st-Century Economy. “Advanced Metering Infrastructure”, Conducted by the
National Energy Technology Laboratory for the U.S. Department of Energy, February 20098, Page 7.

Table 2: Smart Meter Versus Electromechanical Watt Meter

Smart Meter Electromechanical Watt Meter
Time-based Pricing Calculates monthly total energy usage
Consumption data for consumer and utility
Net Metering
Loss of power and restoration notification
Remote turn on/turn off operations
Demand Response
Energy Prepayment
Power Quality Monitoring
Communication with Smart Appliances
Source: NETLE Modern Grid Strategy: Powering our 21st-Century Economy. “Advanced Metering Infrastructure”, Conducted by the
National Energy Technology Laboratory for the U.S. Department of Energy, February 20098, Page 7.

The implementation of the Smart Metering and Advanced Metering Infrastructure

(AMI) is a smart investment. To do so “across the US would cost about $26 billion and

37
Davito, B., Tai, H., Uhlaner, R. “The Smart Grid and the Promise of Demand-Side Management”,
McKinsey, Page 42
<http://www.mckinsey.com/clientservice/electricpowernaturalgas/downloads/MoSG_DSM_VF.pdf>
 Levine 18

the utility operational savings would cover anywhere between 50% and 80% of this

cost.38” Furthermore, “long-run generation, transmission, and distribution system capital

savings” could amount to $35 billion.39 This, along with roughly $5 to $10 billion per

year in reduced electricity prices would make the benefit/cost ratio very favorable at

4:140. Smart Meters alone cost around $250, including installation and integration into

the utilities system41. To install a Home Area Network, which would be capable of

automating energy usage like cycling off AC units when energy prices are high, costs

another $330. Like computers, it seems reasonable that this technology will become

increasingly more affordable.

The benefits of Smart Metering are extensive. There are economic benefits to

utilities and consumers. In addition, environmental and social benefits could be

significant, especially with the integration of renewable energy sources. The consumer

can benefit simply from the installation of Smart Metering and an in-home display.

Advanced Metering Infrastructure with easily accessible information feedback

mechanisms “facilitates greater energy efficiency since information feedback alone has

been shown to cause consumers to reduce usage42”. Smart Meters can allow consumers

to track, monitor, and change their energy use patterns to save money. Consumers will

be able to notice, for instance, that they are paying for unnecessary energy usage while at

38 st
NETLE Modern Grid Strategy: Powering our 21 -Century Economy. “Advanced Metering
Infrastructure”, Conducted by the National Energy Technology Laboratory for the U.S. Department of
Energy, February 20098, Page 21.
39
Ibid.
40
Ibid.
41
Kanellos, Michael. "Dissecting the Cost of the Smart Grid." Greentechmedia. Greentechmedia, 27 OCT
2010. Web. 26 Mar 2011. <http://www.greentechmedia.com/articles/read/dissecting-the-cost-of-the-
smart-grid/>.
42
Ibid, Page 7.
 Levine 19

work. Simply having information which shows consumers the dollars attributed to

inefficient energy usage will help change habits.

It should be noted, however, that the implementation of Smart Meters may

increase bills for some consumers. Old meters tend to degenerate and provide lower,

inaccurate readings. In addition, Smart Metering can allow for more effective TOU

pricing and RTP schemes, which would immediately reduce costs for some and raise

costs for others.

Benefits of Smart Metering: Utilities, Consumers, and the Environment

Utilities stand to gain from the implementation of Smart Meters as well – “AMI

helps the utility avoid estimated readings, provide accurate and timely bills, operate more

efficiently and reliably, and offer significantly better consumer service43.” AMI would

help reduce power outages and improve the reliability of the grid. This could potentially

save billions every year. Installing AMI also helps improve capital allocation. As it

stands right now, utilities often need to pay for increased transmission and power plants

to have enough energy for only 1% of the time. Paying interest on capital investments

that produce electricity only 1% of the time is not a worthwhile investment.

One business case study of a Southeastern utility company found that with the

implementation of AMI technologies, “costs of billing research are now being reduced by

25%, 95% of field service orders for special reads have been eliminated, a 30%

improvement in theft detection and recovery is being realized, and trouble call handling

43
Ibid, Page 21.
 Levine 20

costs are being reduced by 25%44.” It is interesting to note that “The Netherlands

government has announced its intent to replace all 7.5 million electric meters in the

country by the end of 201245.”

Environmental benefits of Advanced Metering also cannot be overlooked. In

combination with renewable resources and demand response programs, smart metering

can help reduce carbon emissions significantly. Smart Meters will be essential for the

effective integration of Plug-in Hybrid Electric Vehicles (PHEV) into the electric grid. In

the future, these vehicles could pose an enormous benefit and risk to the electric system.

For example, without “smart” technologies, PHEV may substantially increase peak

demand when people come home from work and re-charge their vehicles. With smart

grid technologies, however, users may be able to feed electricity back into the electric

grid to help meet peak load demand. Their PHEV may be programmed to charge during

low-demand hours. Smart meters will also be necessary for distributed storage and

residential power generation. Finally, smart meters will help increase the energy

efficiency of homes through automated controls.

One program that has already been created to automate demand response is

known as OpenADR. California Public Utilities Commission (CPUC) has been

monitoring OpenADR results throughout the state. In 2006, 1MW of peak load reduction

was realized. In 2008, that number had risen to 53.8 MW. One study in California tested

the benefits of Auto-DR in large industrial and commercial buildings and found an

44
Tram, Hahn, and Ash Chris. "Meter Data Management System - What, Why, When, and How ." Energy
Pulse. N.p., 29 July 2005. Web. 24 Mar 2011.
<http://www.energypulse.net/centers/article/article_display.cfm?a_id=1061>.
45 st
NETLE Modern Grid Strategy: Powering our 21 -Century Economy. “Advanced Metering
Infrastructure”, Conducted by the National Energy Technology Laboratory for the U.S. Department of
Energy, February 20098, Page 21.
 Levine 21

“aggregated savings of 3% during the moderate period, and 8% during the high price

period46.” Perhaps more importantly, however, “most of the buildings” in the study

reported “no complaints or comfort issues.”

Consumers – from large industrial users to residential customers – stand to benefit

from the implementation of smart meters. Many of the benefits previously listed, like

those that pertain to PHEVs and distributed storage, would benefit many consumers.

Perhaps the biggest benefit to consumers that smart meters offer is a better glimpse into

their own energy usage. Information alone can help consumers reduce energy usage and

costs. Furthermore, once smart meters are coupled with home area networks, even more

energy savings can be effortlessly realized through automated energy controls.

Road-blocks to Smart Metering Installation

Despite the enormous potential savings and benefits of Smart Metering, state

regulators have not always found the installation of these devices to be necessary or

worthwhile. In Baltimore, Maryland state regulators have denied BG&E’s plan to install

1.2 million smart meters47. State regulators wrote that "the Proposal would not, in and of

itself, enhance the electricity transmission grid or the Company's distribution 'backbone,'

and therefore it doesn't justify the proposed customer surcharge by BG&E48." Consumers

in Baltimore also balked at the idea of having to pay for the implementation of the Smart

Metering system, and there were arguably certain aspects to BG&E’s original plan that

46
Piette, A. M., Watson, D., Motegi, N., Kiliccote, S., Linkugel, E. “Participation through Automation: Fully
Automated Critical Peak Pricing in Commercial Buildings” Lawrence Berkeley National Laboratory
47
Tweed, Katherine. "Baltimore Gas & Electric's Smart Meter Plan is Rejected." Greentechmedia.
Greentechgrid, 22 June 2010. Web. 24 Mar 2011.
<http://www.greentechmedia.com/articles/read/baltimore-gas-electrics-smart-meter-plan-is-rejected/>.
48
Ibid.
 Levine 22

were unfavorable. For instance, AARP Maryland was against the plan because the utility

not only passed the installation of Smart Meters onto the consumer, but also because the

Smart Meters did not come with in-home displays (which would be extremely important

in relaying information-feedback)49. It does make sense for the utility to take up much of

the cost for the implementation of smart metering infrastructure. Utility companies stand

to benefit from reductions in business operation and management costs with new and

better technologies. Therefore, the utility should be expected to put up much of the initial

costs. If the regulatory structure changes to incentivize utilities to reduce demand, then

utilities would stand to benefit not only from a business operations stand-point, but they

would also gain revenue from the investment. In this case, the entire cost should be

undertaken by the utility.

In order for Smart Grid implementation to occur, state regulators need to see the

value of Smart Metering. Besides the obvious fact that some regulators, like the ones in

Maryland, may not see the benefits of the Demand Response, other hurdles still remain.

One obstacle that must be overcome is the valuation of old metering systems. “The

National Association of Regulatory Utility Commissioners (NARUC) in February of

2007 adopted a resolution calling for Commissioners to recognize the need to consider

faster regulatory depreciation of existing meters and metering systems (AMI 19).” An

example of this would be a $60 residential traditional meter depreciated over 30 years

would be worth $20 dollars after 20 years. If the utility wanted to install an Advanced

Meter instead of retrofitting the old meter, it would incur a “loss.” This “loss” adds to the

49
Peters, Joey. "Consumers Wary of Smart Meters." Consumers wary of smart meters. Stateline, 23 July
2010. Web. 24 Mar 2011. <http://www.stateline.org/live/details/story?contentId=500546>.
 Levine 23

cost of the advanced meter significantly50. Smart Metering technologies raise the

opportunity costs of retaining old metering systems. These meters and systems should

devalue at faster rates.

Another issue is the reluctance for regulators to approve dynamic pricing51.

Dynamic pricing would arguably “hurt” certain consumers that consume a lot of energy

at peak times. Some have also argued that dynamic pricing would disproportionally hurt

low-income families as they would be less able to reduce demand for electricity. Both

arguments are relatively weak. In the first case, just as keeping the current system

benefits those who consume large amounts of energy, it also hurts those who pay a higher

price than they should because they consume very little energy. In the case of low-

income families, government subsidies and non-profit organizations can certainly help

with dynamic pricing just as they do now with averaged pricing. The final regulatory

issue is that regulators see AMI and DR investments as utility programs and so they force

out third-party companies from the market52. This obviously hurts the development of

DR and AMI products. Non-utility companies, especially those that specialize in IT and

internet software programs, should be allowed to vie for market share of demand

response technologies.

An example that highlights the current market inefficiency is the 3M

Programmable Communicating Thermostat (PCT) made by Global Power. Its retail

value is $99, which is about 40% of the total cost that utilities currently pay for their

50
“Deciding on ‘Smart’ Meters: The Technology Implications of Section 1252 of the Energy Policy Act of
2005” <http://www.eei.org/ourissues/electricitydistribution/Documents/deciding_on_smart_meters.pdf>
Page 39.
51
Levy, roger. "Smart Grid: Demand Response." Message to joshual@princeton.edu. 23 MAR 2011. E-
mail.
52
Ibid.
 Levine 24

direct load control programs53. Utilities have no incentive to work with third-party

companies and so the market for DR products is limited and has higher costs. Non-utility

companies should be allowed to run DR programs and be adequately compensated for

them. Just as utility DR programs in some states can get paid for reducing peak loads, so

too could non-utility DR programs. Utilities should also be incentivized to work with

companies like Global Power. This of, course, requires that they receive some sort of

return on investment for reductions in energy consumption. Utilities will be reluctant to

invest heavily in technologies, like the 3M PCT made by Golden Power, when the

foregone conclusion is lower electricity consumption and thus lower returns on

investment.

53
Ibid.
 Levine 25

Principal Findings

Real-time pricing with automated Demand is the future of Demand Response.

Providing consumers with real time pricing and enable them to control their energy usage
through real-time pricing seems to the most effective and sustainable demand response
method. Further research needs to be conducted in this area, but a switch from the old
pricing scheme to this market-based scheme should take place.

Utilities should look to implement consumer-centered programs that give the

consumer autonomy over energy usage.
For demand response to become implemented on a large scale and the business model to
be effective, consumers need control over their electricity usage. With new smart
metering technologies, consumers can now control their energy usage for low cost. This
new technology is superior to contractual utility programs whereby consumers give the
utilities the right to regulate their energy use for a given amount of hours per year. For
this loss of autonomy, utilities provide incentives to their customers. This is
unsustainable, however, as the demand curve flattens and the incentive to join these
contractual programs lowers. Smart meters allow consumers to regulate energy usage
through automated online controls. With this technology, the cost to the consumer to
implement electricity saving measures is small and consumer autonomy is retained.

Regulators need to re-evaluate the opportunity costs of maintaining our current

system. Slow devaluation of old meters, for example, hampers the implementation
of Smart Metering. Thirty year devaluation accounting methods over-value old meters.
The increasing advances in technology make old ones quickly irrelevant.

Direct Control Demand Response needs to be consumer friendly and should be

automated so that consumers can manually override automated settings. Although
direct control programs have a lot of promise and can drastically reduce peak loads, they
can also be inconvenient and burdensome. However, with OpenADR or similar
programs, it is possible for inconveniences to be removed and easily attainable benefits
achieved.

State regulators should endorse “negawatt” return structures that compensate

utilities for reduction in energy consumption.
Under the current regulatory structure, demand response can result in reduced demand
and thus revenues. In order to incentivize utilities to reduce demand, a compensatory
regulatory structure needs to be endorsed. This structure should be market based. At
peak hours, demand response can reduce demand and bring down the costs to supply
electricity significantly. The benefits of demand response can exceed the costs of
generation. In cases which demand response provides an economic benefit to the system,
system operators should compensate demand response providers by paying them the
market price for generation.
 Levine 26

Incentivize non-utility involvement in demand response and advanced metering

infrastructure. The market for DR and AMI has not fully developed because of state
regulations that often view DR as a utility program. Utilities should have the incentive to
work with other companies if those companies can help provide the utility a return on
investment. By paying utilities to reduce energy usage, they may be more willing to
invest in retail products like Smart Thermostats which will reduce their consumer’s
electricity usage.
 Levine 27

Appendix A
Demand Response Load Curves

Explanation of Graph

The load charts above were provided by Great River Energy in Minnesota. The blue line in the
chart represents August 4th 2010. The green line represents July 8th 2010. The y-axis is
measured in Megawatts and the x-axis is time. On August 4th 2010, higher temperatures
resulted in increased AC usage at all hours of the day relative to the July 8th line. At around
11am on August 4th the load curve started to pull away from the July 8th load curve. At around
12pm on August 4th Great River Energy decided to initiate its direct control load management
program. This program cycles off AC and water heating units randomly over a set period of
time. Since all units do not cycle off at the same time, the load curve falls over a period of
roughly an hour, instead of immediately dropping. The program ends at randomized times as
well and so the load curve rises slowly after roughly 8pm.
 Levine 28

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