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Some Caveats on Obama’s Smart Grid Funding

The business case for a smarter grid needs to be widely accepted–and larger-scale investments must be made.
October 27, 2009

Today President Obama announced what the White House is calling “the largest single energy-grid modernization investment in U.S. history.” It’s actually anything but “single”–it’s $3.4 billion in stimulus funds to help pay for a collection of projects scattered around different utilities and companies. (The White House managed to give something to projects in 49 out of 50 states.) The money will pay for, among other things, several million so-called “smart meters” that allow customers to manage their electricity use. Consumers will be able, for example, to take advantage of dynamic pricing and trim consumption at expensive peak times. They can save money while helping utilities make the grid more efficient and reduce emissions.

The move should prod utilities to finally start offering the dynamic pricing – cheapest at night, with differing prices at various times of day – needed to make the most use of the technology. “By giving electric utility systems across the country the tools that allow them to realize billions of benefits from dynamic pricing, they are hoping to induce the states to modernize their retail pricing policies,” Peter Fox-Penner, principal with the Brattle Group, a consultancy in Cambridge, MA, told me. “There are signs this inducement will cause a historic shift in retail utility pricing policies, but the outcome is not fully visible yet.”

The stimulus dole-out is surely going to be very helpful, as far as it goes. The White House says that the expenditures will, taken together, “reduce peak electricity demand by more than 1,400 [megawatts], which is the equivalent of several larger power plants, and can save ratepayers more than $1.5 billion in capital costs and help lower utility bills.” If true, this is a remarkable testament to the power of investing in smart grid and other energy-efficiency technologies. (You can find a good example of such an installation in Boulder, CO, here, a good recent analysis of the issues here, as well as a longer piece about building a green grid here.)

But there are a couple of caveats.

First, the White House move does not change the fundamental rationale behind most utility investments. Today it’s often too easy for utilities to make a business case for building new power plants to burn more energy in support of wasteful consumption, rather than installing software and smart meters and control systems geared towards saving a similar amount of energy–even though it is very possible for them to make such a case. If this thinking had really changed–meaning, if efficiency-mindedness was really top-of-mind in utility boardrooms and state regulatory agencies–no federal stimulus money would be needed to install these kinds of technologies. Instead, utilities would already be installing them–based on the documented energy and dollar savings they’d be projected to realize.

The second caveat is that, structural issues aside, $3.4 billion is not very much money (even if, as the White House says, the $3.4 billion is being matched by $4.7 billion in private investment). In fact, this total sum ($8.1 billion) is still only about two percent of where we need to be–that is, if you believe Obama’s fellow Nobel Peace Prize laureate, Al Gore. Just last summer, Gore made a fairly sensible call for a unified national smart grid that would move power from remote, renewable sources of wind and solar power and, in particular, increase the efficiency of electricity use through smart meters and other technologies installed across the nation, to move beyond today’s scattered projects. The analysis by Gore’s people put the tab for such a grid at $400 billion.

“We’re on the cusp of a new energy future,” Obama said today. True enough, but the operative word is still “cusp.”

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