Smart Meters Need Effective Electricity Pricing to Deliver Their Full Benefits

Co-authored by Kristina Mohlin, Economist

walletSmart meters, which provide detailed electricity use data throughout the day, are a critical piece of a smarter, more resilient 21st century energy system. But they are not a cure-all for modernizing our antiquated power grid.

In Matthew Wald’s recent New York Times article, entitled “Power Savings of Smart Meters Prove Slow to Materialize,” he argues that smart meters have failed to produce measurable savings. And we agree – but not because smart meters themselves have failed. Rather, most customers with smart meters don’t have access to people-powered, or time-variant, electricity pricing, which creates opportunities to save money. This is a missed opportunity for customers, utilities, and the environment.

Time-variant pricing better reflects electricity costs

Throughout most of the country, the price paid for residential electricity is the same regardless of the time of day when it’s consumed. This arrangement is a byproduct of an earlier era, one in which electricity information was difficult to convey and the actions of individual customers was impossible to gauge in real time. In practice, electricity is actually dirtier and more expensive to produce and transmit at certain times of the day, particularly when everybody wants it – for example, at 6pm during a heat wave when customers are cooling their homes. Also, during this high-demand time, energy prices spike and electric utilities flip on expensive and dirty fossil fuel “peaker” power plants to meet energy demand. From an economic point of view, it would be more efficient for electricity used at these peak demand times to have a higher price.

Most industries – from automobiles to food –have fully embraced the benefits of varied pricing for premium items or services. The utility industry is one of the few that has not. Charging the same rate for electricity at all hours is like charging the same price for filet mignon and ground chuck. Of course, we can all agree that pricing meat in this manner is inefficient, resulting in an inevitable shortage of filet mignon. Flat electricity rates work the same way, causing customers to over-consume the most expensive, polluting power. The result: higher bills for everybody.

Time-variant pricing attempts to make the true cost of electricity transparent to customers. Without smart meters, utilities have no idea what time of day people are using electricity and are therefore unable to apply time-variant pricing. Since reducing energy demand helps utilities avoid purchasing expensive peak electricity and investing in extra capacity to meet rising demand, smart meters save utilities money as well. Finally, as far as customers are concerned, there is no incentive to change the way they use electricity without time-variant pricing.

Lost opportunity for customers to save on bills

In many states, even though utilities have the ability to offer time-variant pricing, they simply don’t for a number of reasons – among them are legislative barriers and concerns that this type of pricing might negatively affect low-income customers. But, even in states where time-variant pricing is available, adoption is low due to a lack of education and outreach.

The way in which these programs are structured also affects the adoption rates. As we wrote in an earlier blog post, many of the utilities offering time-variant pricing ask customers to opt in to the program, rather than setting it as a default from which customers can opt out. It turns out that this type of choice structure invariably leads to low adoption rates – not just with time-variant pricing, but with a host of other types of decisions, such as organ donation. Even in California where several utilities offer time-variant pricing and smart meters are widespread, very few customers have signed on to these programs.

This is unfortunate, as NYT’s Wald illustrates with two examples, given that customers who have smart meters alongside time-variant rates can indeed save money. He talks to Karen Taubman, an Illinois customer who knocks nearly 20 percent off her bill every month, and Joe Godinsky, also from Illinois, who’s “convinced he’s saving money and convinced his parents to put their house on a real-time rate, too.”

But very few customers in the country are as lucky as Ms. Taubman and Mr. Godinsky. Some might still have standard metering technology, which only measures electricity use for the entire month, leaving them oblivious to the periodic nuances in electricity pricing that could be saving them money. And, even those who have smart meters will have little incentive to respond to the valuable information their meters provide unless their utility companies offer pricing schemes that vary the price of electricity depending on the time of day it is used.

The rise in smart meter deployment is a great opportunity to realize savings both for the utilities and the customers by avoiding expensive and dirty peak time generation, thereby helping to decrease the average cost of each kilowatt hour of electricity sold and reduce harmful pollution. But this opportunity can only be realized by implementing time-variant pricing; smart meters alone won’t be enough.

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