Only people can make the smart grid smart

Central Load Dispatch Center in Seoul

UCLA's Matthew E. Khan gives his view on how Smart Grid success is dependant on smart consumers.

Futurists expect the smart grid will change how we use electricity. But it depends. The theory is that as consumers receive real-time information about the cost of electricity and their consumption, and utilities introduce dynamic pricing linked to demand, people will respond by reducing their use and shifting it to times of day when electricity is cheaper. They'll reschedule flexible activities (such as when to do a load of wash or recharge an electric vehicle), and cool their houses more during the cheaper morning hours so they can turn their air conditioning down during the pricier afternoons.

It sounds good on paper, but I worry that the smart grid's backers have oversold its across-the-board benefits. How it shapes costs and consumption may vary from city to city. And how well it delivers on its promise will depend significantly on states having the political will to regulate electricity pricing as needed. Not everyone, and every city, will respond in the same way, or benefit equally.

Consider St. Louis, Missouri. This city's residential, industrial, and commercial electricity prices are well below the national average. In hot, humid St. Louis, the smart grid will inform a household of the extra cost when someone lowers the thermostat, just like it will elsewhere. But as long as electricity continues to cost the same regardless of when people use it, they may shrug off data about their consumption and crank the air conditioner because the price of staying cool is low, and doesn't change. In San Francisco, on the other hand, a city where electricity prices are higher and per capita consumption is lower than in St. Louis, people may be quicker to respond to signals from the smart grid about their use.

Stanford economist Frank Wolak has shown that consumers are indeed highly responsive to energy price incentives. In one novel study, a group of households in Washington D.C was alerted that a "Critical Peak Price" period would be in effect the next day, during which electricity prices would be five times higher than usual. The households responded as you'd expect — by slashing consumption by 15% to 20% during the high-price period. Households with "smart" thermostats that made it easy to throttle back air conditioning during peak pricing reduced their use the most.

One concern about dynamic electricity pricing is that it could disproportionately affect the poor who, while being highly price sensitive and likely to shift consumption when they could, would be less able to absorb price peaks. Regulators concerned about possibly price gouging by utilities and the disproportionate impact on the poor might therefore hesitate to embrace dynamic pricing. But this shouldn't be a road-block; it's straightforward to design pricing systems that, while raising prices at certain times, could reduce a household's overall costs.

How the smart grid affects consumption will depend on the signals it sends, and the sensitivity of consumers to those signals. Introducing dynamic pricing will be an essential step in changing consumption behavior. Given the scale and cost of smart grid initiatives, I'd advise that dynamic pricing and the associated smart-grid capabilities be rolled out first in the subset of cities, such as San Francisco, where electricity prices are high, and the population has shown a willingness to conserve. The results of those experiments will inform the effective introduction of smart-grid and dynamic pricing initiatives more broadly.

The smart grid represents an astonishing array of technologies. But the smart piece, ultimately, is human intelligence — the wits to put it to wise use.

Matthew E. Kahn is a Professor at UCLA's Institute of the Environment, the Department of Economics and the Department of Public Policy. His latest book, Climatopolis: How Our Cities Will Thrive in the Hotter World, was published by Basic Books 2010.

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