Promises and Pitfalls of Smart Grid - Smart Grid (R) Evolution: Electric Power Struggles - page 25

peak pricing,” where the time periods are set but the rates of the periods can vary with
the market price; and “real-time pricing,” where the retail rates reflect the market rates
(Jones and Zappo 2014 ). Each of these different rate-pricing structures aims to better
link consumers' rates to the actual cost of electricity. Although these pricing mechanisms
have been widely promoted by economists and used by many industrial customers, they
remainlightlyusedintheresidentialsector.Whilemanysmall-scaleexperimentshaveused
different pricing tools to model consumer behavior, many public regulatory commissions
remain wary of approving dynamic price-rate structures. While states with restructured
retail markets offering retail choice offer dynamic pricing to customers and some large
utilities have residential pricing plans with high enrollments, most residential customers do
not participate in this type of program.
Although the cost of producing electricity varies with the time of day, most residential
electric customers in the United States and many other places still pay a fixed charge
per kWh and receive a monthly bill from their utility. A smarter grid could modernize
this system and give electricity consumers information on electricity generation costs. In
this scenario, future households and businesses manage their electricity use and may save
money by making more informed choices about electricity use. Smart grid could also
automatically control appliances that can be programmed to respond to price signals. For
example, an internet-connected refrigerator in a smart grid system could be programmed
to cycle its compressor when electricity prices are lowest, or be remotely controlled by the
utility to help reduce peak demand.
A smart grid could also offer reduced systemwide costs. These reductions in system
costcouldcomedirectlyfromefficiencyimprovements,frombettermanagementofsystem
externalities including environmental losses (discussed in Section 2.1.3 on improved
environmental quality), from self-healing (discussed in Section 2.2 ) , or from lower
generation costs due to better use of resources or reduced peak demand.
Economic Benefits for Utilities
Smart grid promises multiple economic benefits for incumbent utilities, including reducing
labor costs, enabling more sophisticated demand management, improving billing accuracy,
enhancing customer engagement, and allowing more efficient use of capital resources.
Smart grid also has potential to provide economic benefits associated with deterring
electricity theft, increasing returns for infrastructure investment, and reducing costs of
recovery after disruptions. By linking electricity generation to electricity demand in novel
ways, smart grid creates new market opportunities for responding to consumer demands.