Balancing grid investments with consumer needs

Pricing models likely to change
Tools

People and businesses need electricity for just about everything, and they purchase it on a 24/7 schedule. They want it to be as inexpensive as possible, but even in the age of the burgeoning smart grid, the grid and its infrastructure is aging.  New investments need to be made in order to keep the lights on, but costs need to remain low. This is high-wire act that requires balancing customer needs (low prices) with engineering needs (healthy infrastructure) in order to sustain reliable generation.

And, unfortunately, it's not really debatable.

 "We have to make the investment. I believe that's unavoidable," said Paul Koonce, CEO of Dominion Virginia Power, speaking at a recent EEI conference. "And as a result, the customers are going to have to compensate us for that investment, even those that are taking advantage of on-site generation."

But asking customers to pay higher rates for new infrastructure seems to be at odds with utility and regulatory initiatives such as net metering, demand response, and distributed generation, which are designed to get customers to spend less and use energy more wisely. It's certainly a difficult predicament, given the energy industry's tangled regulatory web, which limits profitability and takes a hard look at any grid expenditures that lead to cost increases to customers.

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It's clear then that pricing issues are going to be a key regulatory focus going forward and have a significant impact on how the smart grid evolves in the future. ___________________________

Still, new pricing models have a role to play in drastically change the energy use landscape.

"I think this collaboration between the utility and the customer with respect to grid modernization can go to another level because of the amount of information available on almost a minute-to-minute basis," said Lloyd Yates, executive vice president of customer relations at Duke Energy.

Can a smarter grid lower costs?

Fundamentally, the smart grid has allowed for an influx of available information, which has made possible flexibility in these pricing models. But the bottom line holds that regulatory design rates with an eye on keeping the lights on, not for peak profit or investment potential.

"Rates are set to provide peak reliability," Koonce said. "You allocate the cost based on who causes the peak on a system."

This burden has historically fallen on residential customers, who drive the majority of the load. It's a model that is likely unsustainable. Policy changes must be made to suitably marry investment and cost allocation.

"I think if we can deal with some of these public policy issues around rate making, that is essential to allowing us to look after the interest of our shareholders who are making a very substantial investment and to partner with the customer who wants to embrace the technology," Koonce added.

Another likely possibility, however, is that investments made into the grid have the potential to actually bring down rates over the long-term, simply by boosting efficiency.

"While we are talking about substantial capital investment, I think there is going to be an offset in the O&M [operation and management] expense that is also a part of [the customer's] rate because I think we will be able to do things with much more precision, much more proactively," Koonce said.

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Asking customers to pay higher rates for new infrastructure seems to be at odds with utility and regulatory initiatives such as net metering, demand response, and distributed generation, which are designed to get customers to spend less and use energy more wisely. ___________________________

It's also possible that efficiencies alone might not guarantee that costs will go down -- something that regulators, customers and utilities must all keep in mind.

"I think customers are going to see cost increases," Yates countered. "But those increases will be less than they would have been had we gone back with the same grid."

Breaking regulatory barriers to pricing flexibility

All in all customers want freedom of choice and they want to enhance their operations and reduce their costs.

"Customers are looking to take advantage of the different offers from different suppliers, around different pricing mechanisms and different deals," said Stephen J. Woerner, Senior Vice President and COO at Baltimore Gas & Electric

On the other hand, utilities want to produce a reliable grid and still pay the bills and (in some cases) shareholders. It's clear then that pricing issues are going to be a key regulatory focus going forward and have a significant impact on how the smart grid evolves in the future.

"Until [pricing issues] are addressed, there is going to be this constant friction that [utilities] are going to have," cautioned Koonce.

Whatever model a utility chooses to go with, it's clear that something must – and will – change, and soon.

"If you think about the future 10 years from now, you'll have different pricing mechanisms, different tariffs, different price points," Yates concluded.