Article Info Email to a friend Printer friendly

A report by Standard and Poor's¹ on October 14, 2008 suggested that regulated utilities may significantly adjust their spending estimates due to the current economic crisis but that “the adjustments will not be so much to reduce or eliminate the expenditures permanently as to defer them for some indeterminate period.” The article goes on to say that electric utilities have the need to invest in their infrastructure and cannot defer spending indefinitely due to aging assets.

These findings are based on a survey by Black & Veatch LLP that shows “perhaps as much as 60 percent of the generation, transmission, and distribution infrastructure is at least near the end of its service life, while in some cases 20 percent to 25 percent is past or well past its intended usefulness.”²

With the election of the Obama/Biden ticket yesterday, the energy policies proposed during the election campaign may provide some guidance as to how investments will be viewed going forward by the White House. In the “Barack Obama and Joe Biden: New Energy for America” fact sheet,³ the plans specifically call for investment in the Smart Grid and incentives for utilities to invest:

“Invest in a Smart Grid. Achieving these aggressive energy efficiency goals will require significant innovation in the way we transmit electricity and monitor its use. Barack Obama and Joe Biden will pursue a major investment in our national utility grid using smart metering, distributed storage and other advanced technologies to accommodate 21st century energy requirements: greatly improved electric grid reliability and security, a tremendous increase in renewable generation and greater customer choice and energy affordability. They will establish a Grid Modernization Commission to facilitate adoption of Smart Grid practices across the nation's electricity grid to the point of general adoption and ongoing market support in the U.S. electric sector. They will instruct the Secretary of Energy to: (1) establish a Smart Grid Investment Matching Grant Program to provide reimbursement of one‐fourth of qualifying Smart Grid investments; (2) conduct programs to deploy advanced techniques for managing peak load reductions and energy efficiency savings on customer premises from smart metering, demand response, distributed generation and electricity storage systems; and (3) establish demonstration projects specifically focused on advanced technologies for power grid sensing, communications, analysis, and power flow control, including the integration of demand‐side resources into grid management.”

In addition, the costs for implementing a Smart Grid are reduced by the recently enacted Energy Improvement and Extension Act of 2008⁴ that accelerates depreciation for investments in smart meters and smart grid systems by utilities, shortening the period from 20 years to 10 years.

Lawmakers allowed this change in depreciation rules knowing it would provide incentives for investment in smart metering and other Smart Grid components. If a utility were to go forward with an investment, it would provide a stimulus to the regional economy:

• Labor from entry level workers up to highly educated white collar workers
• Manufacturing for the equipment and installation equipment
• Retail to provide goods and services to the people working on the project

Just as Energy Policy Act of 2005 established that demand response is the official policy of the United States, the Energy Improvement and Extension Act of 2005 establishes that alternative energies and the Smart Grid are important and necessary components for defining our own energy future. Regulators will have to balance the economic stimulus of Smart Grid investments and President Elect Obama's interest in the Smart Grid against burdening rate payers with additional costs when money is tight.

The drivers for investment are shifting in response to the increase in unemployment, reduced demand for energy, and volatile commodity prices. The industry was faced with an immediate need to encourage consumers to use less energy. The costs to produce peak energy were skyrocketing and the costs to build peaking plants and delivery infrastructure to deliver power were adding to the concern. Today, the costs of fuels for generating peak energy (natural gas and fuel oil) have fallen so sharply that, at least temporarily, the cost of generating peak energy is tolerable. With the recent price volatility, no one can say with any certainty how prices will move in the future.

Also reducing the immediate need for demand response is the reduced sales of electricity, even after adjusting for weather. Consumers are conserving and have been for the last two years. The economic crisis will likely accelerate this reduction as fewer homes are built, fewer still occupied, and consumers are reducing their spending across the board due to uncertainty.

While customers are using less energy, a greater number of customers are not paying their utility bills. Utilities, under pressure from shareholders or municipal boards to collect revenues, are responding more quickly to missed/late payments. In general, customers prefer to keep up with their bills, even if money is tight. If customers don't pay, other customers make up the shortfall, further burdening the economy. A better path is to provide customers more control over their energy spending. Prepayment allows customers to pay for energy before it is used, and customers can time their payments to match their pay dates. Customers who are paid weekly can pay their utility bill weekly, avoiding the need to save some from each weekly paycheck to cover a full month's utility bill. Another benefit is customers have more timely information on their energy use. Most Smart Metering systems support prepay and back office improvements implemented in concert with Smart Metering remove inflexible rules built into old billing systems, allowing customers to pay as frequently as desired without having to be on an official prepayment plan. As more customers face difficulties in paying for their energy use, why not invest in systems to put customers in control of their energy use and spending?

As an alternative to shutting customers off when utility bills are not paid, Smart Metering allows utilities to limit customer usage to a level defined by customers or enough to run a few key appliances, such as some lights and the refrigerator, but not elective uses such as a big screen TV or air conditioner. Smart Metering systems with support for home area networks offer customers another option for controlling their bills—the ability to monitor their energy usage on a real time basis and control large loads automatically.

Prepay normally is discussed in terms of the residential market. However, when large company names such as Ford and General Motors are used in the same sentence with the word “bankruptcy,” utilities and regulators may want to extend discussions of prepay, remote connect/disconnect and load limiting to industrial and commercial customers. This can be done strategically or on a customer-by-customer using Smart Metering that relies on public networks for communications to avoid large, unpaid bills from commercial and industrial customers experiencing reductions in revenues.

Despite lower prices at the gasoline pump, Americans are still very interested in purchasing hybrids, PHEV plug-ins or the newly announced ENVI from Chrysler: demand continues to outpace supply. Prices for oil, natural gas, and gasoline will creep back up again because too much of our economic engine is based on using energy and we can't move that quickly away from oil and foreign oil dependency. We should enjoy the lower prices but at the same time, not let it deter us from investing in energy efficiency and alternative energies.

On May 3, 2007 in a testimony to Congress, Kurt Yeager, Executive Director of the Galvin Electricity Initiative and President Emeritus of EPRI remarked, "The biggest impediment to the smart electric grid transition is neither technical nor economic. Instead, the transition is limited today by obsolete regulatory barriers and disincentives that echo from an earlier era.” From UtiliPoint's experience, the opposite is also true—in areas where cost recovery and regulatory support is greatest, Smart Grid projects are moving forward.