Energy Beyond the Kilowatt-Hour



  • The transition to the smart grid could create challenges for utility providers, which stand to lose revenue if overall energy consumption decreases
  • Utilities have discussed new revenue-generating options including sales of smart-phone applications, flat rates based on square footage rather than kilowatt-hours, and additional fees for energy-draining appliances
  • Consumers have been slow to embrace the smart grid, possibly because it has been promoted from a utility-centric view

Brewster McCracken, executive director of the Pecan Street Project in Austin, hopes that someday the smart grid will be considered as integral to energy consumption as the Internet is to the consumption of knowledge.

The term “smart grid” is relatively new, though the basic technologies have been around for decades. At the core of the system is a smart meter, a more technologically robust version of the standard home electric meter, and other technologies that promote conservation and renewable energy sources. A smart grid demonstration project is underway in Austin as part of the Pecan Street Project, which itself is a partnership that includes utilities, the City of Austin, and the University of Texas at Austin.

Pecan Street’s smart grid project is part of an effort to upgrade the nation’s energy infrastructure with new technologies that promote conservation and renewable energy sources. At the consumer level, the goal of the initiative is to give customers more control over how they use electric power and how much it costs them, McCracken says.

Of course, conservation is more complex than simply pulling the plug on energy-draining electronics. The transition to a smart-grid system also creates hurdles for the traditional business model of utility providers, which bill their customers based on the amount of energy they use (measured in kilowatt-hours). For these companies, a decrease in overall consumption leads to a drop in revenue. Much as gas-tax revenues decreased as cars became more fuel-efficient, utility companies’ profits could be at risk unless the industry finds a way to adjust its current business model to accommodate smart-grid technology.

The Business of Conservation

Utility providers and third-party developers are discussing several options for new revenue streams, many of which involve developing new services and technologies that can be marketed to consumers and the private sector. But the fundamental obstacle, experts say, is that it is not yet cost-effective for utilities to reconfigure their business models and infrastructure to incorporate renewable energy technology on a large scale.

“For the [energy] producers of the world, there is no money in conservation,” said Juan Garza, president of advanced technology initiatives at NRG Energy, at a recent forum at The University of Texas at Austin. “If we can find a way for them to make money … then we can probably turn it around. But for the time being, the people that produce energy want to sell more of it.”

Jim Marston, director of the Texas Regional Office of the Environmental Defense Fund, says the smart-grid movement could increase the popularity of on-site power sources, such as solar panels, making it easier for consumers to cut utility providers out of the equation. Unless these companies properly adapt, Marston says, they have plenty of cause for concern.

“If you’re getting paid by rate times kilowatt-hours, this is truly the road to ruin,” he says.

Marston adds that providers have already taken several steps to avoid that fate and are considering additional options. One possibility could be to develop new products and applications for smart phones and tablet computers that allow consumers to track energy use within a home or business with the same ease as the latest iPhone app. They could even pinpoint the specific appliances that are draining the most energy and adjust accordingly.

Utilities will also need to restructure the way they charge their customers for energy use. In one proposed model, providers could charge customers a flat rate based on the square footage of their homes. In that model, homes with energy-draining appliances and amenities, such as swimming pools and plasma TVs, could be required to pay add-on fees. Marston compares this fee structure to the multiple tiers of cell phone data plans. Homeowners could also lease space on their rooftops for the utility to install solar panels, a system Marston describes as a partnership between the utility and the customer.

“Utilities will try to drive down costs at a steeper rate than they lose in gross revenues,” he says. “If that’s the case, you can have net profits that are equal to where they are now. But it means people will think about the utility very differently, because it won’t be in the business of selling kilowatt-hours; it [will be] in the business of reducing costs, being a partner, and reducing emissions.”

Carey King, a research associate at the Center for International Energy and Environmental Policy at UT Austin, says that part of energy producers’ evolution will be a shift toward a services-based model.

“In the future, there will be a focus on energy services instead of energy delivered,” King says. “In the next 20 years, perhaps we will change to think about what we get for purchasing energy, not exactly how much energy we get.”

Getting Consumers on Board

Advocates believe the smart grid will encourage consumers to use less energy, and by modifying their habits, buyers can take advantage of dynamic pricing — the option of paying less or more for their electricity, depending upon when it is used. For example, on hot summer afternoons, rates might go up as air conditioning use drives heavy demands, and at night they may drop, offering cheaper rates while you charge your electric vehicle.

The smart grid has plenty of supporters, and pilot programs similar to the Pecan Street Project have been implemented all over the country. Yet consumers have been slow to embrace the smart grid, and at the recent University of Texas Interdisciplinary Energy Conference, researchers and energy executives pondered why.

McCracken says energy producers won’t succeed by promoting the smart grid from a utility-centric view.

“We talk about improved billing or outage detection, and that simply doesn’t mean much to consumers,” he says. “We have to show we are solving real problems in consumer’s lives.”

McCracken argues that isn’t just a pricing sell. “Price isn’t the salvation without other benefits. I pay more for my cell phone than five years ago, because I want a data plan that allows me to check my email anytime I want. We have to leverage the new smart grid possibilities in ways that get consumers excited.”

Amanda Carrico, a social psychologist with the Vanderbilt Institute for Energy & Environment, agrees that price is overemphasized by many energy policy makers. “We know from research that energy use in nearly identical homes can vary by as much as 300 percent,” she says. “There are obviously complicated behavioral factors that influence consumer behavior other than price.”

Carrico points out that the actual energy savings derived from programmable thermostats is negligible, in part because consumers don’t take the time to use them correctly. She emphasizes that smart grid technologies must be convenient and the advantages readily apparent.

“The single most effective thing you can do is give the consumer feedback on how they are doing,” she says, referencing utilities that have given feedback on monthly bills such as, “You used 14 percent more energy than your neighbors.”

Part of the problem, McCracken says, is a utility mindset that doesn’t mix easily with the idea of offering consumers flexibility and creative options. He supports open industry standards that would allow marketers to offer smart-grid products and applications directly to electricity consumers.

This could provide fertile territory for smaller third-party innovators to move into the energy market, which has long been dominated by larger corporations. Because many providers have grown to the verge of becoming regional monopolies, Marston says, they have not had much incentive to develop cutting-edge new technologies to keep up with competitors. But that is changing.

“If utilities try to hold back their innovative technologies, they will disappear,” he says. “If we're going to have real innovation, we have to have new entrants into the markets.”


David Wenger contributed to this article.


Related articles

Faculty in this Article

David Wenger

Director of Communications McCombs School of Business

David Wenger is the director of communications at the McCombs School of Business. He writes primarily on topics of innovation, competition and human...

About The Author

Rob Heidrick

Writer, McCombs School of Business

Born and raised in Austin, writer Rob Heidrick has spent several years as a contributor and editor at local magazines and community newspapers. He...


#1 very helpful article. scott

very helpful article. scott carson med1online

Leave a comment

We want to hear from you! To keep discussions on-topic and constructive, comments are moderated for relevance and for abusive or profane language.
Login or register to post comments