Smart Grids: How Smart?

President Obama’s stimulus package, the American Recovery and Reinvestment Act, appropriates nearly $24 billion to modernize our country’s electric power grid, including an $11 billion outlay to make it “smart”. Those appropriations are stirring the hopes of renewable energy advocates, who foresee expanded opportunities for solar and wind technologies as well as a big, new role for plug-in electric and hybrid-electric vehicles.

And there are reasons to be hopeful. Decentralizing our electric system by adding a lot of small generators would help achieve the Smart Grid project’s primary objectives of improving the reliability, security and efficiency of our electric power system. Renewables also create a lot of jobs per unit of energy, and with unemployment above 8 percent for the first time in 26 years, that could provide welcome relief. And job creation is a bipartisan issue – you'd be hard pressed to find a politician in Washington willing to argue against entrepreneurship.

But what exactly is the vision for a smart grid? The characteristics were officially spelled out in Title 13 of former President Bush's Energy Independence and Security Act of 2007, which envisions using digital communications and control technology to enable the variety of devices connected to the grid to talk with one another. The idea is that by communicating, loads and sources on the grid could alter their behavior in beneficial ways. For example, if you plug in your car when you get home from work but don’t need it fully charged until morning, the start of the charging cycle might automatically be delayed until other loads turn off, perhaps after you go to bed. Smart appliances like air conditioners and refrigerators could limit the amount of cooling they do when the grid is approaching overload, and smart cars might offer up some of the energy in their batteries to help power those loads.

But will the project dubbed “Smart Grid” be smart for consumers, or just for utilities? The name certainly implies a “no-brainer”, suggesting a win-win so obvious that we needn’t concern ourselves with the details. That’s usually a good clue that a closer look is warranted. Remember the Patriot Act?

The first hint of a problem, beyond all the dubious language about data mining and cyber-threats, is a curious passage requiring states to consider allowing utilities to bill consumers for the value of any equipment rendered obsolete by the program. Compensate utilities for their obsolete technology? Imagine typewriter makers agreeing to build computers but insisting that we have to keep paying for typewriters too. And what if the new grid is so smart that it renders the old one useless? Must we keep making payments on the dumb grid even as we begin paying for the smart one?

Another disturbing provision – this one in the stimulus bill – requires states seeking stimulus funding to provide assurances that they will work to implement rules ensuring that utilities won’t make less money as energy use declines. These rules, termed “revenue decoupling” rules because they decouple utility revenues from the volume of energy sold, are being touted as a way to encourage utilities to help their customers conserve. The obvious problem (although not so obvious that anyone is talking about it) is that under revenue decoupling, a single customer can still save money by cutting electricity use, but an entire community cannot. Once the revenue of a utility is guaranteed regardless of usage, it doesn’t matter how much energy the community conserves – all together they are still obligated to pay the same amount to the utility. Revenue decoupling rules are, in reality, little more than thinly veiled attempts to guarantee the revenues of an industry that is hurtling headlong towards obsolescence.

With rules that force consumers to continue paying for obsolete assets and for energy they no longer consume, we ensure that the lions share of benefits from modernizing our power grid will go to utilities, rather than consumers. But there is another way to go about it, and other countries are already well down the path.

Denmark had wind but didn’t have the economic power to develop it, so instead they created a policy that enabled inventors and entrepreneurs to access renewable energy markets even before their inventions were market-ready. Within a few years, companies in Denmark were designing and building some of the most advanced turbines in the wind industry, and the tiny country of just over 5 million citizens today controls 38 percent of the world market for wind turbines.

What was Denmark’s secret? They simply opened up their power grid to every renewable electricity producer seeking a market, guaranteeing their right to interconnect and promising to buy every renewable kilowatt-hour produced at a premium price called a “feed-in tariff”. The flood of renewables that followed eventually necessitated upgrades to their grid, but those upgrades were driven by a mandate to accommodate new players, rather than to protect incumbent ones. Forty-six countries now have a feed-in tariff law, validating its reputation as the world’s most successful tool for advancing renewable energy.

The Smart Grid project might succeed in modernizing the power grid, but unless we change its focus it will fail to provide consumers with cheaper, cleaner, and more reliable power. You can’t simply throw billions of dollars at the builders of the dumb grid and expect them to build a smart one. We tried that with investment banking, pouring trillions into the very companies that created our financial crisis rather than taking a hard look at fresh policy approaches.

With the power grid, there’s no room for mistakes. Modernizing our electric power infrastructure using policies that create entrepreneurial opportunities for small businesses is where the smart money will go.