Sioshansi F.P. Smart Grid: Integrating Renewable, Distributed & Efficient Energy
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Similarly, ERPI estimates of smart grid benefits increased as
well. These dramatic increases in costs and benefits suggest
that these estimates may not be reliable and much more work
is needed before they are ready to be used as the basis for
ratemaking. EPRI's revised figures are due in part to advances
in technologies. The costs associated with smart grid if it
addresses privacy or cyber security problems must also be
considered [14] and [18].
The Compulsory Nature of Smart Grid Raises
Fundamental Equity Concerns
As stated in the introduction, however one defines smart grid,
it is clear that its advocates are drawing an analogy with smart
phones, computers, and other electronic devices that have
taken off over the last twenty years. What distinguishes smart
grid from smart phones, though, are compulsion and choices.
Consumers voluntarily use computers, smart phones, and
innumerable other electronic devices, along with their
innumerable applications. The market was driven by
companies anticipating consumer needs, taking the risk on
products and services that consumers may want, and investing
capital to satisfy consumers without the guarantee of return.
The case with smart grid is completely different. Here,
consumers are being asked to guarantee much if not most of
these investments with, perhaps, some expectation of lower
future utility bills. There is little discussion of the issue and
importance of choice. Instead, arguments are made, for
example in the case of advanced meters, that one size must fit
all. The meter purchase, selection, and timing are not left up
to the consumer but to the utility. The power of the
technological revolution in computers, communications, and
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electronic devices is that it gives consumers choices,
including the choice not to purchase a particular device or use
a service. There seems to be an unwritten premise that
utilities must go with a one-size-fits-all strategy; this
assumption needs to be demonstrated by smart grid
advocates, not just assumed as a given. Much, if not most, of
the costs associated with smart grid are assumed to be
recovered via compulsory initial increases in electricity rates,
which presumably, if advocates of smart grid are correct,
would result in lower future rates or less of an increase than
without smart grid.
This has profound equity implications, and this issue of
compulsion has not been emphasized enough. Compulsion
changes everything. One can have legitimate and serious
equity concerns with respect to products and services that are
purchased voluntarily. Is this used car of the quality claimed
by the dealer? Would the average consumer understand the
terms and conditions of a mortgage? In these and other cases,
the consumer is a voluntary participant, even if misinformed
or incompletely informed. The consumer has the choice to
walk away from the transaction and pursue other alternatives.
Paying for smart grid, though, is mandatory, not voluntary.
Forcing customers, particularly poor customers, to pay for
smart grid, even if it would make them collectively and
individually better off, can be viewed as inequitable. Why
should low-income families be required to purchase a smart
meter when they cannot afford smart appliances, do not have
an internet connection to use the information provided by the
meter, do not have a plug-in electric vehicle, and the benefits
of smart meters accrue disproportionately to large users of
electricity? Granted, society compels its residents to fund all
sorts of investments that individuals may or may not desire or
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benefit from, but society also makes provisions to protect
low-income families. Nonetheless, the question remains: is it
equitable to require an individual to purchase a particular set
of goods and services even though that individual would be
better off doing so?
The regulator answering this question does not know whether
customers would be better off than doing something else with
their money. It may be that the benefit-cost ratio for smart
grid is 2:1, but customers may be able to use their money for
something with an even higher benefit-cost ratio. Of course,
neither the benefits nor costs of smart grid are known with
certainty. Take the example of smart meters, which have been
the most extensively studied subsystem of smart grid. The
ratio of utility operational benefits to broader social benefits
of smart metering ranges from approximately 30 to
100%[19]. In the United States, costs of smart meters range
from $123 to $532 per meter, with an average of $221. Note
that the range is –50 to +100% of the average [20]. As noted
above, the cost estimates for smart grid have are large and
increasing.
In addition, any benefit-cost analysis looks at ratepayers in
the aggregate and not as individuals [21]. Two possibilities
need to be considered. It may be the case that the benefits are
expected to exceed the costs for the average customer, but not
for all customers or subgroups of customers, such as
low-income customers. Compelling some ratepayers to pay
for smart grid when they receive less benefits than costs can
be considered as inequitable. But it is also inequitable if some
ratepayers receive a net benefit from smart grid (benefits
exceed their costs) but they receive less benefits than others.
This may be the case with low-income consumers using smart
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meters if the cost of smart meters is allocated by household
instead of by annual usage. For instance, assume that
higher-income households receive $400 in benefits from
smart meters but lower-income households only receive $200,
yet both pay $150 for the advanced meter. Higher-income
customers receive more net benefits than lower-income
consumers, an outcome that some may consider inequitable.
Further exacerbating equity concerns is the asymmetric
information between utilities (and their vendors) and the
regulators and ratepayers. The former have a lot more
information about the costs and capabilities of smart grid than
the latter. This puts the utilities and vendors in a stronger
position than the regulators and customers who lack access to
privately held utility/vendor data or information.
The obvious solution to this compulsion problem is to provide
customer education, choice to customers, and additional
consumer protection [4], [6], [21] and [22]. The smart grid
discussion has devoted too little effort to figure out how to
provide customers with choice. To be sure, there are some
difficulties; for example, equipment and deployment costs are
lower if uniform decisions are made for a service territory,
but that assumes that the initial selection of equipment is
correct. If that decision turns out to be incorrect, now a whole
service territory has the wrong equipment. There are open
issues that need to be analyzed and vetted and not simply
assumed to be the case. But it is incumbent upon advocates of
smart grid to provide alternatives and explain their
implications so regulators and customers can determine the
additional costs and benefits of allowing individuals greater
choice. In some cases, smart grid proposals have been
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rejected by regulators due to inadequate justification or
inadequately rigorous analysis [23].
Smart Grid Raises Other Equity Concerns Besides
Compulsion
There is no single definition of equity, and any attempt to use
only one definition is unlikely to result in clarity or
consensus. That being said, it is important to lay out various
equity concerns against which to evaluate proposed smart grid
plans. As noted above, whether something is compulsory is a
fundamental consideration, and the response that compulsion
is necessary to save on costs is not sufficient.
Maximizing social welfare using the tool of cost-benefit
analysis could be considered an equity framework in the
tradition of the utilitarian philosopher Jeremy Bentham
[24]—the greatest good for the greatest number—or only an
efficiency consideration with no equity content. It would be a
mistake to accept implicitly the assumption that a social
cost-benefit analysis is the only equity framework and
therefore to assume that if smart grid passes such a test, it
should be adopted for both efficiency and equity reasons.
Proponents of smart grid may, in effect, be making such an
assumption by offering a social cost-benefit analysis as the
only criterion for evaluation. Any other considerations, under
this erroneous assumption, are implicitly irrelevant. It is
probably not a coincidence that smart grid advocates have not
explicitly stated their belief that equity considerations can be
reduced to a social cost-benefit test.
But there are many other major schools of thought that
address equity outside of the utilitarian paradigm and should
be considered. For instance, some argue that the least well off
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in society should be made as well off as possible [25]. The
focus is not on the average ratepayer, as assumed under a
cost-benefit approach, but on those that are worst off, such as
low-income families. In contrast, Aristotle argues that goods
should be divided in proportion to each claimant's
contribution [26]. Under this ethical framework, the costs of
smart grid would be assigned based upon the proportion of
benefits received. For example, since low-income families
use less electricity than most other families, they would pay,
if at all, less for smart meters, for instance, than others. Other
ethical inquiries start with the premise that ecological and
environmental sustainability should be our organizing
principles. Under this view, perhaps less resources would be
devoted to smart grid and more to renewable resources and
energy efficiency, or at least those elements of smart grid that
enable cleaner resources would receive more attention. Still
others stress a minimal state that should not use coercion to
redistribute resources or prohibit activities by people for their
own benefit [27]. This approach emphasizes that ratepayers
should be given choices and in particular should not be
required to purchase functionalities that they do not desire,
even if it is for their own good or for society's benefit.
Even within the cost-benefit framework that smart grid
advocates have adopted, there are numerous equity issues that
have not been brought to light. Both absolute and relative
equity concerns must be addressed. For instance, it may be
that smart grid technologies do provide net benefits to
consumers, an absolute measure, but that consumers’ share of
the benefits compared to that garnered by the utility is not
equitable. This may be the case with monetary benefits or
with the allocation of risk between the parties.
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For instance, if it were the case that customers received only
10% of smart grid benefits, even if those benefits more than
covered their costs, and utilities received 90%, that would not
be viewed as equitable. Perhaps many observers assume that
virtually all cost savings are passed on to consumers sooner or
later and that these cost savings will, including the time value
of money, exceed the upfront costs. If this assumption is
correct, it needs to be made a lot more explicit, and regulators
should consider conditioning smart grid investments on its
acceptance by utilities. This relative inequity is compounded
by the asymmetry of information between utilities and
customers and the fact that utilities have a lot more say in the
adoption of smart grid and its particulars than consumers.
Similarly, if utilities bore little or no risk for the performance
of smart grid whereas customers did, even if such risks were
expected to be rewarded, that also is inequitable. In summary,
equity concerns include both absolute and relative costs and
benefits, risks, and returns.
Another important class of equity concerns pertains to
low-income customers [4] and [21]. Again, issues of absolute
and relative equity issues arise. For example, even if
low-income customers are better off with smart meters than
without, customers who consume more electricity may be
receiving a higher share of the benefits for the same cost. If
the costs of smart meters are paid by each customer and the
meter cost is the same for all residential customers,
low-income people who use much less electricity than larger
residential customers are paying the same but receiving less
benefit. Another example relates to the claimed reliability
benefits of smart grid. If costs are allocated by customer
rather than by usage, then once again the relative allocation of
costs and benefits would not be equitable.
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Another limitation of the cost-benefit approach adopted by
smart grid advocates is that it reduces benefits to dollars. But
an additional dollar to higher-income consumers has less
additional benefit (in the language of economists, utility) than
it does to lower-income consumers. Presumably, utilities and
their vendors, shareholders, and executives are wealthier than
low-income consumers. So, if the objective is to provide the
greatest good or utility to the greatest number, the types of
smart grid technologies that benefit lower-income consumers
should be considered and rolled out first because a small
improvement in their financial situation is a large benefit or
utility. There may be many smart grid technologies and
applications that do benefit lower-income and other
disadvantaged groups, for instance by improving reliability,
reducing electricity consumption and utility bills, and
improving monitoring of vital health equipment that some
depend upon, among others.
Another common definition of equity within the cost-benefit
framework is that costs and benefits should be aligned. That
is, customers who add costs to the system—for instance, due
to high peak usage—should pay the additional costs due to
generating and delivering electricity during peak hours. It
may be, as some have argued, that in the case of smart meters
combined with some form of dynamic pricing, lower income
customers would be better off, at least in aggregate, because
they use less on-peak energy than larger customers [28].
Under existing uniform rates, therefore, these lower income
customers are paying for some of the costs associated with the
peak consumption by higher income customers. If this turns
out to be the case when the costs of smart meters are
included, it would be fortuitous because it aligns with
another, and very different, equity definition under which
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some customers—low-income, elderly, handicapped, and so
on—should have their electricity rates subsidized [2].
This issue of aligning costs with benefits also arises with
plug-in electric vehicles. It is not clear why anyone,
particularly low-income ratepayers, should have to buy a
meter that is capable of supporting an electric plug-in vehicle
if they do not have such a vehicle. Presumably, families with
low income own fewer newer cars than higher income
families and therefore are not likely to have a car, let alone a
new plug-in electric vehicle. Requiring all ratepayers,
particularly low-income ones, to purchase a meter in the
unlikely event that sometime in the future they will have a
plug-in electric vehicle does not make sense, particularly
given the high cost of plug-in electric vehicles and the lack of
high market penetration of these vehicles anytime soon.
Conclusions
The argument here is not that smart grid should be opposed
by regulators because it is necessarily inequitable, but that
there are important equity concerns that need to be addressed.
Each particular smart grid strategy and plan proposed by a
utility must be carefully assessed not only for the plan's
asserted benefits and costs but also for the distribution of
these benefits and costs under different equity lenses.
Regulators should not rely upon generic cost-benefit studies
of smart grid, particularly when those studies concede that
they are not rigorous or complete and do not account for all of
the associated costs. This is not to suggest a wide-ranging and
never-ending investigation into fundamental philosophical
questions about social justice. In fact, such an approach
would not be successful because it cannot tell regulators how
to solve concrete problems [26].
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Instead, a much more circumscribed and focused approach is
in order. Society compartmentalizes equity issues, such as
those with smart grid, because they would otherwise be
impractical and overwhelming [26]. The result is that it is
perfectly acceptable to address these questions in the context
of the norms and precedents that have evolved to deal with
specific types of situations [26]. Not surprisingly, laws and
regulations regarding the determination of electric rates
provide important guidance in evaluating equity concerns
with respect to smart grid investments. The process that
regulators must go through to make a determination regarding
a specific and complete proposal should be thorough and fair,
provide access to stakeholders, and require parties to
demonstrate their claims based on evidence and reason. The
numerous conferences, papers, and presentations heralding
smart grid should not replace the ratemaking process.
Case law and ratemaking precedents also provide regulators
substantive guidance on equity decision-making. Although
considerations of efficiency are important, they are not
dispositive. Regulatory rulemaking commonly appeals to
other values such as providing consumers information so they
are better informed about decisions that affect them and they
are better able to respond. Ratemaking policy also considers
environmental issues, monetary and other support for
low-income households, and assigning costs to those that
cause them. Each of these considerations suggest individually
and collectively that larger customers who consume more
electricity than smaller customers should pay more for smart
grid, that additional costs imposed on low-income consumers
should be offset, at least partially, and that the elements of
smart grid that directly and materially improve their lives
should be prioritized over those elements that do not.
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