Smart Grid: We Still Need to Change Utility Regulations

oncorsmartmetersmallAt a hearing before the House’s Committee on Science and Technology this morning, a group of experts from industry and standards groups provided testimony on the status and goals of the smart grid. The testimony was a lot of the policy jargon you’d expect — an update on the standards process and an update on the smart grid stimulus funds (both chugging along, they say) — but there was an interesting, unnerving tidbit in the testimony of Jeffrey Ross, executive VP for smart grid software maker GridPoint.

Ross points out that smart grid technology has not been more widely implemented because the way investor-owned utilities are regulated simply doesn’t encourage it. Oftentimes the more power an investor-owned utility produces, the more money it can make. That means some utilities could actually risk losing money by deploying smart grid technologies, Ross says. His point: “[W]e need to realign the regulatory and economic policies and incentives pertaining to investor?owned utilities (IOUs), such that utilities are motivated to invest in smart grid technologies.”

Ross’ declaration isn’t a new argument and trade groups and environmentalists have pushed for different types of “decoupling,” in which utilities’ power sales are disconnected from their profits, for years. The state of California already has a law like this, which has pushed California utilities to become the most energy efficient in the U.S. But these laws are hard to get through — the stimulus package had originally had a decoupling clause in it, but the language ended up being lightened (likely through intensive lobbying) and ended up only encouraging efficiency.

But Ross’ reminder is particularly disturbing, because it reminds me that those billions allocated from the stimulus package would be much more effective if they were being pumped into a market where all utilities had financial incentives to implement them. And that means there’s a significant risk that the funds for demo smart grid projects won’t have a more long-term effect on utilities, if, at the end of the day, they just can’t make money from them.

There’s a precedent for utilities implementing energy-efficiency measures only halfway because of this issue. According to Gartner analyst Zarco Sumic, while more utilities are implementing energy-efficiency programs, they have little incentive to actually encourage customers to sign up for such programs because of the mismatched regulatory environment. That means utilities often fail to market energy-efficiency programs, and more than half of respondents to a Gartner consumer survey said they were unsure if their utility offered any energy-efficiency programs.

The current attention from investors, entrepreneurs, IT firms and the federal government on smart grid technology has been unprecendented in recent months. But the system through which these technologies will implemented has a fundamental regulatory flaw, and that needs to be fixed before all this momentum dies down.