What is the Smart Grid?

Electric Consumption and the Arab Oil Embargo

Prior to 1973 the electric industry encouraged customers to consume electricity. More consumption meant more efficient large central station generating plants. And more consumption fueled the post-war economic boom.

But the 1973 Arab Oil Embargo was a wake up call. Utilities faced the  fact that the generating units they were using to meet peak customer demand were fueled by foreign oil. And deliveries of that foreign oil could cease without notice. Thus, reliability of electric service was, at least in part, subject to the whims of foreign powers. After the Oil Embargo it was no longer good policy to just encourage electric consumption.

Confronting the System Peak

Electrical consumption throughout the day at various months during the year looks like this graph of typical load curves.

Typical daily load curve
Source: fsec.ucf.edu

The curve shows that, especially in the summer, usage peaks towards the late afternoon. Utilities run the generating units used to meet this peak on oil, the most expensive (and possibly least reliable) source of electricity.

Reducing the system peak reduces use of the peaker units. Less reliance on peaker units means less dependence on foreign oil, fewer emissions from oil-fired generation and lower cost electricity. The industry and its regulators now seek ways to “shave the peaks”.

The main weapon in the fight to shave the peaks has been demand side management programs. These programs encourage customers to reduce their consumption during the time of the system peak. The demand side management programs have succeeded in reducing customer peak demand. However, primarily because of the increased air conditioning load, the peaks remain.

The Smart Grid Will Turn Utility Service to a Two-Way Street

Many in the industry now believe that the Smart Grid will both revolutionize peak shaving capability and help to resolve numerous other challenges facing utility operations.

Electric service has, historically, been a one-way street – utilities generate electricity and transmit it their end-use customers. The Smart Grid will make electric service a two-way street. Utilities will still deliver electricity. But they will also use new technologies to monitor and control all aspects of the electric system. This includes their own transmission and distribution systems as well as customer-owned distributed generation and storage and all components of customer usage.

With the consent of their customers the utilities will be able to control customer owned distributed generation and usage to most efficiently manage their system for the benefit of all. This following video shows how the Smart Grid would work:

The Benefits of the Smart Grid

The potential benefits of the Smart Grid include the following:

  • Utilities will deliver real time pricing information to customers who will be able to respond by reducing consumption during high cost periods of the system peak.
  • With customer consent the utility will be able to directly reduce individual customer usage during the time of the system peak.
  • When peak usage is reduced, either through customer action or utility action, generation costs are reduced for the entire system.
  • The utilities will be able to dispatch and use customer owned distributed generation and electrical storage to meet peak demand when needed by the system.
  • Incorporation of customer owned generation and electrical storage will reduce emissions from central station power plants and reduce transmission losses.
  • Power quality required for digital applications will be improved.
  • Outages, no matter what their cause, can be immediately detected and fixed.

Financing the Smart Grid

It is generally accepted that adoption of a Smart Grid will benefit the utilities, their customers and the public in general. Components of the Smart Grid will, presumably, be installed by the utilities and become part of utility operations.

In a study conducted in 2011 the Electric Power Research Institute (EPRI) estimated that the cost of the Smart Grid would be $476 billion. EPRI also estimated that the payback would be 2.6 to 6.0 times that amount. These costs would typically be passed along to customers in the form of higher rates. However, even though there are clearly benefits to be gained from the Smart Grid, there is a question of whether the incurred costs should be treated like other utility costs.

The cost of a utility service typically reflects the value of that service to the end-user. When a customer buys a kWh it pays for the cost of producing and delivering that kWh. But the existence of the Smart Grid will not necessarily benefit any particular customer. Instead, it is more of a societal benefit.

Many electric customers already have the option of terminating their utility service in favor of combined distributed generation and storage or participation in a micro-grid. If they see their electric rates increase due to a service that does not provide them any direct benefit they may opt to disconnect from the grid to avoid the higher costs.

Much of the benefit of the Smart Grid comes from the utility having access to customers that remain on the grid. If customers start to leave the system to reduce their costs the utility will have access to fewer customers, thus, reducing the benefit of the Smart Grid and reducing the number of customers available to pay for the Smart Grid. See the paper entitled Paying for the Smart Grid by Luciano De Castro and Joisa Dutra for an in depth discussion of financing the Smart Grid.

This financing issue will have to be resolved before we can receive all the benefits that the Smart Grid promises  to provide.


I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

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