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. More large central station generating plants meant lower operating costs and lower electric prices. And lower electric prices fueled the post-war economic boom.

But the 1973 Arab Oil Embargo was a wake up call. While coal or nuclear fuel were used for most large base load plants the smaller plants used 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 looks like following graph of typical load curves. This graph shows that, especially in the summer, usage peaks towards the late afternoon.

Typical daily load curve
Source: fsec.ucf.edu

Reducing the system peak reduces use of the oil-fueled 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. The following video shows how the Smart Grid will 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 utilities 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.

Utility costs are typically 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 Smart Grid costs should be treated like other utility costs.

Many electric customers already have the option of terminating their utility service by using distributed generation or participating in a micro-grid. If their utility rates increase because of the cost of the Smart Grid they may opt to disconnect from the utility to avoid the higher rates.

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, the benefit will be reduced and there will be fewer customers to share the Smart Grid costs. 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. 

Is the Utility Death Spiral for Real?

Causes of a Utility Death Spiral

For over 100 years the government has guaranteed utilities a reasonable operating profit. However, current conditions have led utilities to the precipice of a death spiral.

The regulatory compact, embedded in all state public utility acts, requires utilities to provide reliable service to their customers in exchange for a government guarantee of a reasonable return on utility investment. What could be a better promise for a business? Provide a necessary service to customers and receive a steady and reliable return for investors. 

But now there is talk of a utility death spiral. A death spiral can be defined as “a situation that keeps getting worse and that is likely to end badly with great harm or damage being caused.” Is this even possible?

Well the fact is that not only is it possible, it is probably true. Utilities have invested in infrastructure that provides a necessary service. Their government approved rates include recovery of, and a return on, that investment in infrastructure.  

But customers are responding to these rates by installing distributed generation like rooftop solar. This self-generation reduces, or even eliminates, purchases from the local utility. And even though sales go down, the fixed costs of the installed infrastructure remains the same. And those fixed costs have to be recovered from remaining customers. Those costs will be recovered over fewer sales and rates for those sales will inevitably increase.  

Rooftop solar is contributing to the utility death spiral
Source: weforum.org

As rates increase more customers will decide to install their own distributed generation. This further reduces sales by the utility and increases rates for remaining customers. If nothing is done to check this utility death spiral the infrastructure costs will either be paid by the poorest customers who can least afford to install distributed generation or will not be paid at all sending the utility into bankruptcy.

Utility Response to the Death Spiral

Some utilities have responded to the death spiral by seeking to hold on to the status quo. To retain sales, they have opposed government incentives to customers that tend to overprice the value of distributed generation. And to make sure that they recover their fixed costs, they have proposed to “decouple” recovery of fixed costs from sales-based charges. Where decoupling has been approved the utility recovers its infrastructure costs through a fixed customer charge paid by all customers no matter how much electricity they use. 

The utilities’ tactics effectively reduce the benefits of distributed generation for customers. Customers hoping to get the full benefit of distributed generation will opt to disconnect from the grid. At one time disconnecting from the grid would have been almost unthinkable. However, now more and more customers can disconnect by purchasing small scale storage to back up their distributed generation or by joining a micro-grid. The following video describes the operation of such a micro-grid: 

If the utility tactics that seek to stop the death spiral force customers off the grid they will not stop the utility death spiral. They will instead exacerbate it.  

As described in the Post entitled What is the Smart Grid? utilities can achieve significant efficiencies for the entire system if they use a Smart Grid to gain the ability to monitor and control customer owned distributed generation. In other words, it is in the public interest for the utilities to keep customers on the grid and to take advantage of their efforts to use distributed generation. It will be up to utilities and policy makers to determine how the utilities will be able to both meet the public interest and to thrive financially in an environment where their traditional source of revenue (selling and/or transmitting energy) is shrinking. 

For more information on utility response to the death spiral see the Deloitte article entitled Beyond the math: Preparing for disruption and innovation in the US Electric power industry.


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.