Cost Expectations
Oracle found in its survey of 604 U.S. consumers and 200 U.S. utility managers, “Turning Information into Power,” that there are grounds for concern. The survey found, for instance, that although U.S. gas and electricity costs remain modest by global standards, 94 percent of respondents were concerned about the energy costs of their primary residence. Almost as many – 93 percent – rated “saving money” as a ‘Somewhat Important’ or ‘Very Important’ motivator to conserve energy. As proof of that importance, 88 percent said that in the previous 12 months they had actually taken steps – adding insulation, switching to compact fluorescents, and the like – to lower their energy costs.

Every bill received, payment made, or visit to the company website should be used as a valuable opportunity for companies to promote strategic adoption of the online channel. A positive payment experience strengthens a company’s brand and increases the potential to transition customers to paperless billing.

Costs and Renewables
Most startling on the cost front were the slightly more than half of the survey respondents who said that one of the most important benefits of renewable energy use is that it will reduce personal energy costs¹ – an idea few in the utility industry support.

Is this an idea left over from mid-Twentieth Century sci-fi projections? Possibly not. Many media stories on renewables highlight the falling cost of renewables technology. One search engine shows 264,000 hits on the exact phrase “low cost solar” and millions more where the words are in close proximity.²

These reports are not intended to deceive. They use “low cost” in the sense of “lower in cost than a similar item was in previous years” – a concept clear within the energy industry. It is also the case that new cap-and-trade systems or carbon taxes could, in a foreseeable future, easily make renewables less expensive than fossil fuel generation.

Still, it appears that a substantial number of consumers interpret “lower cost” as meaning “lower than I currently pay.”

Costs and Information
Consumer concern with cost is also clear in the survey results on information usage.

On one hand, consumers have a desire for more infor­mation on energy consumption. Nearly all those surveyed (95 percent) said they were interested in receiving consump­tion information.

And most saw room for improvement in the amount and quality of information utilities currently offer.³

Also demonstrating the value consumers place on information is the fact that 69 percent of them said they would review detailed “real-time” usage data if it were available. Most of those saw information as leading to lower personal consumption.

Does that mean consumers would value the near-real-time information a Smart Grid can provide? For some consumers, “value” may not equal “money.” When asked if they would be willing to pay an upfront cost for the ability to see detailed and/or real-time consumption data, only 20 percent said yes.

Expenditures for customer portals via which utilities plan to deliver Smart Grid information could also be problematic. The survey revealed that such portals were not high on the priority list for the more than half of all consumers who would prefer to receive their energy information by mail.

Costs versus Benefits
Total Smart Grid cost estimates vary widely. KEMA has estimated U.S. costs for the Advanced Metering Infrastructure (AMI or “Smart Metering”) portion of the Smart Grid at slightly more than $63 billion.⁴ A study from U.S. regional transmission operators,⁵ suggests the grid needs $100 billion in improvements to substantially raise the percentage of generation from renewables. A widely circulating number for total Smart Grid cost is “up to $2 trillion.”⁶

The thick technical reports backing up these estimates do not lead easily to consumer-oriented explanations. And few bother to point out that, even without the Smart Metering and renewables associated with the Smart Grid, ongoing transmission and distribution investments have been – and will continue to be  – substantial

From the consumer’s point of view, it is equally difficult to assess benefits. A 2003 U.S. Department of Energy study suggests Smart Grid-related benefits of $46-$117 billion by 2023.7 Estimates since then have risen considerably. The Electric Power Research Institute, for instance, estimates8 that reducing power interruptions and fluctuations – an almost certain Smart Grid benefit – could save up to $100 billion each year in damages and lost business.  

Few, however, venture to guess at how total benefits might approach the costs without positing carbon taxes or CO2 cap-and-trade permits.

Other Studies
The Oracle study is not the only one detecting a gap between customer expectations of future energy costs and experts’ estimates of likely costs.

A Deloitte study found that “Sixty-two percent of consumers would be willing to pay five percent more on their electric bills to stop greenhouse gas emissions.”9 Applied to consumers alone, that would produce about $7.8 billion annually; applying that percentage uniformly across all sectors would produce about $18.2 billion.10

Similarly, the Distributed Energy Financial Group11 found:
Nearly one-third of Americans believes that no utility bill increase is necessary to manage climate change, and another 44 percent say less than 10 percent… One third of Americans… would be very dissatisfied if they had to pay 10 percent more for electricity to address climate change.

While cost estimates are vague and implementation schedules highly uncertain, a 5-10 percent rise in bills seems unlikely to generate revenue quickly enough for a pay-as-you-go rollout. Such utility capital projects are rarely, however, financed through current revenue; bonds could make payment far more manageable, especially for investments made gradually over time. Given ongoing inflation rates and projected pricing for the renewable energy to put onto an improved grid, however, consumers are almost certain to notice the added costs.

Promoting Support
Education
One approach to encouraging customer acceptance of Smart Grid costs is to demonstrate their need. That begins with putting national abstractions into local terms.

“Reducing peak consumption” is a vague concept, at best. Consumers need something clearer: Unless we reduce consumption during X time periods by Y amount, we are going to have to spend Z dollars to build a new distribution line.

Clarity permits all stakeholders to examine options for reaching a goal. In this example, discussions might involve:

• Monthly rather than seasonal rate adjustments. Some studies suggest that varying flat rates monthly rather than annually12 could produce 30 percent of the peak-shaving gains anticipated through real-time pricing.
• Critical peak pricing programs for very large customers or volunteers only.
• Customer-owned generation strategically positioned to reduce use of specific lines.
• Direct load control devices on customer-premises equipment like air conditioning units. These devices proved workable in the 1980s and 1990s but lost favor, in part because utilities could not detect which units were still operational or which households overrode their use. Comparing direct load control with the cost of more sophisticated equipment could help customers understand the pay-off for investments in such single-use devices versus the potential of more flexible, multi-purpose advanced metering systems.

The customer may also respond positively to information on lessons learned from previous local or national programs aimed at solving the problem, such as:

• Weatherization.
• Use of an existing automatic meter reading (AMR) system, read daily and using 24 hours as an “interval” to gain at least some of the benefits available from Smart Metering.
• Rewards for specific percentages of use reductions maintained over specific time periods.
• Intensive education programs delivered more aggressively using not merely the bill stuffer but (with the customer’s permission) more aggressive channels such as e-mail or short message service (SMS).
• Low-cost loans, collected as part of the normal energy bill, for energy-saving equipment and weatherization services.

Helping consumers understand the grid improvements essential to meeting state Renewable Portfolio Standards should also ease customer acceptance of Smart Grid costs – or possibly direct the backlash, if one remains, at an appropriate target.

Reducing Costs
The Smart Grid is not a single package of specific hardware and software. Despite the claims of some vendors, it does not arrive in a box. The shape of the Smart Grid will vary from region to region; so will its costs.

Technologies and customer programs designed to reduce peaks, for instance, will not be a part of the Smart Grid in regions with transmission and distribution overcapacity. Utilities developing local run-of-river hydro or biomass generation to fill Renewable Portfolio Mandates may ignore the sophisticated grid improvements associated with using “non-dispatchable” wind and solar.  

The Smart Grid is a vision we will realize through evolution. And Smart Grid costs could plummet over time. Economies of scale and innovation will likely reduce manufacturing costs, as they have in virtually every other high-tech venture. Experience with business processes and customer programs will likely lead to the emergence of best practices that will increase efficiency and reduce investments in dead-end approaches.

Non-Rate Funding
Customer revenue is not the only source of funding for Smart Grid projects.  The $11 billion in Smart Grid grants available under the U.S. fiscal Stimulus package may be, as some describe it, a drop in the bucket of overall Smart Grid funding. But it is a valuable drop in kicking off projects. Additionally, the Department of Energy has about $3 billion available for Smart Grid grants.

Reducing utility risk profiles may be another source of funding.  Standard and Poor’s numeric business risk profile categories significantly affect utilities’ cost of capital. Lowering risk reduces the cost of capital in quantifiable ways. Utilities and regulators could – should they choose to do so – apply the savings to various Smart Grid improvements.13

Working with the Media
Television, radio, and newspapers can be invaluable allies in getting clear and realistic Smart Grid information in front of customers. Many utilities already have a significant media presence and excellent contacts. But reality is that only the largest media outlets have full-time energy reporters. Most use generalists who cover little beyond commodity price changes and do-it-yourself home weatherization.

That suggests significant risk concerning potential media portrayal of the Smart Grid. Once the rust of media “hype” subsides, a generalist reporter might, for instance, take a
$2 trillion Smart Grid cost estimate, assign half to business and half to residential customers, and denounce the Smart Grid as saddling households and small businesses with an astounding $7,000 bill.

Utilities can help head off such incidents by providing the media with not just a community-outreach professional but also with a technical expert who can, on an ongoing basis, localize costs and benefits, explain utility plans, answer customer questions via a blog, and generally help fill the information gap.

Conclusion
Consumers today are coping with continuing bad financial and environmental news. For many, positive media stories and federal support have turned the Smart Grid into a much-needed beacon of hope for addressing some major environmental issues in a positive and meaningful way.

Studies like Oracle’s “Turning Information into Power” suggest, however, a gap in consumer understanding about likely future energy costs. Most utilities will want to turn that lack of understanding into support and avoid a backlash against Smart Grid costs. To do so, utilities may want to step up media contacts and customer communication initiatives regarding the costs, benefits, and alternative paths to a cleaner and more secure energy future.

About the Author
Guerry Waters joined the Oracle Utilities Global Business Unit (previously SPL WorldGroup) in 2000. Previous positions include Vice President of Energy Information Strategy at META Group (now Gartner) and CTO and Director of Technology Strategy and Engineering at Southern Company. He focuses on IT strategies that help utilities meet their goals amidst changing customer demands, regulations, and market structures.