Conspicuous consumption: How utilities want to lighten your load

A big change may be ahead in the relationship you have with your electric utility. That's because the worrisome carbon footprint is stomping all over the options electric utilities have to meet increasing demand for power. Experts at the W. P. Carey School of Business and elsewhere say utilities will most likely turn to you, the consumer, for help in managing this complex problem.

You can't see them, you can't hear them and, most of the time, you probably don't think about the electrons flowing into your home to power your television or light up the lava lamp. But soon your utility might ask you to think twice about cranking up the air conditioner or drying clothes any time you're in the mood for a tumble.

In fact, a big change may be ahead in the relationship you have with your electric utility. That's because the worrisome carbon footprint is stomping all over the options electric utilities have to meet increasing demand for power. And, utilities will most likely turn to you, the consumer, for help in managing this complex problem.

Climbing the peak

According to the United States Department of Energy (DOE), only 10 percent of energy consumed in the U.S. during 1940 was used to produce electricity. By 1970, that fraction had grown to 25 percent. Today, it's around 40 percent. Yet, industry investment in vital infrastructure to supply growing demand hasn't kept up with these growth statistics.

The Energy Information Administration, official keeper of energy statistics for the U.S. government, says that some 281 gigawatts of new electricity-generating capacity will be needed by 2025 to meet the country's electricity demands. It would take 937 new 300-megawatt power plants to produce that much electricity.

To make matters worse, much of the additional capacity is needed merely to meet peak demand, which the North American Electric Reliability Corp. expects to grow by almost 18 percent in the next 10 years. "Peak demand is rising faster than general consumption by a factor of about two to one in most regions," says Patti Harper-Slaboszewicz, a researcher for UtiliPoint, an industry-intelligence firm and consultancy.

Meeting peak demand is a very inefficient proposition for utilities, because peaking plants may only be pressed into service for a just handful of weeks each year. "The peak is growing, and utilities have to reduce it," says Kerry Smith, professor of economics at the W. P. Carey School of Business. "Can they do that in a way that is cheaper than adding peak capacity?" Sure they can. They can get consumers to shift demand to off-peak hours. And, that's exactly what many utilities are hoping to do in the near future.

Smart moves

A movement is underway among utilities coast-to-coast to make peak-period electricity far more expensive than the juice you use at other times of the day. But, there's a catch: Utilities can't charge rates that reflect time of use unless they actually know when customers use the energy. That's not information utilities get from the 20-year-old meter that's probably sitting on the side of your home.

They need to install new meters, ones that record consumption at least on an hourly basis and, sometimes, record it at even smaller intervals. Many utilities call these "smart" or "advanced" meters, and the devices report meter readings throughout the day to the utility via a communications network.

UtiliPoint's Harper-Slaboszewicz tracks the utility metering business closely and, according to her, she expects various utilities around the country to announce deployment of some 33 million advanced meters during 2008. Their main reason for doing so, she says, is to impact demand through new, time-based pricing schemes and related technologies. Those "smart" meters are a requirement for time-based rates in order "to maintain the recordkeeping that's associated with the rates," says the W. P. Carey School's Smith.

He also believes such programs must have "signals back to the customer." That is, households need some way to monitor consumption along the way, not just at the end of the month when the bill comes. What's more, Smith believes such time-of-use electricity rates require supportive technology to be effective. "Consumers have limited options to comply with those rates.

The only thing we can do is wash clothes after 8 p.m. or on the weekends," he says. He maintains that complying with time-based rates would be much easier if the consumer had "the ability to turn off the refrigerator temporarily or buy a thermostatic control that will turn down the heating and cooling in the house," when rates are high. This is, in fact, where the electric utility industry seems to be heading.

The power of price

Don't be surprised if, in the next few years, you start seeing thermostats that can receive price signals from your utility. When electricity rates are sky-high, you'd be able to set your heating and cooling devices to respond accordingly. Researchers have been testing such devices for a number of years. Over the summers of 2003 and 2004, California's three large investor-owned utilities teamed up to test how 2,500 households would react to various pricing schemes and load-shedding technologies, for instance.

Under simple time-of-use pricing, in which customers paid higher prices during certain hours each day, residential customers cut their usage by an average of 4.1 percent during the summer of 2003. Once the novelty of the rates wore off, the savings dropped to 0.6 percent in the summer of 2004. More effective was the "critical-peak rate." That's when utilities would warn consumers that, because of anticipated demand, rates would skyrocket the next day.

Some customers on those critical-peak rates had automated thermostats and other load-shedding devices that would kick in to save energy when the utility sent a signal that rates were up. Those consumers without the thermostat and load-shedding devices on things like water heaters or pool pumps managed to shave load by around 12 percent. Those with the load-shedding devices cut their peak loads by 27 percent to 34 percent.

That California study cost some $20 million and was the largest demand-shaving pilot conducted to date. In a much smaller study conducted by DOE's Pacific Northwest National Laboratory (PNNL) last year, 112 homeowners were given smart meters capable of receiving price signals from the utility, plus thermostats, water heaters and dryers that were all connected to the meter and equipped with programming devices that let consumers decide how or if appliances would run when electricity prices spiked.

"Over the duration of the study, participants who responded to real-time prices reduced peak power use by 15 percent," notes PNNL sources. To facilitate such automated load shedding, utility electric meters may become a gateway to devices connected via a home area network (HAN). Researchers at ON World, a market-intelligence firm, estimate that the possible worldwide market for HAN devices will reach 276 million units by 2012.

Smart meters, smart outlets and programmable thermostats that automatically adjust energy use to reflect consumer-pricing preferences are among the devices in that estimate. Utilities seem to be moving toward adoption of these technologies. Last year, analysts at Chartwell, an energy-industry research firm, found that 22 percent of utilities responding to a survey said they were planning or considering special rates to cut peak load among residential customers.

Elementary education

"Smart utilities will consider this a great opportunity to become advisors, not just the bad guys churning out carbon," says Richard Charles, senior vice president of client development at Alliance Data, a large provider of business-process outsourcing for utilities. According to Charles, savvy utilities will position themselves as entities "who can help you use energy wisely and at the same time lessen your carbon footprint."

In other words, utilities may find themselves shifting from being commodity peddlers who sell electrons to being providers of a service, and that service is energy management. Such a shift forces companies to "start thinking like customers and thinking about customer benefits, as opposed to technology or the latest manufacturing invention," says Mary Jo Bitner, professor of marketing and academic director of the Center for Services Leadership at the W. P. Carey School of Business.

"Oftentimes, and this is particularly true in the utility case, new services being offered by the company require changes in behavior on the part of customers," as well as the utility, she adds. "It really involves becoming more of a partner with your customers — where both the company and the customers benefit through reduced energy consumption."

Customers may be ready for the change. According to Bitner, current trends suggest that consumers may be increasingly open to energy conservation measures as a means of addressing climate change. As a case in point, consider the winner of the 2007 "Energy Efficiency Initiative of the Year" award conferred by Platts, a division of The McGraw-Hill Companies and leading provider of energy-industry information.

The utility that took home the prize was the Toronto Hydro-Electric System, which earned kudos for its "Peaksaver" program, an air-conditioner load-shedding initiative. Toronto Hydro sends wireless radio signals to thermostatic controls that then cut air-conditioning demand in residences — something many U.S. utilities do as well. In fact, around 35 percent of the 3,100 electric utilities in the U.S. have some such program, according to Chartwell researchers.

But, most of those programs pay people to participate. Customers get rate cuts or rebates when they let the utility cycle-off the air conditioner on hot summer days. Toronto Hydro didn't offer customers a dime. The utility simply pushed the program as the right thing to do in light of global warming. And, the social-responsibility pitch paid off.

The utility targeted 2,600 participants by mid-2006. By the end of 2007, more than 24,000 customers had joined up, and 97 percent of them expressed satisfaction with the program. Toronto Hydro launched an extensive communications effort to push its program. As Bitner says, "utilities will need to shift focus from sales to education" to make such programs work.

"If you want customers to deliver a level of energy conservation, customers essentially become partners in the production process," she continues. "They need to understand what to do, how to do it and what the benefits will be." But, she adds, "This may be an easier sell now than it was 10 years ago. There seems to be so much more awareness and discussion" about climate changes and the need for environmental responsibility.

Bottom Line:

• Rising peak demand, climate concerns and potential capacity shortages are forcing electric utilities to find ways to lower demand for electricity.
• Utilities are likely to push load-shifting and conservation programs to consumers.
• This will, in some ways, transform utilities from being commodity sellers to being service providers.
• To meet their new role, utilities will need to become consumer educators, but they'll probably find willing "students," as consumers increasingly favor ways to protect the environment.