Smart Grid or Strong Grid? Comment on Ken Maize

Ken Maize’s recent post arguing for a strong grid instead of a smart one made an important point: the Smart Grid is largely an assortment of tweaks and minor fixes that lets America’s utilities get by with the transmission status quo to cope with the growing demand and integration of intermittent renewables.

Policy should instead aim at a strong grid. Redundancies and “excess” capacity could better maintain reliability and lower delivered power costs in a world of monopoly utilities. It would also facilitate market transactions if competitive retail and wholesale power markets prevail.

Maize has well-founded concerns about how utilities in a smart-grid world will

1) administer their new gizmo-heavy systems;

2) justify the benefits that small consumers will get in return for higher bills, and

3) make up for the prospect for increased vulnerability to innocent or serious hacking.

Rate Base Aplenty

Unfortunately, the Smart Grid has one great upside for utilities. If politics force them to invest less in generation (what they should be doing), they will need to plug a hole in their rate bases, i.e. the assets on which they can earn regulated returns with near-certainty. The Smart Grid does just this; its sheer size will require lots of costly meters, communications hardware and software, equipment to process the information produced, and still more investments to dispatch generation and manage demand on the basis of that information. The full cost also includes stuff on the consumers side of the meter, some of which utilities are also likely to supply.

The best part for utilities is that there is no logical ceiling on what they can spend. Build enough capacity to reliably meet load growth and you have no reason to build any more. But with the smart grid, there’s always something you can buy or someone you can hire to squeeze just a little more savings out of the system.

The Smart Grid story is akin to the nuclear delays and overruns of the 1980s. The politics were similar, stemming from overblown concerns about fossil- fuel exhaustion and the environmental effects of combustion, supplemented by a mix of legitimate environmental concerns and fraudulent posturing.

Then it was nuclear, and now it’s renewables that promise clean and soon-to-be-inexpensive power. Both the past and present crises would mobilize the public to conservation, with what power people still needed would come from the new technologies.

Just imagine: Turning the lights off when you leave the room will morph into fiddling with a computer display of hourly power prices and the kwh your appliances are currently expending. In case your life lacks meaning, the California Public Utilities Commission has already announced that it wants energy efficiency to become “a way of life.”

Nuclear Redux?

Like nuclear power at launch, a “successful” Smart Grid will require investment in untested technologies on a massive scale. The GridWise alliance of smart suppliers and utilities echoes the early standardized “turnkey” nuclear plants. They were loss leaders for General Electric and Westinghouse that produced a mass of commitments from utilities that insisted on customizing their plants and handling their own construction. Customization, incompetence and random events drove nuclear costs to unheard-of levels, but utilities had little to fear as long as the politics were with them. Only after Three Mile Island changed the public’s risk perceptions would some state commissions begin assessing penalties for cost overruns in nuclear construction that had little to do with safety.

In contrast to the case of nuclear power, however, there is no obvious event that will trigger a change in the regulatory climate to one of distrusting the Smart Grid—short of a major blackout that can be so linked. But should regulatory conditions change, Smart Grid hardware just might become the next generation of “stranded costs” to be picked up by ratepayers.