Much has been said in the discussion about the introduction of smart meters. According to Michael West in the Sydney Morning Herald, “smart meters and ‘flexible pricing’ merely shift the business risk from the company to the consumer”.
This entirely misses the point that shielding consumers from the price volatility is counter-productive. In our electricity generation system, wholesale energy is traded on an open market where the laws of supply and demand dictate prices from minute to minute. However the consumer is shielded from dynamic price changes, contributing to ridiculous wholesale price spikes for a few hours per year. Sometimes peak price can be more than one hundred times the typical off-peak price.
So ‘protecting’ consumers from dynamic pricing is a reason why the wholesale price is so unstable in the first place. The wholesale price volatility would be reduced if consumers are exposed to the price. This would also lead to lower peak demand, therefore less peak-time generating capacity has to sit idle most of the time.
So yes, at present the power retailers do assume peak pricing risk, but in return they extract from every consumer a significant premium built in to the everyday price of electricity. Since we pay them a premium in return for avoiding some risk, that puts our power retailers in the insurance business.
As a power consumer, I would love to avoid paying that risk premium for the 99 per cent of hours when wholesale price is low to moderate. So West’s proposition that flexible pricing is a way of the power companies to offload risk misses the point that there is significant potential for lower everyday prices through the paring back of the risk premium that gets passed to consumers in power tariffs.
I propose that retailers offer a pricing plan that, very simply, charges the dynamic wholesale price plus a fixed margin. With smart meters and in-home displays, the dynamic price charged can be displayed to the consumer. Most of the time the consumer would pay much less than they pay today. On average they should be no worse off, but now there is the incentive for more mindful consumption and the prospect of reducing costs in ways that really benefit the grid.
So when the consumer is exposed to the market price fluctuations, therein lies an enormous potential for financially motivated innovation in energy management. The incentive arising from this price signal will drive great innovation. Already today companies like Enernoc are using clever means to make a buck out of ‘demand-side management’. This will start first with large consumers, but there is scope for it to apply at all levels.
Imagine if, on request, 100,000 pool pumps of consenting customers are automatically turned off on a hot day instead of bringing online a 50MW peaking power plant for a couple of hours. Imagine if auto-defrost home fridges are signalled to defer their defrost cycle for a critical few hours. These are some of the less-visible innovations that smart meters could enable. There are bound to be others we haven’t thought of yet. This benefits the grid, and so indirectly benefits all consumers through lower prices from avoided investment in peak generating capacity.
Beyond the benefits to grid is the capacity for smart meters to enable other interesting things directly for the consumer. I have an in-home display that talks directly to my meter and can help me keep an eye on power guzzling devices, and on the immediate cost of power. I also have access to a web portal from my power distributor that presents my usage data and lets me see the big picture. It also lets me plug in different retailers’ tariffs to let me make the most of competition and calculate what my costs might be should I choose to switch.
No doubt some consumers would choose to continue to pay a premium to the power companies for them taking on the peak price risk. However I would much rather pocket the premiums and put that towards clever ways of lessening my own need for power.
Richard Keech is a research coordinator on the Zero Carbon Australia Buildings Plan at Beyond Zero Emissions and an energy efficiency consultant