How Smart Is Xcel's 'Smart City' Grid?

Xcel Energy thinks there are big energy savings -- and bigger money -- to be made with its ambitious $100 million project to turn Boulder, Colo., into the world's first "smart-grid city." Colorado's biggest electric utility figures that developing an auto-balancing, self-monitoring power grid will give Boulder utility customers real-time data about their energy usage, and thus allow them to manage their energy consumption more efficiently.

The only problem is that Xcel assumes that a better understanding of real-time electricity usage will be enough to encourage businesses and residential customers to voluntarily cut back on their power consumption, particularly during peak hours when the grid in many cities operates at close to maximum capacity.

In fact, though, there's good reason to think that most people won't change their consumption patterns unless they have an economic incentive to lower their bills by avoiding peak hours. Unfortunately for Boulder, Xcel plans to keep charging a flat rate for electricity instead of instituting "dynamic pricing" that would provide such incentives.

According to Ahmad Faruqui, an energy economist with the Brattle Group in San Francisco, "dozens of experiments that have been carried out over the past 30 years in North America and Europe demonstrate that customers will cut consumption during peak hours if they earn a rebate on every [kilowatt-hour] curtailed."

Xcel spokesman Mark Stutz agrees that dynamic pricing is a necessary component to the long-term success of smart-grid technologies, but says Xcel can establish a "proof of concept" simply by providing real-time information feedback to consumers. Over time, Stutz says, Xcel will "review" the possibility of asking the Colorado Public Utilities Commission to approve time-based rates.

Will that be enough? During its demonstration phase, which runs through August, Xcel only plans to show that its new system functions as planned. By the end of 2009, however, the utility wants to see quantifiable savings, changes in customer energy management, better grid reliability, greater energy efficiency, increased use of renewable energy sources and support for plug-in hybrid electric vehicles and intelligent-home appliances.

That's a pretty tall order when the utility's customers face neither carrots nor sticks in order to change their behavior -- and when Xcel is deliberately vague about whether it plans to provide them.

During the project's first phase, Xcel will distribute 15,000 smart-meters to the first group of SmartCityGrid customers, including residential, commercial and light industrial users. A Web portal will give consumers insight into their energy use and information for better home energy management. Some customers can also choose to install in-home automation tools, giving them increased control over home energy use.

In its second phase, which will run from September to December 2009, Xcel will expand the system to an additional 35,000 customers.

Xcel only expects to pay for part of the project, and plans to leverage commitments from its Smart Grid Consortium partners and other sources, including government grants, for the remainder of the $100 million effort. Of the $100 million investment, about 60 percent is paying for new equipment and installation. Most of the remainder is pegged for software and information technology, said Mike Carlson, Xcel's chief information officer.

The importance of this initiative cannot be underestimated. The transmission system in the United States is increasingly operating close to its capacity margin, according to the North American Electric Reliability Corporation (NERC), a non-profit organization dedicated to the reliability of the North American bulk power grid.

"Electricity usage in the U.S. is projected to grow more than twice as fast as committed resources over the next 10 years," the NERC announced in its annual 2007 Long-Term Reliability Assessment. "Unless additional resources are brought into service, some areas could fall below their target capacity margins within two or three years."

Even a five percent drop in peak demand can yield substantial savings in generation, transmission, and distribution costs -- enough to eliminate the need for installing and running some 625 infrequently used peaking power plants and associated power delivery infrastructure, according to Faruqui. At the national level, this translates into a savings of $3 billion a year, or $35 billion over the next two decades.

Although we applaud Xcel Energy for its forward thinking, one should be remember that Xcel operates as a for-profit company, serving 3.3 million electricity customers and 1.8 million natural gas customers in eight states (and must answer to shareholders), before lauding the Company for its seemingly selfless initiative to reduce its carbon footprint.

"Xcel Energy is primarily motivated by wanting to improve their level of control over their operations and over the processes by which they deliver electricity service to customers," cautions Lynne Kiesling, a lecturer at the Department of Economics, Northwestern University, and editor of the Knowledge Problem blog. "The company is focused on their own centralized control, when the real potential value creation is in pushing control out to the edge of the network. A smart grid enables decentralized coordination, which is way more valuable in aggregate than Xcel's centralized control."

With only weak cost-based incentives, however, Xcel may not be able to justify the expense of advanced metering infrastructure deployment to customers in terms of return on investment.