Studies in the academic and gray literatures have touted the potential large-scale benefits of a smart grid for the United States. Despite an overall lack of technological constraints, however, the empirical evidence shows a potential gap between ex ante expectations and ex post realizations of the benefits of modernization, as well as some reluctance on the part of utilities and consumers to adopt or use the technologies as expected. The surge in technological deployment during the early 2010s, in fact, was a result of federal funding via the American Recovery and Reinvestment Act of 2009. In this report, RAND Corporation researchers review the current technical, regulatory, and economic context of the electricity market and theoretical benefits of developing a smart grid. They then discuss some of the entrepreneurial opportunities associated with smart-grid data once the grid is fully modernized. Next, they examine the existing empirical evidence related to smart-grid adoption and implementation and investigate the potential reasons for these experiences. Finally, they offer some policy suggestions that might help overcome the identified barriers and discuss their relative merits.
Regulatory Structures, a Lack of Standards, and a Move to Real-Time Pricing Can Create Winners, Losers, and Opportunities for Entrepreneurship
- Full-scale adoption of smart-grid technologies, coupled with a move to real-time pricing, will create both winners and losers among consumers, even though the overall net benefits to society may be positive. In addition, the extent of the gains is subject to risk, which is currently borne primarily by consumers. These two factors represent barriers to smart-grid development from the demand side.
- The cost-plus-fair-rate-of-return pricing structure, inherited from the existing electric grid, can discourage investment in innovative and possibly more-expensive technologies.
- Entrepreneurial opportunities may emerge from novel uses of data collected from smart meters. These data can provide detailed insight into household consumer behavior and pose privacy concerns.
- The lack of technology standards also increases uncertainty to utilities that are concerned about investing in capital equipment that might not be compatible with other system components or will become obsolete in the future.
- Faced with budget constraints and multiple sources of non–rate-based regulations (e.g., renewable portfolio standards and other environmental legislation), utilities and regulators may prioritize investments differently, increasing tensions and risk between the regulators and the utility.
- The economic and regulatory structure of the incumbent distribution and transmission systems inhibits innovation on both the producer and consumer sides of the market.
- Regulators should use the levers at their disposal to promote adoption of smart-grid technologies based on the principle of maximizing net benefits to the system (versus just cost minimization of the investment).
- Regulators should develop efficient pricing regimes for distributed generation, reflecting the overall net marginal benefit (or cost) of generation and recognizing the use of the distribution system as a type of public good.
- Technological performance standards should be developed at the federal level to decrease investment uncertainty.
- Regulators should recognize that the net benefits of smart-grid technologies may differ from subsystem to subsystem because of system-specific variables, such as previous investment paths and the degree of customer responsiveness to electricity prices.
- Regulators and utilities should be realistic about the distribution of net benefits from smart-grid solutions, recognize uncertainties where they exist, and refrain from overpromising benefits to consumers.
- Regulators should require utilities to develop privacy policies as applied to data management and release and encourage utilities to market those policies to consumers.
- Regulators should consider forward-looking test cases because historical data will not adequately represent the new functionality of a modernizing grid.