The Smart Grid Debacle and What to Do about It

Found at

tl;dr: Use less electricity, win valuable prizes.

Look at the picture above. Stare long and hard.

First of all, this is the least-cool protest I’ve ever seen.

Second, is this what the smart grid has bought us? With north of 20 million smart meters deployed in the U.S. and $3.4 billion in ARRA spending committed:

  • Utilities got free money. Twenty million smart meters at $200 a pop means $4 billion; the other 40 million currently planned means $8 billion more to go. You are paying for this – either through your federal taxes (for meters subsidized by the ARRA) or rate hikes in your utility bills (for the rest). Further, most U.S. utilities earn revenue in the form of a regulated return on capital invested, i.e. the physical assets they’ve deployed in the field – including smart meters. So at a typical return rate of 11%, they’d collect an additional $1.3 billion every year for the smart meters they’ve deployed.
  • Vendors made bank. Take a look at Silver Spring’s S-1. Scroll down to the financials and you’ll find $422 million in deferred revenue. Again, your dollars at work.
  • Consumers got worse than nothing. These smart grid investments are supposed to lead to lower prices, better reliability, and more choice. But so far, consumers are seeing little more than ham-fisted rollouts and lightning-fast disconnections if they fail to pay their bills. In this environment, it’s no surprise that largely unsubstantiated fear-mongering about smart meter safety and privacy attracts a growing following.

Don’t get me wrong: Smart grid infrastructure is a vital requirement for the future. But the process of selling it to consumers has, by and large, been awful. At this rate, the utility industry risks permanently alienating multiple generations of people who are all coming face-to-face with energy technology for the first time. If backlash against the smart grid rippled up through public utility commissions to elected officials, it could permanently scuttle future initiatives – a phenomenon already hinted at in Hawaii and Maryland.

If you envision the same kind of future I do – one where the stuff you plug into the wall responds transparently to grid conditions to help balance supply and demand – it will never be realized in the face of popular disdain. In my view, reversing consumer perceptions of the smart grid will require:

  • Blindingly obvious consumer benefits. Getting a smart meter shouldn’t be like putting in a new smoke detector – it should be awesome, more akin to unpacking a new iPhone. Benefits like faster outage recovery and deferred transmission construction are too infrequent and vague for consumers to care about, so what can be done? 1) Build simple apps to show consumers their energy usage, 2) suggest what they can change, 3) fund prize pools for those who reduce the most, and 4) trumpet the giveaways Powerball-style. This is proven to work elsewhere – witness companies like HealthHonors and HealthPrize, which give cash prizes to people for taking their prescription drugs.
  • Super-low cost. Most utilities have an incentive for consumers to use less electricity, in the form of money they get paid by public utility commissions for every kilowatt-hour reduced. Utilities must deliver the reduction at the lowest cost per kWh. It’s going to be less costly (and, I suspect, more effective) to do this via cheap prize mechanics rather than deploying yet more costly hardware. My quick-and-dirty math below shows why: If a $200 home energy monitor with a $2/month subscription fee yields a 10% electricity reduction, that works out to $0.03/kWh reduced. But if a $2 million prize pool (let’s tack on another $1 million in administration/marketing) gets customers to use 3% less across a 1.7 million household base (I used CT Power and Light), you’re at less than half a cent/kWh – an order of magnitude lower, and on par with tried-and-true CFL bulb giveaways.

  • A marketing infusion. To date, smart meters have been the consumer face of the smart grid. Their rollouts have been frequently unfortunate. One much-discussed California utility began deploying smart meters during a blazing summer amidst a change in rate plans: Can you blame angry consumers for thinking that the new meters jacked up their bills? Smart grid initiatives need to be managed like products, stress-tested by PR paranoiacs, and marketed by savvy tacticians recruited from the likes of P&G and Apple.

With this in mind, what am I excited about as an early-stage venture investor?

  • Competitions. The Biggest Energy Saver competitions in Texas and San Diego are probably the best examples of this, and the ideal market-testing playgrounds for start-ups with behavioral approaches. Lucid Design Group has done a great job of setting up similar competitions for university and corporate campuses.
  • Software disambiguation. I don’t know what I’d do if my smart meter said I use, say, 20% more electricity than similar homes. I do know what I’d do if I was told “the problem is your fridge.” Within a few years, smart meters in California and Texas will start chirping electricity consumption data wirelessly to any device in the home: While there are plenty of logistical wrinkles to iron out, the idea of using algorithms to work out the contribution of each individual load – and make personalized recommendations about what to change – is tantalizing. A bunch of start-up companies are on the case.
  • “White tag” markets. In nearly all states, if a company wants to harness smart meter data to enable household electricity reduction, it has to contract with a utility in order to get paid. Utilities can only take on so many of these projects at a time, and they pose notoriously long sales cycles that are poison for start-ups. A better way to encourage innovation would be to establish an open market for residential energy savings credits (“white tags”) and let anyone participate, as long as verified reductions can be demonstrated. This process is underway in Connecticut, Pennsylvania, and Nevada, although it seems to be a long time coming.

A final note: Successful innovation here (at least in the U.S.) is more likely to come from the bottom up than the top down. Americans don’t like being forced to do something, and get outright hostile when they think you’re invading their homes: As National Rural Electricity Co-Op Association VP Jay Morrison said at Gridweek this month, “What Glenn Beck has taught us is that if the government says we have to install something, people will resist it.” Make the smart grid awesome for consumers – using prizes, games, and competition to win a battle for attention – and people will engage on their own.

This entry was posted in Consumers, Smart grid. Bookmark the permalink.

3 Responses to The Smart Grid Debacle and What to Do about It

  1. David Schatsky says:

    Excellent thoughts and analysis, Matthew.

  2. Jasmine says:

    how about install the meter and the utility will offer a lower intro utility rate for the first year…. while customers figure out how to make it work for them? alerts when customer is reaching their budgeted utility spending… Let say I only want to spend 100 this month. I can get a text or email when I’m at $75…. As a consumer I want to be able to go online and see how much I spent today, this past hour, week and this past month…. Put a little widget on my desktop so I can see real time info.

  3. Great post, Matthew. Glad to see this important topic getting more coverage.
    At Physic we’ve been focused on this topic of how to reduce the friction for consumers to realize the benefit of the smart grid. I recently got the chance to beta test the new Homebase from our portfolio company, EnergyHub, which you can read about here:
    If you live in Texas, you can now buy one of these EnergyHub systems, connect it to your smart meter and start to realize the “oh, it’s my fridge” aha moments that you mention above. It’s about time some of the other more progressive states got on the bandwagon as well.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s