The Smart Grid in Texasresearch.engr.utexas.edu/.../docs/smartgridintexas.pdf · The smart grid is an energy management tool that could allow energy providers and users—utilities

The Smart Grid In Texas: A Primer 1

The Smart Grid in Texas A Primer

By, Melissa C. Lott – UT Austin

Tylor B. Seaman – UT Austin Charles R. Upshaw – UT Austin

Ehab Gondi Kartan Haron – UT Arlington

February 14, 2011


Foreword This work was co-sponsored by Power Across Texas and Oncor. Power Across Texas is a 501(c)(3) Texas non-profit organization that aims to bring clarity and understanding to critical and complex energy issues in Texas. Oncor is a Texas-based regulated electricity distribution and transmission business, which is owned by a limited number of investors including majority owner, the Energy Future Holdings Corporation. The authors created this primer while they were enrolled as graduate students at The University of Texas. Their work was completed with the support of three advisors:

Dr. Michael E. Webber (The University of Texas at Austin) Dr. John C. Butler (The University of Texas at Austin) Dr. Wei-Jen Lee (The University of Texas at Arlington)

All figures, except where noted, are the original creations of the authors.


Table of Contents

1. Executive Summary 3

2. Introduction 8 2.1 The Electric Grid Today 9 2.2 The Texas Electric Grid 10 2.3 How Texans Use Electricity 12 2.4 One-way Communication Between Utilities and Customers 14

3. The Electricity Sectorʼs Business Structure 16

3.1 How Electricity is Sold 18 3.2 How Utilities Make Money 19 3.3 Electricity Bills – Leaving Texans in the Dark 20

4. Modernizing the Electric Grid 21

4.1 The 4 Layers of Smart Grid Technology 23 4.2 Next Generation Revenue Models 25 4.3 The Potential Benefits of the Smart Grid 27

4.3.1 Improved Next Generation Infrastructure 27 4.3.2 Substantial Energy Efficiency Gains 27 4.3.3 Enhanced Renewable Generation Potential 28 4.3.4 Widespread Distributed Generation 29

4.4 The Potential Risks of the Smart Grid 30 4.4.1 At-Risk Populations and the Digital Divide 30 4.4.2 Struggles for Integrated Utilities 31 4.4.3 Cyber-security Risks and Unforeseen Reliability Problems 31

4.5 The Smart Grid Today By State 32

5. Conclusion 34 6. References 35


Executive Summary Electricity is a foundation for modern society, enabling critical activities in

business and life: it turns the lights on, heats and cools our homes, treats our water, drives machinery at manufacturing facilities, and powers the Internet and appliances such as computers and cell phones. Indeed, widespread electrification is one of the key differentiators between healthy, wealthy societies and poor, sick societies. And Texans, as the largest electricity consumers in the nation, have benefitted economically from the existence of a robust electric grid. But, for most Texans, the pathway that brings electricity to their doorsteps is a black box (or more literally, a gray meter, gray transformers, and far-flung transmission lines and power plants) that obscures the details about electricity generation, transmission, distribution, and consumption, leaving many mysteries for end-users.

The current lack of access to information prevents Texans from making

informed choices about the amount of electricity they use, how much it costs, and the related environmental impact. While the current electric grid literally bathes Texans in light, it figuratively leaves them in the dark. As the electric grid evolves and undergoes standard maintenance, Texas can choose to upgrade grid technology in a way that not only ensures future grid reliability, but also empowers Texans with a smarter grid structure. Specifically, Texas can choose to either:

1) patch the current electric grid system using business-as-usual

approaches, potentially risking long-term growth and competitiveness, but saving money on the front end, or

2) invest in fully updating the grid for the 21st century using modern technologies and a smart grid design.

The latter could provide Texans with the opportunity to actively manage their electricity use in a more economical way, while simultaneously enabling the use of the diverse mix of resources that are abundant in Texas (including natural gas, wind and solar). Further, the smart grid could give businesses competitive advantages, and improve the resiliency of the stateʼs electrical infrastructure.


The smart grid, while ambiguous as a term, typically embodies a modern grid concept that would replace antiquated (dumb) infrastructure with currently available and yet-to-be-invented technologies that enable 2-way flows of energy and information between Texans (customers) and their electricity providers (utilities). In the typical grid configuration, energy flows one-way from the grid to consumers and information flows one-way from consumers (or more precisely, from their power meters) to the grid operators. However, with the smart grid, energy and information might flow easily from the grid to customers, and vice versa, in real time as shown in Figure 1.

Figure 1: The smart grid could enable active two-way communication between utilities and their customers

By enabling two-way flows of energy and information, the smart grid could provide consumers with insights into their electricity prices and consumption, which could in turn allow them to actively manage their electricity use in a more deliberate way. By allowing grid operators to reach beyond the meter into the operation of particular appliances in households, the grid can be more accurately balanced, brownouts or blackouts can be avoided, and outages can be quickly mitigated. With smart grid technology, billing can be automated and new service models can be developed. This set of tools could empower Texans, liberating them with the information necessary to make individual choices about their power consumption while enabling utilities to make the grid more robust and economically efficient. Texas is strategically poised to lead the nation in the transition to a smart grid system due to our unique electric grid system, natural

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resource abundance, mix of competitive and regulated markets, large energy industries in the state, and looming infrastructure investments.

Investing in the smart grid in Texas is likely to yield the following four long-lasting effects:

1. Improved next generation infrastructure that can replace and upgrade the existing antiquated electric grid system while creating a substantial number of jobs and improving grid resiliency.

2. Substantial energy efficiency gains that can save Texans money, avoid capital costs for new power plants, reduce per capita consumption, and lessen environmental impacts.

3. Enhanced renewable generation potential from Texas-specific sources, including intermittent wind and solar, that can lead to rural economic development while improving air quality and reducing water use, but would otherwise be hard to tap fully without a smart grid system to match variable demand with the variable supply.

4. Widespread distributed generation, primarily from rooftop solar panels, which can help make homes and businesses more self-sufficient in terms of their electricity needs (thereby reducing their costs), create new economic opportunities for installing and operating small-scale generation systems, increase the resiliency of the grid against major outages, reduce water use in the electricity sector, and improve air quality.

Overall, there are a variety of economic, environmental and security

benefits from investing in a wide-scale implementation of the smart gridʼs elements. In the long-term, these effects could provide a strategic competitive advantage for Texas with direct benefits for Texans. But, there are also some important downside risks, technological hurdles, and policy barriers that need to be overcome. The downside risks include: the potential negative impacts for some groups (for example, fixed and low income customers) if the capital cost of smart grid investments cause electricity bills to rise; increased vulnerability to cyber-attacks and the resulting privacy concerns; the potential for higher-than-expected capital costs; and unforeseen reliability problems from widespread implementation of new meters, solar panels and appliances. Strategic implementation of smart grid technologies will help Texas capture the benefits of a smart grid and avoid the potential technological pitfalls. Effective policy actions at the state level that remove the policy barriers and create smart markets (with


real-time pricing, two-way billing, etc.) will yield an innovative environment that could overcome the technological hurdles.

In summary, the smart grid could lead to a power system that is more cost-effective, cleaner, and more resilient against outages. At the same time, it could empower Texans to actively manage their energy use, create new jobs in the state and encourage new businesses development. But, this potential comes with risks that should be reviewed prior to widespread smart grid implementation.

This primer provides background on the electric grid and its current

technology, illustrating the need to either pay for short-term patches or invest in long-term solutions for the gridʼs increasing problems. Within this background is a discussion of business ownership and revenue structures that are currently used in the electric grid in Texas. These concepts are later tied into a discussion on some innovative pricing models that could be used in a smart grid environment.

The discussion on the current state of the electric grid is followed by an

overview of the smart grid design, from technology and business viewpoints. Included are discussions of four layers of technology within the smart grid design, and the potential for this design to be the next evolutionary step in the modernization of the stateʼs electricity infrastructure. Finally, this primer provides an overview of the potential benefits and risks associated with a move to the smart grid and the general conclusions and recommendations resulting from these observations.


1 Introduction Todayʼs electric grid was designed using technologies that were state of

the art more than a century ago. While these technologies have been largely able to meet 20th century needs, todayʼs aging infrastructure and antiquated technologies need significant investment for upgrades and improvements. This phenomenon is typical throughout the country and not just limited to the Texas electric grid. As the Texas grid evolves to better meet the needs of Texans, the state can chose to either: (1) patch the existing system with a business-as-usual approach to electricity markets, generation, distribution, and consumption, potentially risking long-term growth and competitiveness, but saving money in the short-term, or (2) invest in fully updating the grid for the 21st century using modern technologies, innovative market structures, and a smart grid design that has the potential to improve system reliability, reduce environmental impacts, and enable end-users to comfortably and affordably reduce energy consumption. Due to unique aspects of the Texas grid and its resource base, the state is well positioned to move to this smart grid design.

The smart grid is an energy management tool that could allow energy

providers and users—utilities and consumers—to actively control energy consumption in a way that could make electricity more cost-effective, cleaner for the environment, and more resilient against man-made or natural outages. In the long-term, the smart grid could increase grid reliability and the quality of the electricity that we receive, providing a competitive advantage for the state by allowing us to more fully harness our natural resources, save consumers money on their monthly bills, avoid costly blackouts and brownouts, and encourage companies who provide the key technological components or who would benefit from the new market structures to operate in Texas. The smart grid could encourage the building of new manufacturing facilities and the creation of green businesses and energy technology companies within the stateʼs borders. All of these activities could bring jobs to Texas and bolster the stateʼs economy.

The smart grid could also empower Texans by providing them with the

information necessary to actively control their energy use in an informed way. But, to realize the economic, environmental and security advantages while mitigating the downside risks of the smart grid, it is important to understand the impacts of this grid evolution on key stakeholder groups: electricity generators, transmission and distribution companies, retail electricity providers, and customers.


2.1 The Electric Grid Today

Every day, there is a mass migration of electrons across the United States along a web of wires to ensure that, when you flip a switch, the lights come on. American power companies and local governments built the electric grid over the last century, initially stringing wires to connect cities to small local power plants. Later, the Rural Electrification Act brought electricity to Americaʼs countryside – via hundreds of thousands of miles of new wires. Today, the nation is home to an electric grid with more than 160,000 miles of transmission lines (the huge silver towers you see along the road) and millions of miles of distribution lines that bring electricity to your doorstep.

The first portion of the electric grid exists at the power plant, where

electricity is generated. At this point, transformers are used to increase (“step up”) the voltage of this power so it can be transmitted more efficiently, as shown in Figure 2. This high voltage electricity is then moved along large power lines, which typically transmit the three-phase alternating current (AC) that is used in our homes. In the United States, some direct current (DC) transmission lines are used to transmit electrons over very long distances to reduce losses. Transmission lines are generally aboveground, though some underground lines are used in densely populated areas.

Before electricity reaches its final use point, its voltage is decreased

(“stepped down”) using another transformer at a distribution substation, as shown in Figure 2. The final customers for this electricity could be industrial, commercial or residential customers – each of which has different voltage requirements.

Figure 2: Todayʼs electric grid consists of power plants, transmission and distribution lines, and customers1

1 Graphic courtesy of the U.S. Department of Energy, Energy Information Administration. http://www.eia.doe.gov/kids/energy.cfm?page=electricity_in_the_united_states-‐basics


This approach to moving electricity has been used for over a century, and

has met most of our power needs over that span. But, the aging electric grid has been slowly deteriorating over the past several decades, due to underinvestment in the transmission and distribution infrastructure after the conclusion of the expansion into rural America with the Rural Electrification Act and the last big build-out in the 1970s and 1980s. Todayʼs grid struggles to meet the nationʼs power needs, which makes it prone to power outages that can plunge states into darkness, susceptible to significant price volatility in competitive areas (prices can jump orders of magnitude in a matter of minutes), and dirtier than necessary because of inflexible market structures that make it profitable to keep antique inefficient power plants on line (there are coal plants being used today in U.S. that are more than 80 years old and operate at half the efficiency of a modern coal plant).

Because of the many failings of todayʼs grid system, it is commonly

accepted that many billions (or tens of billions) of dollars in grid investment is needed to complete a wide array of deferred maintenance, to keep up with booming demand, and to reduce the environmental impact of the system by bringing cleaner sources of power online. When contemplating these investments, the possibility to not only repair the system, but also improve it dramatically through the integration of more information, is appealing. The smart grid could allow for this dramatic improvement. 2.2 The Texas Electric Grid

Texas is the only state in the continental United States with its own electric grid, as shown below in Figure 6. The Texas grid is overseen by The Electric Reliability Council of Texas (ERCOT). In total, the ERCOT grid supplies 85% of the stateʼs electricity needs, serving 75% of the stateʼs total landmass. The remaining 25% is connected to surrounding states, and is overseen by the Western Electric Coordinating Council (WECCC), Southwest Power Pool (SPP) and Southeastern Electric Reliability Council (SERC).


Figure 6: Texas is the only state in the continental U.S. with its own electric grid, as shown in this North American Electric Reliability Corporation (NERC) map2

This independence enabled the stateʼs rapid addition of renewable energy capacity. Since 1999, Texas has added more than 10,000 Megawatts (MW) of wind generation capacity, which now supplies nearly 8% of the stateʼs total annual electricity consumption. This wind capacity was brought online so quickly, in part due to the independence of the Texas grid. As new transmission lines are brought online under the Texas Competitive Renewable Energy Zone (CREZ) initiative (established in 2005), renewable capacity in the state is expected to continue its rapid increase. The CREZ initiative established plans for long-distance transmission lines that will run from wind-rich areas of the state to distant population centers, allowing for that energy to more easily reach Texasʼs major population centers, where itʼs needed the most. The independence of the Texas grid could allow the state to more quickly and efficiently move to a smart grid system by eliminating some of the bureaucratic hurdles faced by the rest of the continental United States. This ability to move quickly could help Texas become the nationʼs smart grid leader. And, in doing so, it could provide a competitive advantage for Texas, creating new jobs, developing new industries, and attracting new businesses.

2 Graphic courtesy of the North American Electric Reliability Corporation. January 2011. http://www.nerc.com/page.php?cid=1|9|119


2.3 How Texans use electricity The amount of electricity that Texans use varies throughout the day and

season. The minimum amount of electricity that is used at any given instant in time is called the base load. The maximum amount of electricity used is called the peak load. The daily peak load generally occurs in the late afternoon or early evening, when Texans get home after work and turn on appliances. Historically, the annual peak load has been seen during the summer, when high temperatures lead to heavy use of air conditioners in addition to other appliances. A typical daily load profile for the summer is shown in Figure 3, including the fuel sources that are used in Texas to meet the demand. Figure 3: A typical summer day in the Texas (ERCOT) grid shows how demand

varies throughout the day, over a 24-hour period (midnight to midnight)3

In order to satisfy the variability of demand, electricity generators use power plant technologies that are geared to satisfy peak load versus base load. In Texas, coal, nuclear, and natural gas power plants are largely used to supply base load electricity demand, as is shown in Figure 3. These plants are built to run 24-hours-per-day, for most days of the year. They are generally taken down only for system maintenance and require a significant amount of time to re-start.

3 Figure prepared by Mr. Stuart M. Cohen, Graduate Research Assistant at the University of Texas at Austin, and is used with his permission using data from the Electric Reliability Council of Texas (ERCOT) Individual Resource Output Data.

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Hydroelectric and other renewable technologies are also used to supply some baseload power needs (often replacing coal and natural gas generation), however the intermittent availability of these resources can make them undesirable as baseload providers because they are not considered “firm” or “dispatchable” power.

Peaking plants are designed to quickly meet sudden spikes in the stateʼs

demand throughout the day. These plants can start-up quickly, providing flexibility in the overall system. Frequently, peaking plants burn natural gas. Some of these plants are referred to as “spinning reserve”, because they are paid to stay on (spin), without generating electricity, in order to ensure that demand can be met without a lag period. This is an effective, but expensive, way to provide reliable electricity service.

As mentioned earlier, demand varies not only by time, but also by season.

In the winter, Texansʼ demand (both peak and baseload) is lower. As shown in Figure 4, there can be an approximately 50% less peak demand in the Texas winter compared to the Texas summer. Baseload demand is also typically much smaller in the winter compared to summer. These differences are due to the mild winters and hot summers experienced in Texas, and the resulting difference in demand for heating and cooling.

Figure 4: Winter demand is typically lower than summer demand in Texas4

4 Lott, Melissa, Ashlynn Stillwell, Stuart Cohen, Carey King, and Michael Webber. “Power Generation for the 21st Century.” Clean TX Forum. Austin, TX. May 20, 2009 (White Paper)


While the load curves shown in Figures 3 and 4 appear fluid and smooth,

the actual demand curves are quite bumpy due to the volatility of electricity demand. Each time a light is turned on (or off), demand moves quickly up (or down). This collection of small changes creates a choppy demand curve that requires power plants to constantly shift their output (a practice called load-following). In todayʼs grid, customers are unable to change their demand in response to electricity supply or price. The smart grid could enable customerʼs to follow electricity supply, smoothing out the overall demand curve, by providing the ability for two-way communication between customers and utilities.

Some customers, in states including Texas in California, are already using

two-way communication abilities provided by their utilities to actively monitor and manage their electricity use. In Texas, the Smart Meter Texas portal is a user interface that allows individual customers to gain feedback on their energy consumption. This portal is active today and, with the expected installation of more than 6 million meters throughout the state by 2012, could soon provide a large percentage of the stateʼs population with access to home energy management tools. In California, Pacific Gas and Electricʼs (PG&E) SmartMeter website allows customers to track their energy use and helps them interpret the meaning of this information. 2.4 One-way Communication Between Utilities and Customers

Today, active two-way communication is possible (and common) between generators (power plants) and transmission and distribution companies. But, with the exception of pilot projects in areas that have deployed smart meters and other pieces of smart grid infrastructure, the current electric grid only allows for limited, one-way communication between utilities and customers as shown in Figure 5. The result is typically a one-way flow of information from customers to the grid and a one-way flow of energy from the grid to customers. The smart grid could result in a two-way flow of both information (through wide varieties of interfaces) and energy (through distributed generation and storage).


Figure 5: The smart grid could enable active two-way communication between utilities and their customers

At the heart of this ability for real-time two-way communication is the smart meter. This piece of technology allows for the transfer of data from customers to their utilities, including information on any distributed generation that is operating at the customerʼs location. By enabling the transfer of these data, the smart meter enables customers to actively monitor and manage their electricity use.

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3 The Electricity Sectorʼs Business Structure In order to understand the potential effects of the smart grid on utilities in

Texas, it is important to understand the complex ownership and regulatory structure of the stateʼs electricity sector. This structure was significantly altered in 1999 when Texas Senate Bill 7 (S.B. 7) deregulated large portions of the Texas electricity market. Due to this deregulation, Texas now has a diverse assortment of ownership structures that determine how electricity is bought and sold. These structures can be separated roughly into three types: privatized, municipal (muni) and cooperative (coop).

The difference between the ownership structures lies in who, specifically,

owns each of the 3 tiers of the Electric Utility—(1) Generation, (2) Transmission & Distribution (T&D), and (3) Retail Electricity Providers (REPs). This 3-tier structure is shown in Figure 7. The Generation companies produce the electricity; the T&D companies transport it to the eventual customers; and the REPs actually bill and interface with the customers. The privatized, muni, and coop ownership structures all differ in which tiers are owned and by whom, as well as how profits are distributed, as shown in Figure 8.

Figure 7: There are three distinct tiers in the electricity industry in Texas

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In the privatized ownership structure, each tier (generation, transmission and distribution, and the retail electric provider) is owned by separate organizations. Under the municipal ownership structure, a single entity (the municipal utility) owns the generation, transmission and distribution, and retail electric provider. In a cooperative ownership structure, customers own the transmission and distribution infrastructure as well as the Retail Electric Provider entity that they depend upon for their electricity. Cooperatives may own generation capacity (power plants), or they may purchase their power from other organizations.

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3.1 How Electricity is Sold Today, electricity is sold almost exclusively on a volumetric or per unit

(kWh) basis using the 3-tier structure shown in Figure 9 – regardless of ownership structure of the utility. Electricity generators sell electricity to the Retail Electric Providers, who then sell that electricity to customers. In privatized regions, the price that Retail Electric Providers charge is determined in a competitive market. For municipal utilities and cooperatives the applicable regulatory body sets the price according to what they determine to be affordable for the customer, but also giving the utility a reasonable rate of return (otherwise known as profit).

Figure 9: Electricity is primarily sold on a per unit (kWh) basis

Unlike the other two tiers, T&D companies charge REPs the same amount ($/kWh) to transport the electricity, regardless of the overall ownership structure. These T&D companies operate as regulated monopolies. The price charged to transmit and distribute electricity can be affected by the distance the electricity has to travel (for example, in a nodal market) and if the electricity has to pass through any congested transmission areas. The latter can be common when moving electricity from remote power plants to population centers.

In Texas, transmission lines are being built to serve strategic Competitive

Renewable Energy Zones (CREZ). These lines were sited to help the state better

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utilize its renewable energy resources, in particular, wind. A small portion of the money received for each kWh sold in the state -- regardless of the way it was generated -- is set aside to pay for the CREZ lines. 3.2 How Utilities Make Money

Current revenue models in the electricity industry are typically built upon the foundation of a volumetric pricing (per kWh). This per unit pricing means that utilities generally make more money by selling more electricity, encouraging them to increase the amount of electricity that they sell. Simply put, the more houses or customers that a utility has and the more energy that these users consume, the more revenue the company will make, as shown in Figure 10. As discussed in the previous section, the one exception to this model is found with T&D companies, which are guaranteed a “reasonable rate of return” as regulated entities. In this case, if less electricity flows, T&D companies can charge more per unit (kWh) to cover their capital and variable costs.

Figure 10: Current REP revenue models use a per unit (volumetric) pricing scheme

If the smart grid leads to increased energy efficiency and distributed generation, there might be a decrease in the amount of electricity flowing along the wires from utilities to customers. This decrease could give rise to concerns from utilities regarding how they can profit from new investments. In this scenario, it might be prudent to change to alternative pricing models, which will be discussed later in this primer.

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3.3 Electricity Bills – Leaving Texans in the Dark Today, the primary tool for communicating information from the utility to

the customer is the monthly utility bill (an example is shown in Figure 11). This bill presents the customerʼs electricity use and the cost. These values are generally more than a month old and peak use costs are averaged over the system. This limited set of data prevents Texans from being able to actively manage their electricity use with real-time information, reducing their ability to save money and reduce their environmental impact.

Figure 11: Typical electricity bills do not provide information needed for customers to actively manage their electricity use5

Current bills do not allow customers to identify key pieces of information including when or how they used their electricity. This gap largely prevents customers from actively managing their electricity use, leaving them without the ability to make changes in response to their personal priorities—be they economic, environmental or other. The smart grid and its various technologies improve communication between electricity suppliers and customers. With two-way communication, the smart grid could empower Texans by giving them necessary tools for managing their energy use.

5Image courtesy of MassPowerSave http://masspowersave.com/. Found via Creative Commons. January 2011.


4 Modernizing the electric grid Todayʼs electric grid consists of antiquated technology that can either be

patched, or modernized using a smart grid design. The latter could provide Texans with the opportunity to actively manage their electricity use, potentially leading to a competitive advantage for the state. The smart grid will look different from a utility and customer perspective, as is summarized in Figure 12.

For utilities, the smart grid is a system of integrated sensing and control

devices that can monitor the flow of electricity to and from the customer in real time. This integrated system allows utilities to automatically control and manage system events such as disruptions (for example, outages). The smart grid could also allow utilities to implement new pricing structures into their business models, which will be discussed further in later sections of this primer.

Figure 12: The smart grid design looks different to utilities versus customers

For customers, the most obvious manifestation of the smart grid is the

smart meter. These devices provide data that todayʼs electric meters are unable to capture and deliver, including real time usage information. The main differences between smart meters and todayʼs meters are described below in Figure 13. Smart meters are able to not only automate meter reading processes, allowing utilities to read their customerʼs usage from centralized offices, but also

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•  Secure and updatable devices and software to keep energy data and device control safe from malicious cyber attack

•  Increased interaction with the utility for an improved mutual relationship

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automatically report outages by sending out a “last gasp” message before losing power. Unlike regular meters that do not communicate with the customer (except via a manual reading of the meter itself), smart meters can use wireless communication technology to interact with the customer and in-home devices and appliances. Smart meters also measure the quality of the electricity delivered to the customer instead of only measuring total usage (kWh).

Figure 13: Smart meters have additional data collection abilities than regular meters6

Data provided by smart meters can be viewed through a user interface, which could help customers to better understand their electricity use. These data could allow customers to actively manage their electricity use in response to price and other signals, depending on the pricing structures that are used by their Retail Electric Provider (REP). Software programs could allow customers to automate their electricity management, depending on their individual priorities (for example, cost or environmental impact).

6 Images of power meters from http://www.istockphoto.com and http://www.electronicsweekly.com via Creative Commons. January 2011.

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4.1 The 4 Layers of Smart Grid Technology

There are four basic layers of technology within the smart grid technology infrastructure, as shown below in Figure 14. Each layer builds upon the added capabilities of the layer below, so it is necessary to understand and implement all four to maximize the smart gridʼs potential. Together, these four layers build a comprehensive structure for facilitating active communication and automated management between utilities and customers.

Figure 14: Each of the four smart grid technology layers build upon one another

1) Electric Power Infrastructure (physical layer)

The physical components that generate, transmit, sense, and control the flow of electricity from the generator to the consumer.

• Real-time remote sensing and control systems • Power generation (centralized power plants, distributed

generation) • Transmission and distribution (T&D) power lines

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2) Communication Infrastructure (data link and network layers) Technology that enables devices to communicate with the utility, the customer, and each other.

• Large wireless, power line, and other communication networks send information (utilities)

• Mesh Networks, which allow devices to not only send information but act as a relay for information from other devices in their network, connect all devices in range to create a robust pathway for information (utilities)

• Wide Area Networks that connect large regions in order to send information over long distances (regions)

• Home Area Networks (or HANs) use wired and/or wireless networks to communicate between sensors, the home energy management device, and/or the smart meter (home)

3) Data Management (transport and session layers)

Management of data received from smart grid technologies, including software to automate:

• control and analysis of grid data, including remote meter reading systems

• power output monitoring from intermittent renewable resources • data storage, processing and billing • real-time monitoring of transformer and power line performance

for predictive maintenance • smart charging for electric cars and storage devices

4) Customer and Utility Interfaces (presentation and application layers)

The point where users physically interact with their system or Home Area Network.

• A customer interface • Home Energy Management System • Decision making tools like usage graphs, energy price trends

and patterns, estimated monthly bill, real-time energy cost • Automation tools to control energy use in advance and,

possibly, remotely • Smart appliances communicating with customers


Each of these four layers can be developed using currently available technology. For example, smart meters have already been installed in hundreds of thousands of homes around the state. User interfaces and displays can be bought off the shelf (or the web) for less than $150 per unit. However, it is likely that the prevalence of affordable technology, in particular for the customer and utility interface level will increase once smart meters and smart billing structures have been implemented over wide areas of the state.

As users cannot install new power meters on their homes themselves, the

burden of installing these meters lies on the utility-side. And, to use these meters in a smart grid, utilities will need to invest in smart billing programs for their backend software. In Texas, Transmission and Distribution companies have been tasked with installing smart meters throughout the state and have been given a structure for cost recovery for these meters by the Public Utility Commission of Texas (PUCT). But, some utilities have struggled with obtaining the necessary backend software to create a smart grid environment. So, while the current state of technology enables all four critical layers of the smart grid to be implemented, these technologies are not uniformly mature.

4.2 Next Generation Revenue Models

From a utilityʼs perspective, the smart gridʼs sophisticated communication structure could allow for the implementation of new pricing schemes, using sophisticated backend software. Potential models include Time of Use, Critical Peak Pricing, Prepaid, Real Time, and Real Time Pricing Plus.

These pricing schemes, described in Figure 15, could open the door for

utilities to move away from crude volumetric pricing to more creative and sophisticated schemes by which they charge customers for their electricity. This shift could fundamentally change how utilities make money from the per unit revenue model previously discussed (where all kWh are viewed as equal), to alternative models. Ultimately, new revenue models could allow utilities to align their moneymaking capabilities with their particular priorities, and consumers to align their electricity consumption with their goals.


Figure 15: The smart grid could allow utilities to implement new pricing schemes, as well as existing pricing schemes to a larger customer base

Volumetric Pricing is the current dominant pricing scheme, where

customers are charged a price per unit of electricity (kWh) that they use. In this model, customers are not charged according to the time that they used electricity. Rather, peak use (and its associated higher cost) is generalized over all customers. Simply put, if 30% of total demand is classified as peak demand, customers in the system will pay a peak rate for this percentage of their electricity use regardless of when they actually used electricity.

Time of Use and Critical Peak Pricing could allow both customers and

utilities to save money by charging customers more or less when electricity is costlier or cheaper to produce (when usage is higher or lower). Prepaid would work much like a prepaid cell phones do today. This pricing model could potentially make customers more conscious of their consumption since they would pay before usage, as opposed to up to a month after. Real Time and Real

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Time Pricing Plus would allow utilities to pass on cheaper or more expensive electricity costs directly to the customers. However, without smart grid technology, none of the new pricing structures would be possible, since they all rely on a 2-way flow of communication between the customer and utility.

By allowing for 2-way communication between the customers and utilities,

the smart grid could pave the way for innovative new pricing structures that donʼt rely on the volumetric (relying on increasing energy usage to boost revenues) pricing structure that currently predominates. This shift has the potential to align customer incentives (using less electricity to lower bills) with utility incentives (making more money). 4.3 The Potential Benefits of the Smart Grid The smart grid could empower customers and utilities by providing the ability for active 2-way communication. This ability could, in turn, not only enable large shifts in utility business models and pricing schemes, but could also yield four main categories of benefits. These benefits include improved next generation infrastructure, substantial energy efficiency gains, enhanced renewable generation potential, and widespread distributed generation. These benefits could change the energy landscape in Texas, leading to a long-term competitive advantage for the state.

4.3.1 Improved Next Generation Infrastructure

The smart grid is the result of an upgrade in infrastructure technology that could bring several immediate benefits with it. Specifically, T&D companies could have 1) more accurate monitoring and tracking abilities related to electricity consumption 2) two-way communication flow, and 3) a more robust overall system. For the customers, this infrastructure improvement translates to less frequent outages and, when they do occur, quicker response times. These infrastructure upgrades could also enable remote monitoring and control of electricity flows. As a result, REPs might not need to send employees out into the field for repetitive tasks such as meter reading, thereby reducing costs. These tasks can be automated with smart grid saving the REPs time and money, and allowing them to use employees in a more productive capacity. 4.3.2 Substantial Energy Efficiency Gains

Through greater transparency of a home or buildingʼs electricity consumption, the smart grid could allow customers to become more aware of their energy usage, enabling them to become more energy efficient as a result.


The immediate effect of this increase in efficiency could be lower electricity bills for Texans. In the longer term, energy efficiency opportunities could help the state avoid large capital investments in new power plants, which could further lower electricity bills, and could help reduce environmental impacts.

However, gains in energy efficiency, combined with the current electricity

industry revenue structure leads to the interesting question of how generators will be able to recover capital investments without increasing their per unit rate ($/kWh). Under the current revenue structure and pricing scheme, this cost recovery could lead to higher electricity bills for Texans. Changes to the pricing schemes used in the state could be necessary to avoid this potential pitfall.

However, current examples of energy efficiency success demonstrate that

efficiency might actually lead to lower electric bills overall. In Austin, customers pay more per unit (kWh) of electricity than San Antonio customers due, in part, to the expense of energy efficiency efforts. However, on average, Austinites pay lower electric bills because they consume far fewer units (kWh) of electricity than customers in San Antonio. 4.3.3 Enhanced Renewable Generation Potential

Today, the intermittency of renewables (particularly solar and wind) complicates their integration into the grid. The implementation of a smart grid has the potential to allow for better integration of renewable generation, enabling higher penetration levels. The benefits of this improved integration include having less-polluting electricity sources and less price volatility due to fuel price fluctuations. Also, the problems that arise from fuel source intermittency could be mitigated with active control of electricity demand. The smart grid could allow for better demand prediction, in part by giving grid operators the ability to curtail the amount of electricity demand in their system through automated control mechanisms.

This increased use of renewables combined with more extensive grid

control abilities could reduce the need for (expensive) spinning reserve. Further, the smart grid could make the integration of widespread and large-scale energy storage easier to achieve. An example of a promising storage technology is found when a large number of small storage devices connect to the grid, in particular, with electric cars. This potential is discussed below in Figure 16.The smart grid could allow for the safe charging and discharging of electric cars connected to the electric grid by providing active feedback and appliance control.


Figure 16: Electric cars could combine to create large-scale storage

4.3.4 Widespread Distributed Generation

In the longer term, smart grid could open the door for widespread distributed generation. Right now, the small amount of distributed generation technologies – including the few solar panels that have been installed on rooftops of businesses and homes – have not made a significant impact on the need for on-grid electricity. However, as the price of distributed generation continues its downward trajectory, there could be a rapid increase in installations of distributed generation. If, for instance, the price of solar panels becomes competitive with traditional generation during off-peak periods, then many customers might consider turning their buildings into mini power plants.

If a large number of people start deciding to install solar, then a smart grid

is a must in order to manage the two-way flow of electrons and ensure continuing grid stability. In particular, utilities who are familiar with managing the flows of energy from a handful of large power plants, might see their responsibilities expand as they must be ready to control or respond to the energy flows from

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those same few, large power plants plus many thousands small power plants that are not dispatchable. Consequently, having more information about energy consumption and generation, with temporal and spatial resolution, will be critical for keeping loads balanced. 4.4 The Potential Risks of the Smart Grid

While the smart grid could bring many benefits in the short- and long-term, it also brings with it a set of potential risks. In particular, the increased use of sophisticated technology could amplify the digital divide. Populations with low levels of technology literacy could be left behind due to their inability to interact with the smart grid. Further, low-income groups could be disproportionately burdened with the capital cost of the smart grid. These concerns are already being addressed in part through proactive utility programs that provide affordable technology and customer interfaces, as well as training in the use of these devices to customers.

The smart grid also poses potential problems for integrated utilities that

own generation capacity. If utilities that own power plants are not able to recover their capital investments using new pricing models, they could have difficulties ensuring their continued survival. These problems could include the significant growing pains associated with trying to use todayʼs antiquated business models with the new abilities of the smart grid. These risks could be mitigated using proactive policy mechanisms on a statewide level. Each is discussed in more detail below.

4.4.1 At-Risk Populations and the Digital Divide

Overall, the effects of the smart grid on customers are likely to be positive. Advanced smart grid technology could empower customers to make choices to actively manage their electricity use, which could allow them to more precisely control their overall utility bill ($$) or environmental impact, or both. But, this ability could be limited in certain populations due to the sophisticated level of technology required in a smart grid system. This limitation could lead to regressive effects in the Texas customer population. These potential impacts could be especially problematic for older, fixed-income individuals though experiences in other states (including Maryland and California) suggest that these individuals could benefit the most from smart grid infrastructure if they are educated in its use.


To help reduce the potential for regressive impacts, it might be prudent for Texas to consider subsidizing smart grid customer interface technologies for at-risk groups. Some Texas Transmission and Distribution companies have already chosen to provide subsidized technology for low-income residential customers. Oncor and CenterPoint Energy, for instance, have dedicated more than $8 million to supply technologies to low-income customers to help this group realize some of the benefits of the smart grid system.

4.4.2 Struggles for Integrated Utilities

The potential effects of smart on the Texas electricity market and its participants depend heavily on the ownership structure of utilities in each region and the revenue model that these participants rely upon. While all three tiers—generation, transmission & distribution, and the retail electric provider — exist throughout Texas, the regional ownership structure dictates how they interact with each other, as was previously discussed in this primer.

Ultimately, the interactions between the three tiers of the electric industry

play a large role in how the smart grid could evolve in Texas. Operating with a smart grid system, each tier could experience short- and long-term effects that could be beneficial to the company or might include some risk. Those utilities that own generation capacity could find the potential for widespread efficiency and distributed generation to be a threat to their ability to recover their capital investments. This risk could be addressed by updating the current pricing models used by generation facilities. 4.4.3 Cyber-security Risks and Unforeseen Reliability Issues

Greater connectivity in our grid could lead to threats to privacy and energy security in the state. The latter is of particular concern, as it could result in unforeseen reliability issues in the stateʼs electric grid. However, these concerns are already being mitigated using intelligent design and standard security protocols that mandate redundancy throughout the grid system.

Privacy concerns in a smart grid system are most often discussed in terms

of customer access to their data and their ability to prevent widespread releases of these data. The second is already addressed under current privacy regulations. The first will likely have to be dealt with via statewide policy measures in order to ensure that secure household data is not shared without permission from customers.


4.5 The Smart Grid Today By State California and Texas are recognized as the nationʼs smart grid leaders.

Not only did these two states recently receive large amounts of federal funding under the American Recovery and Reinvestment Act (ARRA), but they are also already home to millions of smart meters and supportive policies encouraging further technological advances. While California is frequently viewed as the frontrunner, Texas is not far behind. And, with recent backlash to widespread smart meter deployment in California, Texas could soon surge ahead in the smart grid race.

Texas has already deployed millions of smart meters to residential,

commercial and industrial customers, giving the state a good start in building the backbone for a statewide smart grid system. It has also passed policies aimed at quickening the smart meter adoption rate in the state. Under Texas House Bills 2129 (2005) and 3963 (2007), Texas Legislators formally encouraged the rapid adoption of smart grid technologies throughout the state, perhaps due to a desire to increase the Texas gridʼs reliability and flexibility.

In terms of federal government funding, ten states are leading the nationʼs

smart grid efforts: California, Colorado, Florida, Massachusetts, New Jersey, New York, North Carolina, Ohio, Pennsylvania, and Texas. Through the American Recovery and Reinvestment Act (ARRA), $4.5 billion was released in support of smart grid efforts, with 42% of these funds being awarded to these 10 states. The goal of this stimulus was to lay the groundwork for market development of the smart grid. Of the $4.5 billion total, Texas was awarded $285.6 million (6.4%) as shown below in Figure 17. To date, North Carolina has received more ARRA funding for smart grid efforts than any other state, at a total of $404 million (9%).


Figure 17: 70% of the $285.6 million in ARRA funds sent to Texas have been awarded to CenterPoint Energy. These funds are primarily being used in their

smart meter deployment project7

Among the top 10 states in smart grid deployment, Colorado is recognized

as the home of the nationʼs most ambitious smart grid pilot project, SmartGridCity. However, Texas is recognized as the national leader in widespread access to smart grid user interfaces (with the Smart Meter Texas website8), planning for issues related to the charging of electric vehicles, and progressive policies such as its clear cost recovery structure for smart meter installs under the authority of the stateʼs Public Utility Commission and its comparably clear plan for statewide smart grid deployment.

However, while Texas has been proactive in smart grid deployment, it still

lags behind some states in its active outward promotion of the smart grid system. California, Colorado and New York are recognized as national leaders in active promotion of the smart grid as a beneficial asset for their stateʼs long-term economic development and social wellbeing.

7Graphic from GTM Research via Smart Planet http://www.smartplanet.com/business/blog/smart-‐takes/top-‐10-‐states-‐leading-‐us-‐smart-‐grid-‐deployment/9399/ 8 https://www.smartmetertexas.com/CAP/public/


5 Conclusion The aging electric grid will require significant investment in the near-term

in order to ensure that it will continue to meet the stateʼs power needs. Texans can choose to either spend money patching the current grid, or to invest in a smart grid future. The latter could provide a competitive advantage for the state, with benefits for both customers and utilities in the short- and long-term. Potential benefits include:

1. Improved next generation infrastructure that could provide a more

reliable electric grid 2. Substantial energy efficiency gains, resulting in energy and cost

savings for customers and utilities 3. Enhanced renewable energy generation potential, as the smart grid

could better manage the integration of renewable capacity onto the grid 4. Widespread distributed generation

While the smart grid is likely a smart move for Texas, there are risks to

both customers and utilities that should be addressed through policy and other mechanisms in order to minimize the growing pains as the state transitions to a smart grid. These potential risks include:

1. Regressive effects of capital investments on low-income Texans 2. Technology barriers due to digital divide 3. Financial struggles for integrated utilities 4. Antiquated business models and pricing structures

By successfully addressing these risks, Texas could successfully modernize its grid to a smarter, better grid. And, with this transition, the state could realize long-lasting benefits.


6 References

1. Baltimore Gas and Electric. The Smart Grid. http://www.bge.com/portal/site/bge/menuitem.e9410201300ca79ce38bb010426176a0/

2. Galbraith, Kate. Why Texas is Using More Coal, Wind and Less Gas.

January 25, 2010. http://www.texastribune.org/texas-energy/electric-reliability-council-texas/why-texas-is-using-more-coal-wind-and-less-gas/

3. GTM Research. “United States Smart Grid Policy 2010: In-Depth Analysis

of Ten Key States Driving Development” Released July 26, 2010. http://www.gtmresearch.com/report/united-states-smart-grid-policy-2010.

4. NIST Framework and Roadmap for Smart Grid Interoperability Standards,

Release 1.0. http://www.nist.gov/public_affairs/releases/upload/smartgrid_interoperability_final.pdf

5. Smart Meter Texas Website.

https://www.smartmetertexas.com/CAP/public/index.html

6. Smart Planet http://www.smartplanet.com/business/blog/smart-takes/top-10-states-leading-us-smart-grid-deployment/9399/

7. U.S. Department of Energy. The Smart Grid: An Introduction.

http://www.oe.energy.gov/SmartGridIntroduction.htm

8. U.S. Department of Energy, Office of Electricity Delivery and Energy Reliability. The Smart Grid: An Introduction. http://www.oe.energy.gov/SmartGridIntroduction.htm

9. U.S. Environmental Protection Agency. eGRID2007 version 1.1.

http://www.epa.gov/cleanenergy/energy-resources/egrid/index.html

Documents

The Smart Grid in Texasresearch.engr.utexas.edu/.../docs/smartgridintexas.pdf · The smart grid is an energy management tool that could allow energy providers and users—utilities