Trouble in Smart Grid City

It sounded like a great idea—at the time.

Let’s put together a demonstration project to showcase the new smart grid technologies and do it right.  We’ll learn a lot from this experience we can apply to the rest of our service territories and we’ll get a lot of good will from investors, regulators and customers.

Let’s Build a Smart Grid City!

Xcel Energy is a good utility, well managed and focused on improving the use of technology to make its operations more efficient and environmentally responsible.  It operates in eight states from the Rockies to Minnesota so it has many regulatory masters to satisfy.  So to get the benefits of good will out of Smart Grid City, Xcel had to do it right.

Boulder, Colorado was chosen as the site for the project in March 2008 and plans began to take shape.  Early on Xcel was worried about how much the project would cost because it already knew it faced rates increases for Comanche 3, a new coal-fired unit power generation station coming into service.

As often happens in projects that require new, untested technologies the costs can quickly rise and Xcel Energy’s initial estimates of capital investment for the Smart Grid City of about $15.3 million grew as problems were encountered with the fiber optic cable required to support the project and other costs.

Xcel had anticipated some cost increases and was worried about adding to its rate increase request.  So it asked many of the potential vendors for the project to help sponsor it by paying a participation fee up front or providing in-find equipment or services.

After all more than 50,000 customers in Boulder, a progressive and green city, would be served by the project and Xcel pitched Smart Grid city as a way for these vendors including many start-ups to showcase their technology and gain a good reference to add to their credentials.  Nonetheless, it was a hard sell and in the end, while a few players did participate most of the major players did not.

Whether participation fees are a good strategy for such projects is an open question, but in the end the amount of participation fees raised was probably not worth the aggravation and did not save Xcel Energy from paying the bills and facing the music in the form of rate increases—about $11 million from its December 2009 approved rate increase went to toward costs for Smart Grid City.

How Much is This Going to Cost?

But that’s not the end of the story.  That rate increase award brought unwanted attention from Colorado regulators wanting more information and more oversight over the costs and benefits of Smart Grid City.[1] In an action that sends a chilling message to other utilities around the country, the Colorado Public Service Commission in one stroke undid all the good will Xcel hoped to get from this project by requiring the utility to seek a Certificate of Public Convenience and Necessity for the project.  This is PSC-code for ‘we reserve the right to disallow any costs for smart grid city we find later—after you’ve spent the money—were imprudent and thus should not be chargeable to ratepayers.

For Xcel this is a set up to get hammered by the Commission as the inevitable cost and transition to that smart grid enabled environment takes place.  And it isn’t a one-time trip to the wood shed either.  Some estimates of the cost of SmartGridCity approach $100 million.

Remember, all this smart grid technology depends ultimately in the political willingness of regulators to subject customers to real-time dynamic pricing to provide them with the economic incentive to moderate their demand to control their rising utility costs.  After a hundred years, utility customers are accustomed to average pricing and stable rates.   Occasional rate increases come along but we typically get 6 to 12 months advance notice and the opportunity to intervene and complain about them—and the regulators generally cut the rate increases back from the utility’s initial request so it does not hurt as much as we thought it might.

Real time pricing is real-time pain.  And real-time pricing will not be the option it is today.  Make a mistake of turning on your A/C at the wrong time of the day and you will pay—big time.  No rate cases, no excuses.

And in the smart grid technology world one of the most talked about topics associated with dynamic pricing is “pre-pay” which will replace traditional utility bills with credit cards and card readers so that we go on line and pay in advance for our energy in whatever amounts we can afford.  Combine real-time pricing with pre-pay and utility customers are in for big changes ahead.

Guess what, customers are not going to like all the smart grid we are going to pay for—no matter how much our politicians tell us “smart grid” is working.