Ken Silverstein EnergyBiz Insider Editor-in-Chief

By understanding those consumption patterns and the costs tied to them, consumers can make smarter choices that will conserve energy and save money -- not just for themselves but also for utilities. Utilities, which must oftentimes procure power at expensive times, would have the technology available to adjust electricity usage when supplies are tight or when system reliability is a concern. The utility industry could save between $50 billion and $100 billion over the next two decades if demand response becomes the norm, the Rand Corp. says.

But, making the investment in advanced metering with demand response is another issue. At present, most utilities are able to pass along their costs to ratepayers. Consumers, by extension, pay flat rates and are largely shielded from price fluctuations. The goal then is to inspire conservation. Some state regulators understand the potential. Texas, for example, is working with utilities to find ways to monitor meters as often as hourly for commercial and industrial customers.

"This is an industry in evolution," says Robert Chiste, CEO of Comverge Technologies in Houston. "The stars are getting aligned with automatic meter reading with a demand response component. If we can establish this as a credible way to avoid building supply then we can, in some cases, try and get better rate treatment. But we need to set out to educate regulators. We need to explain this to C-level executives."

According to Chiste, utilities will spend about $250 to reduce one kilowatt over a 10-year period. That may sound high. But, if any utility was to construct a gas-fired peaking plant, he says that it would spend $300-$350 per kilowatt. Chiste is working with state regulators in Florida to bring about a staggered rate structure whereby consumers would pay more for power during peak usage and less during off-peak times. Electricity would cost 6 cents a kilowatt hour at 2 a.m., for example, while it may cost 9 cents per kilowatt hour at 5 p.m. At the same time, utilities would also have the right during extreme conditions to automatically moderate power usage in homes and businesses.

Lawmakers understand the need to educate consumers and to enlighten them that power prices are tied to supply and demand. In fact, the Energy Policy Act of 2005 signed last August requires utilities to offer each of its customer classes within 18 months a so-called time-based rate that reflects the utility's cost of generating or procuring electricity. That sounds like a mouthful, but it really means that homes and businesses would be penalized or rewarded for using power at certain times on the hottest or coldest days.

Clear Benefits

The roughly 130 million residential meters installed throughout the United States are typically read monthly and are best used to gauge monthly usage -- not hourly or daily consumption. It's a process that utilities have mastered and one that they are reluctant to change, given the cost pressures they now face.

Some experts estimate that about 10 million of those meters are equipped with advanced metering technologies. While not every meter is a candidate for an upgrade, there's still a lot of room for growth. But how would the advance be paid? Utilities can sometimes pay for performance and in other cases, consumers will be charged a small fee with the expectation that their bills will go down. State utility commissions may also allow some costs to be passed through to ratepayers.

But if the benefits are clear and the returns forthcoming, more utilities will come around. Manufacturers say the trend is inevitable: With advanced metering, utilities are given greater control over load management. Dispatchers, for example, monitor weather forecasts and the subsequent demand for their energy. Using that information, they can reduce consumer demand if that becomes less expensive than generating power or buying it on the spot market.

Consider Gulf Power Co., which is using a gateway to read meters and offer advanced services: The Pensacola, Fla.-based utility that is a subsidiary of Southern Co. is installing smart thermostats in customers' homes that give them opportunities to adjust temperatures and keep bills down. Meanwhile, the utility is utilizing its knowledge of energy use to more precisely coordinate electricity supply and demand, a process that permits it to run cost-effective generation and save money.

Similarly, Utah Power had to curtail energy usage in a tightly constrained area near Salt Lake City. It then worked with its state utility commission to find a way to implement a cost-effective demand response program. In 2003 the utility went live and expects to cut 90 megawatts of power during peak times and over 10 years.

The benefits may be obvious, but the cost associated with automated meter reading and demand response has prevented the technology from becoming widespread. If advanced metering options are to be used, utilities will have to spend hundreds per meter for upgrades. But the value to utilities is potentially several dollars a month, which comes from cutting personnel costs, eliminating errors and controlling demand. Manufacturers say that the return on investment is anywhere from two to five years, depending on the precise features that are purchased and implemented.

"It is low risk and easy," says Joel Cannon, president of Cannon Technologies in Minneapolis. "Curtailing industrial loads and improving energy efficiency are important elements of managing growing electrical demand, but getting load management devices on air conditioners is darn sure common sense and it's going to do an enormous amount of good on the lion's share of the problem."

With all the hoopla over fuel emissions and the permitting process, energy conservation is getting lots of ink these days. And by extension, the concept has slowly crept into the mainstream. The trick now is to create a proposition to motivate utilities and their customers to cut energy use. With advanced metering coming over the horizon, the alternative to building new generation supplies is becoming increasingly visible.

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