Smart Grids – Adam Smith or Orwell?

Blog, Energy, Les Routledge

A quick scan of blogs and media coverage of Smart Grids for electricity quickly reveals a fear of a system that could have been envisaged by Orwell.  Fears of big brother type of systems are given voice by many, including Lawrence Solomon at the National Post.

Under the so-called “smart grid” that the UK is developing, the government-regulated utility will be able to decide when and where power should be delivered, to ensure that it meets the highest social purpose. Governments may, for example, decide that the needs of key industries take precedence over others, or that the needs of industry trump that of residential consumers. Governments would also be able to price power prohibitively if it is used for non-essential purposes.

I have to agree, that if Smart Grids are not deployed in an open, transparent and competitive market structure, the result could be seriously problematic.  Who in their right mind would want to give that type of authority and power to big brother, whether that entity is big government or big corporate industry?  If that was the predestined future of Smart Grids, place me at the front of the barricades to stop it moving forward.

However, let’s step back from the fear mongering visions of a fascist future and look at the possibilities in a more balanced manner.

The ability to supply and deliver electrical power is not infinite.  Without a method to ration supply, the system would very well be characterized by blackouts and rolling brownouts as utilities struggle to meet ever expanding demand with limited supply.  The future of “utility managers deciding when and where to deliver power” is exactly how today’s un-smart networks operate when demand exceeds supply.  In the event of a mis-match of supply and demand, utility managers will implement brownouts and blackouts to ration supply to priority users.  All one has to do is look at how underdeveloped electrical utilities operate in the third world to see that model of operation in action.

Those utility-defined rolling blackouts and government-defined decrees on who does and does not get power can exist precisely because there is not an open, transparent and competitive market for the supply of energy.  Without dynamic pricing nor price signals being sent to consumers in real time, the system suffers from the tragedy of the commons where demand can exceed the ability to supply.  A rigid utility network that cannot use price signals to ration demand virtually guarantees that a big brother authority will have to assume non-market allocative decision making authority over who does and does not receive electricity during peak periods.

However, that dystopian future does not need to occur if Smart Networks are designed and implemented in a manner that embraces open standards and market competition from the start.  Even some commentators from the Democratic Party are calling for Smart Grids to employ open standards that enable dynamic competition and innovation.

…we have been making the case that smart grid standards should be as open as possible. Only by opening up the playing field to as many players as possible can we secure the maximum level of innovation.

Smart Grids, characterized by open standards and an industry that embraces competition with dynamic prices, can offer an alternative to a dystopian future centralized command and control over out lives.  They can employ price signals and market-based competition to ration demand as an alternative to authority residing with big brother.

The key issue that need to be debated in public policy is how to ensure the technology is developed and implemented in a manner that ensures open competition and transparent price discovery can occur.  That is the conversation that we should be focusing on in public policy.  We need to figure out how smart regulation can empower consumers in the future by creating a competitive, market-based system instead of relegating them to forever be captive customers of rent-seeking incumbent utilities and power-hungry government regulators.

Returning to Moynihan’s comments, there is a better path forward, but it will require the emergence of intelligent public policies to ensure Smart Networks produce positive economic and social results.  Let’s work to ensure that those intelligent public policies will embrace open, transparent market competition in the electrical utility sector.

First, standards that open up the grid to many players and allow people — including producers of renewables and ancillary services — to enter the market easily without having to wade through government red tape or regulation will go a long way to accelerate innovation and the ensuing economic activity. In other words, set the standard and then let the parties innovate and compete. Open standards are particularly important in an industry as regulated and traditionally sleepy as that of electric power if we are to turn it into a field of innovation.

Second, it is time to re-examine the extraordinarily complex structure of electricity regulation itself. Regulation should be as streamlined and efficient as is consistent with safety and security. Markets should be employed where practical to place everyone on an equal footing.