Over the past several months, as utilities have rolled out smart meters in homes throughout the country, they’ve been met unexpectedly with consumer backlash.

With the roll-out, consumers got a muddled message. Some heard that “smart meters will save you money;” others got no message at all; and many came home to find new meters in their homes without warning

Then reports starting surfacing that consumers were getting a noticeably higher bill the very next month.

That opened the floodgates of questioning so now, in addition to higher bills, consumers are voicing concerns over security and health issues. Will an IP-based smart grid leave personal information vulnerable to hackers? Are the wireless signals smart meters send and receive a long-term health hazard?

The unexpected result of this much ballyhooed home accessory of the clean energy economy is that consumers are now fighting for the right to opt out of having smart meter installed in their homes altogether.

The smart grid industry is moving quickly to respond. It’s forming industry groups and hosting conferences and microsites focused on consumer education, but it’s playing a game of catch-up that no industry really wants to face. It’s a situation that might have been avoided by what GE’s General Manager of Smart Grid, Luke Clemente, calls “smart regulation.”

“The smart grid is in its infancy, and the first step toward building it was smart meters—they’re a key building block—but now we need regulations to create tools that help consumers to be smarter about energy usage,” Clemente said. “We expect to see smart regulations, like time-of-use pricing, which will link change in behavior to lower bills and using energy more efficiently.”

Time-of-use pricing is the holy grail of the smart grid. Also referred to as "dynamic pricing," it refers to the goal of allowing consumers to know how much they are paying for electricity at any time, and giving them the option of shifting their power usage to a time when demand for power, and hence its price, drop.

Trouble is, the smart meters got rolled out, but consumers don’t yet have the option of time-of-use pricing. Why not?

Tepid Uptake of a Promising Tool

The question of time-of-use pricing has plagued the utility industry for decades, long before the smart grid was even conceived. Despite years of studies and research pointing to its economic benefits, no one seems to have much of an answer why it hasn’t become widely available. There have been various time-of-use pricing pilots and studies conducted, and some are currently underway in the United States. There’s the Xcel Energy Smart City pilot in Colorado, for example, and the GridWise™ Olympic Peninsula Project, managed by the Pacific Northwest National Laboratory and funded by DOE.

In those trials, as in the dozens of pilots that came before them, all over the world, utilities are finding that consumers are both willing to adjust their energy usage patterns and that those adjustments do translate to cost savings.

“Despite the promise of substantial economic gains, the deployment of dynamic pricing has been remarkably tepid,” Ahmad Faruqui, PhD wrote in a March 2010 report for financial consulting firm The Brattle Group.

Some Public Utility Commissions are moving ahead with rolling out time-of-use pricing to consumers. According to a recent Pacific Crest Mosaic Smart Grid Survey, more than half of the nation’s utilities expect to have implemented dynamic pricing by 2012, but hurdles remain.

Although the California PUC has ruled that dynamic pricing will become the default for all non-residential customers once smart meters are rolled out to them, it is prevented by law from making good on the promise. State legislation has frozen portions of residential rates in order to recover the costs of the energy crisis of 2000-01. 

Low Income Families May Pay More

There is also concern among consumer advocates that low-income households will suffer disproportionately from dynamic pricing. According to Faruqui, the perception exists that dynamic pricing is unfair — only those who are using excess energy currently will benefit from lower bills. Low-income families and individuals on fixed incomes, who have little flexibility in in changing already low usage habits, will not benefit and, in some cases, may end up with higher bills.

“From certain quarters, most notably consumer advocates, concerns have been voiced that dynamic pricing inflict harm on low income consumers, seniors, people with disabilities, people with young children, and small businesses,” Faruqui wrote.

“It is stated that these consumers are unable to curtail peak period usage, in part because they have very little load to begin with. The underlying premise is that dynamic pricing is unfair.”

Data from Australia seems to support that view. In Victoria last year, the Auditor-General found that consumers would have been paying an extra $150 annually under the province’s proposed new metering system with dynamic pricing. A subsequent study by the University of Melbourne estimated that bills for low-income residents would rise by 30 per cent, or $300 a year.

Still, Faruqui maintains that consumers with below-average usage would see a reduction in their bills with dynamic pricing regardless.

“For the benefits of dynamic pricing to be realized, not all customers need to respond,” he wrote in the Brattle Group report. “In fact, as commonly developed under revenue-neutrality principles, half of the customers whose load factors are better than average will see an immediate reduction in their bills before they make any adjustment to their pattern of electricity consumption.”

Storage and Variability

Dynamic pricing is expected to deliver benefits beyond pricing flexibility for consumers. According to utility industry consultant Jack Ellis, it could help address storage and variability issues associated with renewable energy as well.

“As increasing amounts of renewable energy are connected to electric systems, it may be as important to encourage increased electric consumption during some periods as it is to reduce consumption at other times,” he said.

Fred Butler, the former chairman of the National Association of Regulatory Commissioners, said the historic distrust of dynamic pricing is going to have to change if the grid is to get smarter.

“Most people have paid for their electricity at the same rate every day of every year, every hour of every day—that’s going to have to change,” he said. “If you’re going to have a smart grid that allows you to measure and have two-way communication between the end-use premises, the utility company, the RTO, and other entities, rates will have to change to be more time-of-use rates or critical peak period rates.”

Those changes appear to be happening, as more and more utilities commissions are announcing their intention to shift to time-of-use pricing, and with those rate changes coming, utilities will need to be better prepared to conduct consumer education than they were with the rollout of smart meters.

“We have a massive education campaign that’s needed to explain to people why this is happening and how they can adapt their usage of electricity the way they’ve adapted their telephone usage, waiting for ‘free nights and weekends’ to make calls,” Butler said.

For now, consumers and advocate groups are attempting to put a moratorium on smart meter roll outs for a host of reasons, but the consumer backlash could be softened if the industry works out the kinks in dynamic pricing.