Phil Carson's recent column, "Smart Grid: Talking Value with Customers," cuts through the hype and pegs the fundamental underpinnings of the reason for needing a smart grid. Well done, Phil.

In the frenzy to make the smart grid happen now, I find it useful to believe that there are two fundamental drivers for making the grid smarter. One is a "carrot," the other a "stick."

Enabling more customer participation and a degree of control in electricity markets is the "carrot" driver, because it represents a potentially enticing, if elusive, reward for the customer. But that "benefit" was written into the script only about a decade or so ago. And one might see its introduction as an afterthought, or a byproduct, of the smart grid investments being made in response to another, more urgent driver.

This other fundamental driver is a tension between power supply system reliability—a surrogate term for supplying all the electricity that a customer might reasonably want when it's wanted—and the cost of electricity, which in some instances is the unit price. This driver is a "stick," because ignoring or mismanaging the tension between providing enough reliability while maintaining low enough cost can be painful to all involved on so many levels. Managing that tension is complicated and, thus, the need for a smarter grid has been growing since somewhere around the late 1960s and the early 1970s.

As a generalization, up until about the 1970s, the main driver for new power supply infrastructure investment was maintaining adequate reliability to meet load growth. The unit cost of electricity was not a big deciding factor (nor was the relatively modest, incremental investment in the grid, compared to the significance of the generation investment decision), because of a persistent trend that brought lower unit costs with new investment through economies of scale. Compared to today, the topography and operational behavior of the grid were simple and predictable. But a complex, interactive confluence of many changes in the 1960s and 1970s brought cost into the investment decision equation by turning the declining unit cost trend upside down. That eventually, substantially changed the electricity business.

In part this stemmed from external factors that eventually weakened the influence of economies of scale. Those factors included environmentally inspired resistance to the construction of new electric infrastructure, compliance with new environmental regulations, periodic shortages of conventional fuels and thus higher fuel costs, higher interest rates, lengthy delays in permitting and building infrastructure and attempts at bringing about deregulation and competition in the electricity business. The confluence and synergies of these factors resulted in increasingly higher electricity unit costs and slower expansion of the power system infrastructure, especially transmission.

While the complete story of the transformative effects of this period on the electric supply industry is a long, complicated saga with regional variations, a number of reactions to the growing tension between reliability and the cost of electricity have set the stage for the need for a smarter grid.

In an effort to obtain adequate, lower-cost electric power, local transmission systems were extended and interconnected, resulting in very large networks that became increasingly complex to manage. One unintended consequence of these interconnections was the increased threat of large cascading outages. An increase in occurrences of spot congestion within the transmission system offered the choice of a) lower reliability, even outages, because of the strain being placed on the large interconnected networks, or b) higher unit costs. In some places, mostly where the problem was most intense, deregulated wholesale power markets were created to help make that choice. These markets, while offering a way to make decisions between reliability and costs, had the (I assume) unintended consequence of creating an even more complex and uncertain operating environment for the electric grid. More recently, society has set renewable portfolio standards that have added to the operational and planning complexities and uncertainties of the power system.

This growing complexity and uncertainty led to the need for a smarter transmission system to increase flexibility, robustness and resiliency.

Then, as now, we've attempted to build our way out of this problem using traditional infrastructure technology. The new trend, instead, is to enhance the intelligence of the grid, rather than just building alone. This is potentially a cheaper option, partly because the build solution alone increases the complexity of the grid, partly because the "build option" encounters societal resistance. (Aka NIMBY.)

The effectiveness of smart solutions at the transmission level, however, is diminished by the lack of participation by the distribution system and especially the customer. This diminished effectiveness is especially evident in the difficulty of making the wholesale market price "seen" at the retail level, for such purposes as demand response, either by a market mechanism or by command and control. This factor—along with other considerations at the distribution level—is again shoving the industry in the direction of increasing the intelligence of the electric grid, but now at the distribution and customer levels. This trend is exemplified by recent programs to roll out smart digital meters (and the supporting advanced metering infrastructure) and invest in distribution system automation.

So smart grid investments really are being made for the ultimate benefit of customers at-large, driven by the need to maintain an "optimum" balance between reliability and unit cost of service. Unfortunately, this argument is difficult to make and sell to customers, which might be one reason to promote the "carrot" by appealing to the individual customer's presumed desire to have more control and options in their electric service. That at least is the preferred market strategy from a customer-relations point of view.

I'm concerned, however, that this approach might backfire. First, the widespread participation by customers remains many years off. This is true for a number of economic, marketing, regulatory and technological reasons. Which begs the question: How long will customers be satisfied with the promise of smart grids, without the reality, while smart grid investments continue to be made? Second, this approach alone isn't really very transparent; it doesn't tell the whole story. When, in time, customers understand the whole story - that grid modernization for reliability and resilience is the main driver, and that their participation is a spinoff benefit to come down the road—they may become disenchanted and their participation may be more difficult to secure in the future.

I would argue that a generational marketing campaign that aims to enlighten customers on the societal pressures facing utilities in the near-term, that explains the utilities' efforts to make the grid smarter and more efficient and reliable, and the customer's role and benefits, in the near-term and the more distant future, in all this would result in sustainable public support for grid modernization.

Merwin Brown, PhD
Director, Electric Grid Research
California Institute for Energy and Environment, University of California