What’s in it for Me? Selling the Smart Grid to Consumers
By: Joe Miller
A recent staff report issued by the Federal Energy Regulatory Commission (FERC) on demand response potential indicates that the greatest opportunity to expand peak load reduction is with residential consumers utilizing Smart Grid technologies (link to full report at bottom). That potential depends, however, on an interested consumer group that wants to participate.
What are the incentives for consumers? Are cost savings sufficient to stimulate customer buy-in? Do societal benefits provide sufficient motivation? In this article, I’ll examine the supposed financial incentives for consumers. In a later installment, I’ll address other possible motivations and issues and suggest a basic approach for encouraging customer involvement.
The Value Proposition
As individual residential consumers, we are interested in what the Smart Grid will do for us as individuals. The consumer value proposition answers the question, "What’s in it for me?” Some of the consumer benefits include the following:
Â· More reliable service
Â· Potential bill savings
Â· Transportation cost savings (PHEVs vs. conventional vehicles)
Â· Information, control, and options for managing electricity
Â· Option to sell consumer-owned generation and storage resources into the market
On the cost side of the equation are the Smart Grid implementation and operating costs which are passed onto the consumer.
How compelling are these benefits? Let us look at two of the specific benefits specified above â€" potential bill savings and transportation costs savings â€" to get a general idea of the magnitude of the value proposition for each benefit.
Potential Bill Savings
Let’s use some rough numbers, starting with an average residential electric bill of around $100 per month. Next, we’ll assume consumers who participate in Energy Efficiency (EE) and
Estimated residential bill/month
Expected reduction from EE/DR
10% - 15%
$10 - $15
Assumed bill increase to pay for smart grid/month
$5 - $10
Net consumer value/month
$0 - $10
Figure 1: Potential bill savings
Demand Response (DR) programs will achieve around 10% to 15% savings on their bill each month. The benefit in bill savings is then $10 to $15 per month. If we assume the increase on their bill to pay for Smart Grid investments is $5 to $10 per month, the net benefit is $0 to $10 per month. This is a positive proposition but not one that is very compelling.
Potential Fuel Cost Savings from Plug-in Hybrid Electric Vehicles (PHEV)
At current electricity prices, the cost to drive PHEVs using kilowatt-hours (KWh) as fuel is significantly less. Again, using some rough numbers, we can estimate what the value proposition is for PHEV drivers enabled by the Smart Grid. We begin by assuming consumers drive an average of 10,000 miles per year. Next, we calculate that if the traditional vehicle achieves 25 miles per gallon and the cost of gasoline is $2.50 per gallon, then the fuel cost for operating with gasoline is 10 cents per mile. As the fuel economy goes down and the cost of gas goes up, the cost per mile will go up. So, let us assume a fuel cost range of 10 to 15 cents per mile.
Assumed miles driven/year
Fuel cost (gas)/mile
$0.10 - 0.15
Fuel cost (PHEV)/mile
$0.3 - 0.5
Annual fuel cost (gas)
$1,000 - $1,500
Annual fuel cost (PHEV)
$300 - $500
Potential fuel cost savings/year
$500 - $1,200
Premium to purchase PHEV over gas
$4,000 - $10,000
Figure 2: Potential fuel cost savings from PHEVs
The fuel cost for operating a PHEV is less straightforward and obviously depends on the cost of electricity. Some researchers project the cost of operating a PHEV to be about 3 to 5 cents per mile (see link at bottom).
Using these fuel cost ranges, the annual cost for operating a vehicle with gasoline is $1,000 to $1,500 and for operating a PHEV is $300 to $500, resulting in a potential annual savings of $500 to $1,200. This benefit is more significant than the bill savings benefit discussed above. However, we must not forget the premium of $4,000 to $10,000 to purchase the PHEV so that these benefits can be realized. Yes, this value proposition is more compelling, but is it enough to encourage consumers?
These examples suggest that the consumer value proposition, while positive, may not be compelling enough to motivate wide spread acceptance of the Smart Grid by individual residential consumers. If we are to make a convincing case to consumers, it will have to be on stronger grounds than individual cost savings.
If the value proposition isn’t sufficient, how do we make a persuasive argument for the Smart Grid? That will be the subject of the next article in this series.