Why will the Smart Grid Drive Down Energy Costs and Peak Demand?

Demand response, or consumer side adjustment to energy demand based on supply conditions, is a key element of the Smart Grid. Up until now, consumers have been passive, not clearly understanding the costs associated with their energy demand on a real-time basis, and therefore unable to take significant action with regard to their usage patterns. In fact, most consumers today pay a fixed price per unit of electricity independent of the cost of producing the electricity at the time of use.

In economic terms, today’s consumption of electricity is “inelastic” because consumers do not see or reap any benefit from the differences in the cost of energy production during peak and non-peak times. If consumers were able to know and benefit from lower energy costs during off-peak periods, they could increase and decrease their use of electricity in reaction to real-time prices.

The smarter the grid, the better consumers are able to flatten their own demand during peaks. The Smart Grid will enable consumers to interact with the electrical grid and make informed choices about when they use energy, the rates they pay and the source of that energy. This choice will drive down cost because during off-peak periods, energy will cost less and consumers will be able to use that to their advantage.

This Smart Grid enabled price elasticity benefits the utility companies as well as consumers. Utilities need to find ways to flatten the peak demand to ensure a reliable energy supply to their customers, eliminate costly peaker plants and offset the cost of new infrastructure. A 2007 study by The Brattle Group for the DoE showed that even a 5 percent drop in peak demand would save enough in generation, transmission, and distribution costs to eliminate the need for installing and running 625 infrequently used peaker plants and their power delivery infrastructure, and could produce an annual savings of between $46 and $117 billion. It is no wonder that utility companies across the country are implementing Smart Grid programs.