SmartMeter™ by PG&E induces households to produce renewable energy

Renewable Energy sector has started to become sophisticated; companies formerly were induced by government incentives and subsidies to install solar power systems to make more use of renewable sources, but now they induce households to install renewable energy infrastructure to combat with peak loads and become more of a service provider for such systems. As variety in energy resources increases, Energy companies try to make more use of ICT. One example of this is SmartMeter™ by Pacific Gas and Electricity. As you remember from one of my previous entries, Turkey had overcome energy crisis by digitizing metering devices and applying differing prices for different period. Such a SmartMeter™ brings much more benefits than simply allowing price discrimination and thus making more use of wasted energy production. I would like to mention different features of such a technology and then will dive into an economic theory called “Prospect Theory” in order to show how consumption and production patterns can be affected.

First of all, as mentioned before, SmartMeter™ (Figure 1) uses dynamic pricing model in order to charge customers. In my previous entry, I had mentioned that digital devices in Turkey were charging customers depending on electricity usage in 3 different periods; however, SmartMeter™, by continuously receiving power load data from utility company, adjusts the price on every minute of day and then charge the customer. That is to say, using bi-directional metering technology, SmartMeter™ devices combine factors of price data from utility company and amount used by appliances in the house to charge the household. With regard to simple digital technologies, SmartMeter™ leads to more price discrimination and allows customers more to see their energy consumption data and hourly price so that they can manage their energy consumption. In that sense, this novel device can also be applied to natural gas consumption measurement, which will enable households monitor gas usage at home and limit their usage.  

One innovative feature of SmartMeter™ by PG&E is RF technology (Figure 2); 1 watt radio is installed in these devices to send data through radio waves to the base station which combines data from all households in a neighborhood. By making use of wireless information transmitters, SmartMeter™ technology decreases the possible risk of breakdowns in the infrastructure of wire network and decreases cost of such an infrastructure. However, some health concerns are raised by the media and community that people are afraid of emissions from these radio enabled transmitters. Yet, researches show that there is no risk from these devices.

One more future of SmartMeter™ is that, you can monitor your energy usage from your computer. In one previous entry, I mentioned that VirtuWatt enables industrial energy users to monitor their energy usage; in this case, SmartMeter™ enables household to manage their energy account from their PCs by comparing monthly usage data inside home and with neighboring houses.

Last and the most important feature of SmartMeter™ is that it enables a better monitored "Net Metering". Net metering is simply an electricity policy that enables customers to produce energy from renewable sources and sell it to the utility company. Amount of energy sold back will be deducted from amount of energy bought from utility company and household will be charged net amount. SmartMeter™ device makes use of its innovative information technology feature to discriminate price and incentives. That is, we already know price charged is high at peak hours but on household side, energy produced from different household has also an amount and utility company will create financial incentives to induce households to supply more renewable energy when energy shortage exists. Therefore, those households who installed renewable energy systems in their houses will divert from energy consumption to energy production to help utility company meet gap in energy demand and supply. What household will gain is financial incentive and what utility company gains is the immediate commission through buying from household at a lower price and selling to the industrial users at a higher price. In that sense, utility company is like a broker who buys and sells energy on its already established network. In time, as more households install these systems, utility companies will move from being energy producer position to energy distributor position; being monopsony and monopoly at the same time. 

Now it is time to move to how utility companies should use SmartMeter™ in order to make use of Prospect Theory, which was first published in econometry journal called ECONOMETRICA in March 1979, Vol. 47 and No. 2. For those who do not know this theory, prospect theory shows how we make choices depending on the value of gain or losses with regard to a reference wealth point, with attributed probabilities as their weights to these values. Main takeaway from prospect theory is that, utility gained from $1 gained is smaller than disutility from $1 lost. Likewise, utility gained from second dollar will be less than that gained from first dollar. Simply, you will be happier if I give you $1 today and $1 tomorrow than if I give you $2 today; basically divide gains and combine losses to the customers (As you can see in figure 3, receiving $500 twice has utility value of 120 and is greater than utility value of 100 that is gained from receiving $1000 once). This raises a very mind-opening incentive program for utility companies:

 In order to induce households for more energy production, financial incentives from such an energy production should be sent to households in partial terms, namely in weekly schedules instead of under monthly bills. By dividing gains from energy production into weekly schedule, households will be happier with their renewable energy infrastructure, and by sharing their satisfaction on social networks, they will create word of mouth effect among other households as an incentive to install such infrastructures.  Besides, households will be more cautious about their energy consumption and production patterns by shifting to low hours usage and peak hours production. Otherwise, if company combines all gains in monthly utility bill, not that much utility will be gained by households.

However, one critical factor here is reference point. To clarify it, let us take an example. If an insurance policy premium is $20 and possible loss is $500 with 1% probability, you will be more induced to buy such a policy if your wealth point is -$1000 as opposed to $0. Therefore, in our case, in order to maximize the utility gains from such weekly energy credits, one should be pushed to negative side. That is to say, “net metering” should be shown in the monthly bills. This sentence in fact has 2 components: a) net metering should be charged to the customers since it is the net of energy bought from and sold to company and is a negative reference point; b) net amount charged to customers should be combined in monthly bill so that disutility households will gain from bills will be minimized – otherwise, if utility charges households weekly, they will be more unhappy.

All in all, by making use of SmartMeter™ technology, divide monthly gains from renewable energy production to weekly terms with a negative reference point and combined losses on their monthly bill. Such an idea should be researched under the topic "effect of prospect theory on households' energy production patterns.