Will Electricity Costs Go Up Because of the Smart Grids?

By Stream Energy Director of Market Research Mike Rowley

Will electricity costs go up because of the Smart Grids?

I look at three issues when I think of electricity cost to the consumer:

  1. Fuel Cost – the cost of the fuel to run the generator.
  2. Power Plant Efficiency – this is rated in how many BTUs (quantity of fuel used) it takes to created a single kWh of electricity; the term is “heat rate”.  Our aging fleet of power plants has heat rates of about 6,000 to 14,000, with 14,000 being the least efficient.
  3. Infrastructure capital costs – This is the cost of building and maintaining the needed power plants and power lines to handle the demand of the customers, which is steadily growing. And, even if it was not growing, we need to build power plants to be able to retire the oldest inefficient plants, and to replace the polluting power plants with renewable energy power plants.

The cost to customers for the energy portion of their electricity is represented in the following equation:

  1. Fuel Cost times Heat Rate, plus
  2. the payback capital cost and maintenance of the infrastructure, plus
  3. a reasonable profit margin for the supplier

The Smart Grid will allow consumers the to cut back on usage at critical times, which means that we do not need to build as many power plants for the future; the industry term is called peak shaving. That alone will promote a more efficient use of the assets which will equate to the lowest cost of operation.  Also, society is calling for more renewable energy generators that have little or no fuel costs, but huge infrastructure costs to replace the most polluting generators as well as the least efficient power plants that have come to the end of the useful lives. This combination of better control and more efficient power plants could easily be less of a financial burden than operating the existing system of plants and power lines.

With all that said, I would guess that just the efficiency factors that come from a Smart Grid will keep costs down. As to the electricity bill of the average customer going down, I would say that with the efficiencies of the grid that will be coming because of Smart technology, and the fact that with the better usage data that the average customer has at his/her disposal that allows a personal conservation program to be instituted for each home, there is no reason that we should expect the cost per residence to ever rise, even if fossil fuel costs (which will become less and less a part of the fuel mix for generating electricity) do rise.