Peak minutes: Buying electricity like phone service

NEW YORK (CNNMoney.com) -- Most people don't spend an hour gabbing on their cell phone in the middle of the day. It's just too expensive.

So why would you dry your clothes in the middle of the day? Or roast a turkey? Because most electricity prices, unlike cell phone rates, are the same 24 hours a day.

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The result? People don't worry about using electricity during peak hours, and utilities spend billions building power plants to meet peak electricity demand that may only occur for an hour or two a day, sometimes just a few days a year. And the consumer pays the cost of those plants in the form of higher electricity prices.

But thanks to new "smart" meters, which can transmit information on energy usage by the hour, utilities can finally manage customer demand by boosting power rates during peak hours, and illustrate those costs for customers in order to dissuade unnecessary consumption at those times.

CenterPoint, a Texas utility and subsidiary of CenterPoint Energy (Charts), is deploying a pilot program using these meters, and Southern California Edison, a subsidiary of Edison International (Charts), is in the process of rolling out a program. But nationwide the technology is just beginning to catch on.

In addition to alerting customers to their usage habits, smart meters can even turn on and off air conditioners or other appliances depending on the price of electricity - cutting both demand and pollution. And the money saved by utilities that don't have to build new power plants could end up lowering electric bills.

"It's definitely one of the hottest topics in the power industry right now," said Mark McGranaghan, an engineer at the Electric Power Research Institute, an energy and environmental research group that has worked on smart meter design.

A traditional meter measures the total amount of energy used in a home on a monthly basis. The smart meter, using a network of narrowband wi-fi devices or radio waves, sends a reading back to the utility every hour.

This way, customers can see how many hours of electricity they used during peak demand, and exactly how much it cost them.

"The hope is the customer will respond to actually seeing the [higher] price," said Kevin Wood, a manager at SCE.

SCE is one of the first utilities in the country to embrace the smart meter. Over the next few years, it plans on spending $1.3 billion to install 5 million of the devices.

By 2012, SCE estimates smart meters could reduce their market's electric demand by 5 percent, or roughly 1000 megawatts -equivalent to the output from a large power plant.

But elastic pricing is only half the equation in reducing demand.

The other half lies with the consumer, and how they respond to fluctuating prices.

In addition to letting consumers see the fluctuating cost of power, the smart meter can also communicate with "smart" appliances in the home, turning them off or on depending on the price of electricity.

The customer decides which devices to shut off at what price points, and then the smart meter does it automatically.

If you decide that 20 cents a kilowatt hour is all you're willing to pay to keep your house cool in the middle of the day for instance, your AC will go off when electricity hits 21 cents.

"It's really about customer choice, and them being able to control their usage," said Lynda Ziegler, an SCE executive. "It will really help control the demand side of the situation."

The smart meter program being employed by SCE could be used to expand programs like the one run by EnerNOC, a Boston-based company that specializes in reducing electricity demand by large users, which account for most of the electricity used in the U.S.

EnerNOC gets big power buyers like factories and supermarkets to agree to have their power reduced when utilities are faced with times of peak demand.

EnerNOC automatically shuts off the power, reduces it or turns on back up generators to devices deemed non-essential by the participating company. The utility saves by not having to build expensive new power plants, and EnerNOC and the client company share some of the money that the utility would otherwise have to spend to build those new plants.

"We don't have to buy that next new peaking power plant, but we need the real time data to manage the system," said Tim Healy, EnerNOC's chief executive.

At about $150 a piece, smart meters are about three times more expensive than traditional ones.

Customers will ultimately have to bear the costs of instillation, and SCE said it will seek approval from its regulators for a modest rate hike to help cover its investment.

Other regulators seem to support the concept, but cautioned that the costs and benefits would have to be carefully studied and a decision reached on a case-by-case basis.

"Is smart metering a good idea? That's an easy one," said Richard Morgan, a public utilities commissioner from the District of Columbia. "But how do you roll it out?"

Nearly everyone agrees that the rollout process will be slow.

"It's just not something you do overnight," said Malcolm Unsworth, an executive at Itron (Charts), a company that makes smart meters. "Utilities are very conservative."

Unsworth said most of Itron's revenue comes from meters that simply eliminate the need for someone to come around and physically read it, not the "smart" variety talked about here.

But he said that could change, pointing to the estimated 135 million meters currently used in the U.S. alone.

"There's very little revenue associated with it" now, he said. "But the potential is huge."

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