## 2012/04/05

### Smart-Grids and Carbon Trading: Enough for an economic Negawatt scheme?

Can the Smart-Grid and Carbon Trading create a new, economically viable marketplace in saving power?

In 1997, Amory B. Lovins co-authored a book with a radical new idea to address the Energy Crisis and our Environmental problems (now it might be "Climate Change"):
the negawatt negative watts of power consumed by creating lower demand through more efficient power use.
It is still much cheaper to "save a watt" than for a Power Generator to "build a watt", and the marginal cost of production and distribution is zero to the Generator. The consumer still has to maintain and replace their infrastructure investment.

So why hasn't the negawatt market happened? What's different now that it could work?

There are perverse economic incentives at work that mean no Utility Provider, especially Power Generators, will willingly invest in reducing demand:
Less demand is less income, which wipes out profits and threatens the company.
This is because the billing model is not based on direct production costs, which are dominated by the costs of fixed capital, not the marginal cost of production. Fixed retail electricity tariffs are 3-10 times higher than the variable prices Power Generators receive from the market. Part of this gap are the costs of the network and distribution.

Previously I've suggested three ways the smart-grid could be used to leverage known, proven technologies in domestic and small commercial consumers:
• On-site Tri-generation (power, heating, cooling) from natural gas,
• Small scale Heat Storage Air Conditioning, and
• In-network battery storage for peak-loads.
Lovins negawatt proposal was that large-energy users (companies) should install energy-saving solutions in domestic and commercial premises (like compact fluros, 'super-windows' or improved insulation).

Somehow, the unused energy would be credited, by the Power Generator, back to the large-energy users. But no mention was made of how to bill consumers or that they paid for the benefit at all. They just used less power and enjoyed the savings, without cost.

The idea is based on a profound truth, but isn't economically realistic because of the disconnect between the owners of capital, the investors, and the parties receiving the benefits: the consumers and Power Generators.

Because those unmeasured benefits are hard to quantify, just what is an investment worth?

In Queensland, there is a very large lump of capital (~$1B) that is used for just 35 hrs (3.5 days) a year. It makes for hugely expensive power and inefficient investment. Economically, you'd choose to do almost anything else. This is a direct outcome of the social contract electricity consumers have with all utility suppliers: Give me what I want, when I want it, where I want it for a fixed price. Wow betide you if you run out of capacity. It's a contract that is well past its use-by for all utilities. We, as retail consumers, pay a lot for this privilege. With our roads, we don't demand super-highways everywhere, we understand that demand and supply are related. That a little used side-road and a major highway aren't going to be the same standard. Public roads have their own problems: only toll-roads actually directly charge the user. Everywhere else, roads appear to be "Free Goods", mysteriously paid for in an opaque, disconnected manner unrelated to individual benefit or infrastructure impact. Politics determine funding and priorities, giving a far from optimal or rational allocation of resources: some of us have nightmare daily commutes, others love what the system does for them. When electricity was first reticulated, houses often had one just one power-point in the kitchen along with lighting (60-100W globes, one per room). Household consumption was 1-2 kwHr/day (guess), not the 12-20kwHr/day now. I think there's a solution if you look at the four stakeholders: • Regulators. They can set tariffs that can be charged. • Power Generators, possibly also Power Distributors. • Consumers of Power. • Investors looking for returns. Even Government supported schemes like the Solar subsidies With a Carbon Credits and Trading scheme about to come into force in Australia, the Power Generators get a double economic benefit for every Kilowatt of generation capacity they don't need: • the saved investment (less capital demand == lower costs) • the surplus carbon credits freed up. ($23/tonne)
Here's the scheme:
Same as Lovins, Owners of Capital pay for domestic/commercial users to become more energy efficient or be able to move power consumption to "off-peak" (power storage or A/C units storing heat overnight).
There are two different financing options possible:
• direct Consumer/Investor repayments, perhaps as part of the utility bill.
• modified tariffs for all consumers, not just those in the scheme.
Direct repayment scheme:
• No regulator interaction, no modification to supply tariffs.
• Because of the Power Generator benefits (reduced future investment, carbon credits), they need to make co-payments to the Investors, as well as the consumers.
• What may be $3,000 of house insulation, or$10,000 in double-glazing would normally need 10-15%pa repayments to be economic.
• Because two parties benefit and pay, the retail customer might need pay ~5-7%pa [guesstimate]
• If the retail customer made an up-front payment, this would apply to their share of the investment, not the Power Generators an vice versa.
• The debt would need to be tied to the property and transfer on sale of the property.
• Some of the most motivated large investors should now be the Power Generators and Distributors because of the Carbon Credits they could on-sell.
• If the ROI was attractive, there could be unit trusts for small investors.
Modified tariffs scheme:
• Bulk payments from Power Generators to Investors. Based on a formula related to benefits realised.
• No change to "off-peak" tariffs, want to encourage load-levelling.
• Increased peak tariffs based on houses "energy star rating", to encourage swapping into the scheme.
• A lower peak tariff for "high star" ratings houses.
• during the loan repayment period, a surcharge on the rate, or in the bill, to repay the investors.
Smart Meters and the Smart Grid improve the ability of the retail customers to both manage their consumption by balancing rate and subjective benefit, and for Energy providers to charge variable rates to consumers based on aggregate demand. The act of allowing consumers to assign a monetary value to the benefits they receive considerably improves marketplace efficiency. If it costs more, peak demand will decrease allowing Power Generators to better match capacity with demand and reduce the proportion of idle assets.

While these current approaches allow consumers to assign a monetary value to the benefits they receive, they do not provide incentives to either power consumers or producers to save power, not a means for Owners of Capital to invest in this market.

The whole negawatt notion is intimately tied to providing investors a good Return, but that seems difficult.
The central problem is: How do you charge for the absence of something, a watt not supplied?
There is no meter that can do this, but you can charge a higher peak-demand tariff to encourage changes in behaviour.

For Power Generators, the problem is much simpler: the average number of consumers, the peak-demand and aggregate use can be compared day-on-day. Changes can be calculated and a contractual formula used to calculate negawatts provided and their economic benefit to the Power Generator.

There is a real problem: if the Power Generator hasn't realised any benefits, then why would they pay?
All the fixed-plant investments are sunk costs, It is only when an extra investment is avoided, or some gain can be made from underutilising plant, that the Power Generator has a tangible and quantifiable benefit.

The Carbon Trading market now provides part of the answer: Owners of coal-fired power stations can sell Carbon Credits if they can reduce demand.

The other side of the equation is somehow crystallising the benefits to consumers and Power Generators of improving power-use efficiency. Both would enjoy the long-term benefits, but neither is incented to make the full investment when the other beneficiary gets a free-ride.

There is a well-known counter-intuitive Economic effect of improving energy efficiency:
It often leads to an increase in total energy demand/consumption. This is suggested as an outcome of using efficient L.E.D. lighting, with lighting estimated at 6.5% of global demand.
Without looking hard, the best economic modelling of the benefits of negawatts I can find, is a lecture given in 1989 by Amory Lovins.

His back-of-envelope calculations look promising, but seem to omit one of the major costs of retro-fitting: labour. For a large investor, retro-fitting low-value items like light-bulbs to houses will be dominated by the labour costs. For small and medium enterprises, a simple saving like swapping from v-belts to toothed-belts would mean significant down-time, complex adaption of old equipment and possible consequential breakdowns. With the investor picking up the tab for "time and materials", it doesn't on the face of it, look like retro-fitting and in-place upgrades would be economic.

The adoption of, or upgrade to, modern energy efficient technologies for a viable negawatt scheme has to be:
• DIY for low-value items,
• upgrade of high-cost appliances/systems, like Air Conditioning/HVAC, or
• green-field sites or large-scale upgrades/renovations such as high-rise office conversion to apartments.
Whatever the answer is, if it was obvious, because of the potential size of the market, you'd think people would be doing it now. Perhaps the Smart Grid will make the difference.