Aligning Regulations, Demand Response and Utilities

by Larry Colton and Steve Nguyen, Echelon Corp.

The Department of Energy’s Smart Grid Investment Grant Program recently announced grants ranging from $500,000 to $200 million for smart grid technology utility deployments, a number of which are smart metering projects.

A key benefit that can be derived from smart meters is the ability to create residential demand response programs that allow consumers and utilities to better manage electricity usage to reduce costs and the impact on the environment. Demand response has been an offering to many utilities’ commercial and industrial customers for years and has proven beneficial.

Buildings with sophisticated control systems (similar to newer, energy-efficient buildings in Europe) have reported near-instantaneous drops in demand of 30 percent within three minutes of enacting demand-reducing protocols. The benefits to utilities in the form of eliminating the cost affiliated with increasing generation on demand are large enough that an entire industry of energy service providers has emerged.

In the residential sector, a grid-aware and grid-responsive infrastructure has yet to be implemented, until now. As utilities begin to make deployment decisions on smart metering systems, they also are determining how to leverage the smart grid inside homes.

Unlike the commercial building sector, homes do not have automation systems. This gives utilities an unprecedented opportunity to guide and influence the form and type of interactions electric devices in homes will have with the grid. This includes installing equipment that provides detailed usage information to in-home displays that can help consumers better understand and modify their consumption patterns, as well as adjust their thermostats to reduce load during peak periods.

A characteristic of a smart grid infrastructure, one that goes beyond an independent intelligent system (e.g., billing system), is the ability to accelerate innovation in services and products. Utilities investing in such infrastructures might envision new applications that, for example, would provide smart appliances with consumption and tariff information to enable real-time behavior adjustment, which would reduce energy bills by shifting consumption from high-tariff peak periods to off-peak hours. The linking of information from a smart metering system to home networks and devices allows utilities and their customers to facilitate energy conservation and demand response programs.

The Regulatory Divide

These types of programs are positive for customers, the environment and the nation, but they contradict the long-established utility business model.

Energy conservation will mean lost revenue to utilities, which is not aligned with the objectives of most utilities and shareholders. This misalignment might be the root cause of the slow adoption of energy-efficient technologies and services in the U.S.

Technology that promotes energy conservation has evolved much faster than the regulations that govern utilities and other suppliers. To obtain maximum benefits from smart meters and other smart grid technologies, regulation that promotes and supports the implementation of demand response and other energy conservation programs must be approved. Crossing the divide requires regulation, and other policies should be properly structured to justify and encourage widespread utility investments in demand response.

Now is the ideal climate for government officials and regulators to create regulatory mechanisms to foster increased utility investment in cost-effective demand response technologies. Long-established regulation has favored supply-side resources over energy conversation. Utilities have been encouraged to add new generation because they earn a rate of return on investments on their assets, which can include generation, transmission and distribution infrastructure.

Because energy conservation and demand response programs reduce infrastructure investments, however, there was not an equal incentive for these programs. It’s the opposite. For many utilities, there is a deep-rooted incentive to increase capital investment and discourage new projects that would delay infrastructure investments, e.g., energy efficiency incentives to consumers.

Therefore, when utilities have the option to build a power plant that will contribute to profitability or invest in energy conservation that allows only for cost recovery, they typically add new generation. To compound the problem, a utility’s revenue historically has been directly coupled to electricity usage; the more electricity utility customers use, the more revenue a utility earns.

Because energy conservation reduces customer usage, it reduces a utility’s revenues. This creates a conflict for utilities that desire to promote environmentally friendly activities and must maximize profits for shareholders. As a result, utilities have continued to invest in generation and associated assets. A recent, prominent example of this divide between technology and regulation comes from France.

Startup company Voltalis developed a consumer-based demand response home area network (HAN) capable of reducing a homeowner’s electricity bill as much as 10 percent on demand. Voltalis’ system automatically can turn off air conditioners for hundreds or thousands of consumers based on what Voltalis calls “distributive load shedding” technology. The idea is that Voltalis is compensated by the grid operator for helping maintain supply and demand equilibrium. The French Energy Regulatory Commission ruled that Voltalis should pay the power company, Electricite de France, because “its service would not be possible without the producer maintaining production.” While the resolution has yet to be found, the Voltalis example shows there is work to be done worldwide.

Building Bridges Across the Divide

Legislation must be approved, and regulation must be implemented to create incentives for utilities to promote energy conservation and demand response rather than continuing to invest in generation and transmission and distribution assets. While there must be a balance between the approaches, utilities must be encouraged to use demand response as part of the generation portfolio and strategy.

There should be some type of shared-savings program that allows utilities to participate in the savings customers receive from reducing their energy usage. This will persuade utilities to promote energy conservation because they will benefit, as well. In addition, there should be a penalty if a utility does not encourage customers to reduce their energy usage.

Another approach to encourage utility participation would be that a utility gets compensated for a portion of its avoided supply costs obtained through demand response and other related programs. Such legislation generally should adhere to the following guidelines to help ensure adequate market competition and technical innovation that will provide maximum consumer benefits:

  1. Compensate utilities for improved efficiency by allocating some portion of the savings to the utility instead of passing all savings directly to ratepayers.
  2. Allow real-time and multitariff pricing, provided there is adequate consumer protection.
  3. Adhere to information-sharing models so utilities can choose distribution and metering technologies that best fit their needs, yet do not lock consumers into a single energy provider.
  4. Keep the cost and effectiveness of demand response projects and programs transparent.

Technology that creates smart metering infrastructures under the outlined guidelines is available. Duke Energy chose a smart metering infrastructure based on the Networked Energy Services (NES) System from Echelon. The system provides Duke with an open, XML-based API to integrate its data with any XML-capable software application.

Net metering functions built into the system could enable Duke to allow renewable energy sources to return energy to the grid, and multiple tariffs, along with software-controllable service thresholds, support yet-to-be-defined new service and pricing models. Even prepaid energy is supported with the addition of software at the operations center.

In choosing the NES System, Duke has put in place a smart grid infrastructure that anticipates its needs.

Other early examples of how technology is leveraged to anticipate the changing regulatory environment, or even to work around it, is the Finnish utility Fortum. It has embedded an IEEE 802.15.4 standard-based radio as part of the initial stages of a 500,000-meter smart grid project. The radio will be equipped with a ZigBee Pro protocol stack to provide energy information and enable communications with in-home demand response and energy control-related devices in the future.

In Fortum’s case, rather than rely on any pre-existing HAN for command and control or a homeowner’s acquiring energy-aware products, Fortum has identified a homeowner’s response to energy use information as the initial form of their demand response activities.


Energy conservation and efficiency is the fastest, best and cheapest alternative energy resource. It’s time to grow this resource because technology that supports this is available, and the government is providing smart grid investment grants to help utilities speed the deployment of this technology.

To be successful, however, regulations must be modified for utilities receiving grants and not receiving grants. Utilities should no longer be penalized for encouraging customers to reduce their energy usage.

Instead, utilities should have incentives to innovate and reduce generation, share customer savings for promoting energy conservation and implement demand response programs. These steps are needed to align utilities with energy conservation and speed the adoption of energy-efficient technologies and services.

The DOE smart grid grants provide the ideal incentive for utilities to replace metering systems of the past with smart metering systems of the future.

This is creating a tremendous opportunity to build and enable a smart grid in which utilities and customers can work together intelligently, automatically and continuously to balance supply and demand.

Smart grids benefit utilities, customers, stakeholders and the environment through reduced costs, increased quality and reliability and reduced green house gas emissions, provided we implement supporting regulation that aligns utilities, consumers and regulators.


Larry Colton is marketing manager of Networked Energy Services at Echelon Corp. He is a professional engineer and certified project management professional. He has a bachelor’s degree in electrical engineering from Rutgers College of Engineering and a master’s degree in business administration.

Steve Nguyen is director of corporate marketing at Echelon Corp. He has an undergraduate degree from Brandeis University and a master’s degree in business administration. Reach him at

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