Can Cities Solve the Energy Conservation Penalty?

As the smart grid and other technologies help customers reduce their consumption, cities will be hard-pressed to avoid rate hikes when their revenue decreases.

by / January 2, 2012
Photo courtesy of James Lee / Flickr Creative Commons

Utility customers in Carmichael, Calif., are wasting less water. Until a few years ago, there were no water meters on most residential properties and residents paid a flat rate. Then meters were installed with the help of a federal grant. Ironically conservation efforts in the city — a suburb of Sacramento — have been so successful that revenue has dropped and so rates will go up 18 percent. And while raising rates may be a necessity for the city, ratepayers who stopped washing their cars and watering their lawns may justifiably look at the rate hike as a penalty for their conservation efforts. And Carmichael isn’t the only city that likely will be forced to raise rates in the current economic climate, as old pipes and infrastructure require repair or replacement. But is there a way to avoid the conservation penalty?

The business case for water conservation was explored last spring at the Central Texas Water Conservation Symposium. Conservation yields “long-term cost savings due to avoided costs of purchasing new water supplies or building new infrastructure,” said a report released in March 2011 from the symposium. So long term, the incentives are positive. Short term, however, is a different story.

Supply and demand is a well established economic principle — when supplies dwindle, prices go higher; when supplies are abundant, prices fall. That’s also the operating principle for smart-grid electricity systems envisioned for many cities. Some utilities operating at peak demand — for example, when everyone turns on air conditioners during a summer heat wave — encounter brownouts, rolling blackouts or some kind of service disruption as populations grow. With a smart grid, however, electricity prices fluctuate so that, for example, when demand is high, the costs to the consumer rise as well. The resident can check the meter, see the costs rising and decide to keep the AC off for a while. When the demand — and rates — are low at night, then the homeowner might cool the house and charge up the electric vehicle in the garage. So the incentives are intended to promote conservation and hopefully lower peak demand, which could require fewer new power generation facilities as the population grows.

So the smart grid operates on a short-term supply and demand cycle that could provide some relief to utility companies. A difficulty arises, though, when supply and demand have little or no connection to costs, or when the incentives actually penalize conservation.

Most automobiles, for example, now get higher mileage, and hybrids and electric vehicles are becoming more popular and are even subsidized by the federal government as a way to reduce gasoline consumption and protect the environment. However, electric vehicles are not yet practical for the masses. According to Top Gear, a BBC auto program, electric vehicles cost twice as much as comparable gasoline-fueled vehicles, they lack available charging stations, and they require 10 or more hours to recharge, making long trips impractical. Using faster chargers is likely to reduce battery life, and replacing the vehicle's battery in five to 10 years could cost approximately 7,000 British pounds. So people who buy electricity are taking a significant financial hit in the name of conservation.

A number of jurisdictions, however, also see electric vehicles as a threat to gas-tax revenues, and have initiated plans to tax vehicles by miles traveled instead of by gallons purchased. This mileage tax would penalize those who bit the bullet to buy an electric or hybrid vehicle. When “sin taxes” — on activities such as gambling, cigarette smoking, alcohol use or in this case driving — are successful, revenues will fall. Likewise, increased fees on water, electricity and gasoline can also reduce use and therefore revenues.

The smart grid is subject to the same laws of supply and demand and could insert additional complexities into the rate structure. The owner of an electric vehicle — who isn’t planning any car trips and who sees rates spike because of heavy demand — supposedly could someday choose to contribute part of the car’s battery charge to the grid, and earn money, or at least earn credit toward future utility bills. The smart grid would enable residents to install a wind turbine or solar panels on their rooftops, and "spin the meter backward" to earn money as an energy producer. If this were to catch on, however, could reductions in electricity use produce a revenue shortfall requiring another rate hike to pay for all the smart-grid infrastructure and user-generated electricity?

Mary Ann Dickinson, president of the Alliance for Water Efficiency, speaking at the Central Texas Water Conservation Symposium last year, said politicians are fearful that conservation will drive rates up, so cities keep rates flat until a crisis forces an increase. “If conserving makes rates rise, it is due to the failure to plan, rather than a failure of economics,” she said.

At Issue: How can local governments meet the conservation planning challenge as new technologies, new business models, new shortages and surpluses appear? Contact to comment.

Wayne Hanson

Wayne E. Hanson served as a writer and editor with e.Republic from 1989 to 2013, having worked for several business units including Government Technology magazine, the Center for Digital Government, Governing, and Digital Communities. Hanson was a juror from 1999 to 2004 with the Stockholm Challenge and Global Junior Challenge competitions in information technology and education.