23 October 2016
Smart grids allow real-time monitoring and control of power systems and enable power plants to optimize the conservation and delivery of power. Photo: Xinhua
Smart grids allow real-time monitoring and control of power systems and enable power plants to optimize the conservation and delivery of power. Photo: Xinhua

Why smart grids are key to energy efficiency

Renowned science writer Eddy Lee, who is the convenor of the Hong Kong chapter of the international carbon emissions concern group, has organized a discussion forum ahead of the Paris climate summit to be held later in the year.

Following the talks, 350 Hong Kong has urged the Hong Kong government to launch various environmental protection and energy conservation measures as soon as possible.

Authorities must explore different low-carbon clean energy alternatives to replace fossil fuel, and fully support international agreements to reduce greenhouse emissions effectively, the group said.

The global climate issue involves resource allocation among this generation and the next. Scientists have put forward some great suggestions. However, we have to balance the interests of several generations in order to tackle the subsequent social issues.

Speaking of clean energy, one single energy conservation measure may not suit all markets as demand elasticity could vary across regions.

Against this backdrop, I want to now focus on smart systematic management of electricity market supply and demand.

Unlike other things, power demand changes throughout the day and also varies in different weather conditions. Meanwhile, expensive storage cost means it’s difficult to ramp up supply quickly, while excessive supply might cause waste.

Marginal-cost pricing means setting the price of a product to equal the extra cost of producing an extra unit of output. And it’s called Peak Load Pricing in economics, which is a pricing strategy that implies price will be set at the highest level during times when demand is at a peak.

The peak load pricing strategy will not only satisfy different degrees of power demand during different hours, but will also help power plants retrieve fixed-costs in infrastructure investment. However, it’s not that easy in the real world as it costs money to find the equilibrium price at each moment. But now we have the smart system.

Economists are applauding Uber’s surge pricing, under which the company raises price for a ride when demand is high. Higher rates through the mobile application will reduce waste.

Likewise, the smart power grid system will reduce waste of idling power generating start-up. It could help reduce investment in power generation in the long run as higher tariff will reduce power demand during peak hours.

Smart grid allows real-time monitoring and control of power systems and enables power plants to optimize the conservation and delivery of power. Also, power plants can interact with end-users easily using smart meters. In this case, the peak load pricing is no longer empty talk.

However, decisions on smart meter investments will depend on the costs and whether they can change the electricity consumption pattern of local residents. As far as I know, there are over 100 promotion plans globally to expand the usage of smart meters. Hong Kong is on the list.

Climate issue involves everyone. We need to collect data and make analysis. The government should require power suppliers to install smart meters at some new housing estates.

Real data analysis through smart meters will enable us to learn how to change power consumption habits of local residents. That will enable power suppliers to optimize their pricing formulas.

Also, the costs of installing smart meters are set to decrease as technology improves. Therefore, gradual replacement of traditional meters will reduce the average costs of installing smart meters.

This article appeared in the Hong Kong Economic Journal on Oct. 27.

Translation by Julie Zhu

[Chinese version中文版]

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associate professor at the Department of Economics, Clemson University

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