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Pricing Mechanisms for Smart Grid Could Lead to Future Savings


smart gridFrom smart phones and smart cars to smart washers and smart refrigerators, the smart revolution is fully underway. One crucial holdup, though, is the electrical smart grid, which plays a critical role in the marketability of many of these devices.

Smart appliances are appliances such as refrigerators, washers, air conditioning units, and vacuums that can be controlled wirelessly. A selling point of these appliances is that they can be linked to a smart grid, which would keep track of usage in the hopes of saving the user money. While smart grid research is still in its early stages, ADSC's smart grid research projects are in the middle of it. Specifically, Smart Grid program director David Yau and researcher Richard Ma's research project, "Incentive Pricing for Aggregated User Load Scheduling and Control," looks into creation of pricing mechanisms for electrical companies using the smart grid.

Economic incentives are crucial to the smart grid's success, as electrical companies determine whether or not customers will opt for smart appliances and their demand-response payment plans. Additionally, energy companies must set prices that allow them and retailers to make a profit. Currently, demand-response systems, which control the supply and consumption of electricity, don't utilize effective or simple pricing mechanisms to incentivize customers.

"If we can successfully incentivize wide adoption of demand response, people may save money on electricity, and society as a whole may use less electricity too," Yau said. "Taming peak usage can reduce the probability of overload and lead to a more stable power grid. More flexibility in load control can let us better adapt to intermittent green energy sources, which facilitates their adoption for a cleaner society."

When an electricity grid becomes overloaded, operators want to curtail the load, because it's very expensive to supply power at high load. There are two ways to accomplish this: ask users to drop the load, or ask them to shift the load. To drop the load, for example, an energy company might ask users to raise their room temperatures by a couple of degrees for a few hours during the heat of summer. When operators ask users to shift the load, the energy need doesn't go away, but the timing changes. For example, an operator might ask users to do their laundry between the hours of 8:00 p.m. and 10:00 a.m., thus shifting some of the energy load away from peak times. However, these approaches are only cost-effective for operators if the cost savings they receive outweigh the compensation made to customers for the curtailments.

"It's a pretty interesting network problem, because you have multiple people involved, and they all play different roles but are interdependent," Yau said.

Energy company operators want to maximize their profits, while users want to maximize their savings, while taking into consideration comfort, convenience level, and compensation.

In their research project, Yau and Ma are looking at demand response and how user behavior can be incentivized. By looking at pricing structures and optimal control algorithms, they are able to optimize the economic objectives for everyone involved. They are doing this research in anticipation of an expansion of the electricity grid and development of new services, such as smart appliances. As smart appliances become more prevalent, incentive pricing will become essential.

"Right now, there is no two-way control," Yau said. "There's no feedback currently in the electricity grid. If you turn on your A/C, you are charged. A feedback loop about the energy users enables the new paradigm."

Yau and Ma's goal is to develop a pricing mechanism that entices users to assume desirable energy use behaviors, in order to improve the efficiency of the smart grid. Yau has finished a paper, entitled "Profit-Optimal Demand Response in Smart Grids based on Valuation-Aware Load Curtailment," which discusses how grid operators can exploit a form of demand response called direct load control to maximize profits, while respecting the heterogeneous needs and preferences of customers.

"We do not pass verdict yet on a universally right set of pricing schemes, but we give guidance on how different types of price functions may affect the control problem," Yau said.

In the future, Yau envisions a variety of pricing plans with various levels of discounts for customers. Customers could choose the plan that matches their elasticity, as the usage caps will likely inconvenience or reduce the comfort level of some customers.

Still more factors need to come together before the smart grid and smart appliances are able to fully function together. Yau said that the underlying enabling technologies exist already and are becoming more cost-effective, versatile, and robust. The next step is developing IT techniques to bring the different components together and allow them to work seamlessly and in a timely manner. Additionally, standardization efforts will ensure that the smart grid and smart appliances will work with a diversity of options in the marketplace.

"A lot of factors need to converge to make smart grids flourish fully with smart appliances," Yau said. "But I think it will happen over time."

Incentive Pricing


The Advanced Digital Sciences Center is a Singapore-based research center for faculty of the University of Illinois at Urbana-Champaign. ADSC focuses on breakthrough innovations in information technology.