[Part one is here. Part two is here.]

The smart grid, as you are hopefully beginning to see, is about providing regulators, customers, and utilities with the information they need to effectively manage the demand and supply to the grid. Going back once again to my analogy of the water system, there is no reservoir in the electricity grid. What goes in must come out.

As demand varies over the course of a day, generation equipment must be switched on and off. Peaking equipment - typically natural gas fired turbines - are allowed to operate with fewer (or no) environmental emissions controls, because they do not run all the time. But that's a justification, its not the underlying reason. The reason is that emission controls are expensive, and because the turbines cannot run all the time, they cannot be generating power (and profit) all the time. If the turbines were too expensive, utilities wouldn't bother to build them.

That puts the regulators in a tough position. On the one hand, they are responsible for making sure there is enough generation capacity on the grid. But generating power is a business, not a charity. If too much regulation makes the equipment so expensive that nobody buys it, then the capacity is not there, and our air conditioning can't run in the afternoon. Alleviating this requirement allows us to have the power we need to run all our stuff when its 96 degrees out and everybody's got the A/C cranked down to 65 while being huddled under a blanket because now its too freaking cold inside (yes, I do it all the time, it feels awesome).

But even while allowing peaking equipment to be dirtier, there is still the possibility that the grid can run out of capacity. What if its 100 degrees out, and somebody's coal plant has a failure, and a transmission line goes down, and you've suddenly lost 20% of the grid's generation capacity in a given area? Shit is going down, is what. And nobody is going to build a generator to have on standby for an event that might happen once or twice a year for a few hours.

If you run out of supply, then the demand has to go down. This can happen two ways. One is a rolling blackout. You throw a switch, cutting the power to 20% of your customers for an hour, then somebody else gets a turn without A/C, and so on, until the supply comes back up or the demand comes down naturally. This is an undesirable outcome. 

The second way is that people voluntarily turn off electricity for devices that they don't need. This could be an individual household waiting a few hours to turn on the clothes dryer, or an industrial customer shutting down their manufacturing operation for the day. But why would somebody voluntarily stop using electricity when it is inconveniencing them, or even costing them money in lost production?

Because they are getting paid to do it.

These types of programs are called demand response. A customer signs up with the utility company to participate in a DR program. When the grid reaches a critical state where it runs out of capacity, they call each of the DR participants and tell them they need to shut down whatever it is they promised to shut down when they signed up. In return, they get paid. These payments could be a couple of hundred dollars a year to a residential customer, or tens of thousands of dollars to an industrial or large commercial user.

The utility companies do it because its cheaper than building new capacity. The customers do it because they get paid enough that it is worth their while ($10,000 for an afternoon's worth of lost production is, on balance, a net gain for almost any industrial facility). And capacity gained through demand response is, in essence, the greenest power there is. No direct or ancillary emissions (i.e. the guy driving his car to man the wind turbine farm). No resources (the metal used to build the wind turbine). Nothing.

Now, here's why you need a smart grid for this to work. If you are a typical customer, your meter is just a rolling dial. At the end of the month, the meter man comes and reads it, and charges you for the use. Without an instantaneous readout, how does the utility company verify that you shut down the promised electrical demand?

They don't. But if you have a smart meter, which reads your electricity usage every 15 minutes or faster, then they can see the drop happen in real time. You get paid, everybody's lights stay on, and instead of building another coal plant, we effectively increased capacity by shutting down power consuming equipment.

And these programs don't require the entire grid to be smart, just the meter. That's why the programs are already here. CenterPoint Energy here in Houston already offers this program to its industrial customers. Baltimore Gas and Electric recently completed a pilot program for residential customers. As penetration of smart grid technology expands, so too will the opportunity for end users to make money through participation in the energy markets.