The concept of a smart grid is foreign to most Americans. In fact, 70 percent of Americans haven’t heard the phrase "smart grid" before, according to a recent report published by EcoAlign and Russell Research.1

Similarly, facility managers are at a critical crossroads in understanding how moving to a smart grid will directly impact their building operations and bottom line. An electrical-grid transformation is taking shape quickly, and the smart grid will significantly affect how buildings consume energy—and how much utilities charge for it.

Automation, a familiar building concept, will be critical to the smart grid's success. Specifically, smart building controls will help businesses maximize energy savings with minimal involvement. A smart grid will give insight into changing energy conditions, while increased control capabilities will help facility managers choose when and how to respond.

The potential is significant: With proper controls in place, facility managers will be equipped to respond automatically to changes in electricity pricing, as well as sell excess power back to the grid if renewable technology or some other type of on-site generation is available. This, in turn, will create a revenue stream for businesses and support the drive toward lower carbon emissions.

By preparing facilities for a smart grid and ensuring the necessary components—including building controls—are in place, facility managers can position themselves not only to evolve with this new reality, but benefit from it.

What Is a Smart Grid?
A 'smart grid' refers to a highly automated and interconnected network that enables two-way communications to provide better insight from both the supply and demand sides of the energy equation, helping utilities and ratepayers manage consumption and stabilize the electrical grid.

The traditional approach to energy management is not fully automated, impacting utilities’ ability to manage peak demand—the time during which demand often exceeds supply and strains the grid. During periods of peak demand, utilities have employed various strategies, such as purchasing power on the spot market or using peaking plants to increase grid supply, to avoid brownouts and blackouts. Although these strategies help meet demand, they increase power prices and greenhouse-gas emissions.

The aim of a smart grid is to establish a more transparent, cost-effective, and secure energy network. A smart grid allows utilities to use existing capacity more efficiently, which helps customers decrease costs by giving them the ability to coordinate energy use with price fluctuations.

Successful energy management will rest on an organization's ability to complement traditional efficiency measures. Organizations can choose to be active participants in the energy market and manage costs more effectively. Utilities, in turn, are able to empower customers with the real-time market information needed to make smart energy decisions. For facility managers, the key is learning how to fully leverage this increased "intelligence" for true energy-management success.

The Reality of Critical Peak Pricing
The smart-grid concept is giving way to dynamic pricing structures, which more closely link overall demand with the cost of delivering electricity. These pricing structures include critical-peak-pricing tariffs, in which electricity rates are based on consumption levels and production costs. This critical-peak-pricing strategy—also known as dynamic peak pricing—ultimately helps utilities manage consumption by encouraging customers to shift or reduce their electricity use during periods of high energy demand.

Utilities across the country are beginning to transition many commercial and industrial customers to this pricing structure, meaning rates could jump 10 or more times the normal price during the hottest or most energy-intense days of the year. Facility managers need to determine how to react to these price fluctuations—otherwise, their buildings’ energy costs could increase exponentially. Fortunately, a smart grid enables organizations to take an active role in implementing automatic strategies that respond to critical peak pricing quickly. Buildings will benefit if facility managers plan ahead. No longer are they passive energy consumers, simply accepting energy prices. With a smart grid, facility managers can assess cost-saving opportunities.

Generating Savings Through Automated Demand Response
Pricing shifts already are being experienced in California and the East Coast; the rest of the country is not far behind. Critical peak pricing likely will become increasingly common. The federal government is making investments in measures such as automated-demand-response programs, which enable commercial and industrial facilities to automatically implement energy-management strategies, reducing costs and improving efficiency.

Facility managers can choose to be on the forefront of this transition by opting into critical-peak-pricing programs and learning more about their facilities' energy use, rather than waiting for costs to escalate under new pricing structures.

When demand for electricity exceeds supply, utilities must react to meet customers' energy requirements. Until recently, peak demand management has been based largely on voluntary and involuntary curtailment events. Involuntary events include brownouts—short-term power losses that are inconvenient for all affected. In contrast, customers can voluntarily make loads available for utilities to tap during curtailment events.

A disparity between voluntary and involuntary events has existed because too few loads have been made available voluntarily under traditional pricing structures. Critical peak pricing aims to balance those efforts. As a result, automated-demand-response programs—which build on traditional demand-response programs by automating a building's response to energy prices and demand—will become de rigueur.

California programs currently in place provide good examples of what facilities can gain by opting into an automated-demand-response program. As California utilities move toward critical peak pricing, automated-demand-response programs are helping curb demand during peak periods, which can occur 10 to 15 days per year. The programs curb demand by allowing commercial and industrial customers to automate their responses to rate changes, capitalizing on critical peak pricing. Participating customers are able to engage in such events without manual intervention.