This Gadget Will Revolutionize Our Power Supply
By Tom Dyson
July 16, 2008

In Lee County, Florida, you'll get a 50% discount on the toll bridge if you travel outside daily rush hours.

Economists call this variable pricing. When there's more demand for your service, you charge a higher price. The railroads use it. The airlines use it. Even telephone companies charge separately for peak and off-peak calling.

But there's one industry that really wants to use variable pricing: the power industry.

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Demand for power in the United States peaks daily at 6 p.m. That's when people get back from work, heat their ovens, run the laundry, and turn on the air conditioning. Power demand bottoms at 4 a.m., when the whole country is asleep.

Because they have no way to store electricity, power plants must always have spare generating capacity to meet peaks in demand. If power demand spikes and the power company can't keep up, you get a blackout.

To make sure there's always enough power, power companies run two types of power plants: base load plants and peak load plants.

Base load plants meet the minimum power demand. Nuclear, coal, and hydro power plants are examples. You can't switch off a reactor, cool a furnace, or stop a river, so base plants run all day and night. These plants produce the cheapest electricity.

As a rough guide, peak power is three times more expensive than off-peak power... but it varies a lot depending on the region. As things currently stand, power companies figure out the average cost of power each day and charge every customer the same price, regardless of the time of day they consumed the power.

The power company would like to charge you more for using power at peak times... like the toll bridge or the phone company. By charging more for peak usage and less for off-peak usage, consumers would alter their habits. Peak demand would decline and base demand would rise. Power companies could avoid building expensive peak load power plants. Consumers could cut their bills in half. And it would create spare generation capacity for the future...

According to the North American Reliability Corporation, United States demand for peak electricity will increase by 135 gigawatts over the next decade... But supply will only rise by 77 gigawatts. If these projections are correct, there will be a major shortage of electricity within the next 10 years.

Variable pricing would save everyone money and ease the coming electricity shortage. But how will the power industry implement variable pricing? Smart meters. A smart meter records how much power you use and when you use it.

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The world's largest smart-meter deployment is in Italy, by the power company Enel SpA. Enel says the project cost 2.1 billion euros but saves 500 million euros per year... a four-year payback.

Pacific Power and Gas, the California utility, wants to install smart meters with millions of customers in northern California. And a utility in Texas, Oncor, recently signed a $690 million contract to install smart meters in 7 million households.

Echelon (ELON) and Itron (ITRI) are the two smart-meter market leaders... Variable pricing will revolutionize the electricity industry. I'm going to keep a close eye on the companies that make smart meters... and I recommend you do the same.

Good investing,

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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