A Pepco worker installs a smart meter.

Next-generation "smart" meters could play a critical role in energy conservation in the coming years. Giving customers more information about the price of power at different times of the day will drive them to use less during times of peak demand, or so the theory goes.

Pepco, a utility in Washington, D.C., is piloting a new smart meter program that includes pricing options for electricity use, which could result in increased energy conservation during peak demand and non-peak hours. Pepco in late July sent smart meters to 1,400 customers. The meters communicate real-time energy usage to the utility and eventually end-use customers. Customers in the pilot choose between one of three rate plans—Hourly Pricing, Critical Peak Pricing and Critical Peak Rebate. The hope is that by providing customers with usage information and a variety of pricing options, they reduce energy use during peak periods compared to other smart meter tests.

"The program promotes a holistic approach to energy conservation, combining prices that encourage load shifting to off peak times with tools and information that supports reduced energy consumption at all times of the day," says Chris King, president of eMeter Strategic Consulting.

In the Hourly Pricing program, rates change hourly based on the wholesale price of power in day-ahead markets. Customers are given real-time access to prices. Customers are warned one day ahead of time if electricity prices are expected to rise above 22 cents per kilowatt hour (kWh) for at least an hour-long period.

King says customers with this rate plan stand to save as much as $50 to $100 a year. Customers who choose Critical Peak Pricing will pay much higher prices for electricity—as much as 70 cents per kWh—during peak hours (60 hours a year), but pay the same base rate the rest of the year. Critical Rebate customers pay a locked rate, but receive a rebate if they reduce usage during the same peak hours. Both groups could save between $10 an $30 a year, according to King.

King says that during a typical smart meter pilot, energy consumption drops by about 4 percent over a year. He expects overall consumption in Washington, D.C., will exceed other pilots.

The project is slated to continue through 2010, at which time the public service commission is expected to examine the results and possibly approve the widespread deployment of the meters and rate plans.