Next Tuesday in his State of the Union address, President Obama will call for increased government investment in infrastructure, education and research.  Coming at a time of rising concern about the federal budget deficit, the President’s proposals will no doubt be controversial.  But he will make a sound and valid point:  If America is to compete successfully in the 21st Century and retain its prosperity and economic leadership relative to other nations, it cannot do so hobbled by an antiquated power system or threatened by the prospect of energy supply disruption.

But before the U.S. Treasury starts writing checks, there is much to be learned from the experience of the last two years.  Federal dollars for energy infrastructure really are limited and must be spent wisely and strategically.  Federal investment in energy infrastructure must be driven by rational, cost-effective and attainable goals, not by sound bites and special interests.

Smart Grid investments are a case in point.  Last week I attended a Smart Grid conference in Chicago produced by the Association for Corporate Growth (ACG) hoping to answer one of the enduring mysteries of U.S. energy policy:  What is the Smart Grid? 

As near as I can tell, the Smart Grid is supposed to turn the old electric power grid into a network through which information will flow as well as electric power.  The Smart Grid will use the information to allocate more efficiently when and how electricity is generated and when and how it is consumed. 

This new network will cost quite a bit of money.  According to the Electric Power Research Institute (EPRI), the Smart Grid could cost as much as $165 billion over the next 20 years.  The U.S. Department of Energy has already directed more than $4 billion of Stimulus Package awards into Smart Grid-related technologies and projects.

According to the speakers at the ACG conference, the Smart Grid network will have three principal benefits:  First, the Smart Grid will use power more efficiently, so that we do not have to generate quite as much of it.  This will reduce greenhouse gas emissions and increase the reliability of electricity service.  Second, the Smart Grid will better enable load leveling of electricity supply and demand, so that more variable, renewable energy can be added to the grid.  This too will reduce greenhouse gas emissions.  Finally, the Smart Grid will empower consumers, enabling them to exercise more control over their use of electricity. 

On its face, of course, all of this sounds quite good.  However, it is always a good idea when you hear the concept of billions of dollars of expenditures juxtaposed against words such as “network” and “empower” to hold tightly onto your wallet and tread carefully.

Using electrical power more efficiently is certainly an important goal.  Our national electricity grid is fragmented, antiquated and increasingly subject to failure.  This is a serious problem, particularly as we try for strategic reasons to move our principal source of transportation fuel from less reliable petroleum to what should be more reliable electricity.  According to EPRI, power fluctuations and interruptions cost American businesses about $100 billion each year.  Another $16 billion per year is lost to transmission congestion.  Repairing aging infrastructure to reduce power losses and building new infrastructure to reduce congestion and improve power quality is obviously and urgently worthwhile.  In the highly regulated and somewhat dysfunctional world of the electricity grid, this is only going to happen through government-directed mandate and investment.

Facilitating greater use of variable, renewable energy sources, such as wind and solar, also seems to be a worthwhile goal, though it is more controversial.  The degree of the relationship between greenhouse gas emissions and climate change is poorly understood.  It is unclear how much the marginal reductions in greenhouse gas emissions that greater use of renewable energy would cause will do to stabilize world temperatures.  The cost effectiveness of renewable energy investments is, and probably always will be, subject to question.   Still, because the long term costs of greenhouse gas-driven climate change are so potentially enormous, investments in renewable energy are almost certainly a good bet, even if a precise ROI cannot be calculated.

Finally we come to the subject of consumer empowerment.  This is a bit of a misnomer, since the object is not really to empower consumers but rather to encourage consumers to make better choices about how they use energy.   This is where a lot of the smart metering and net metering and real time charging and networking seems to come in and where a lot of the prospective business profits from sales of new software and collection of consumer data seems to come in as well.

Getting the average retail electricity consumer to care about his or her electricity bill and usage is a tall order.  One speaker from a utility talked about the need to educate consumers about these new empowering technologies and lessen their concerns about loss of privacy.  Another speaker speculated that what was needed was some sort of new energy “killer app”—a game system perhaps—that will get retail consumers thinking about how they use electricity.  And, yes, this is the part of the article where you should be holding your wallet tight.

There is unquestionably a need for retail electricity consumers to use energy more efficiently.  But waiting for consumers, who have always seen and likely will always see electricity as a utility commodity, much like water, to become interested in how it is used is not a good bet.  Pouring billions of dollars into smart meters, education programs, net metering and the like are questionable investments, empowerment, networking and other nice buzz words notwithstanding.

The better model for the Smart Grid, at least as far as its interface with most retail consumers, is what I would describe as the On Star model.  On Star is, of course, the highly successful communications system that is available today in many General Motors vehicles.  The On Star system is highly engineered and very complex.  And yet the consumer interface is, by design, a single button that the customer simply presses when he or she wants help.  The complexity is on the GM side of the button, not the consumer side.

There is a lesson in On Star for the Smart Grid:  The grid does not need to be, and should not be, that smart.  It is cheaper, simpler and, from the perspective of the vast majority of retail consumers, preferable, to leave the complexity of the Smart Grid entirely on the utility side of the meter.  By way of example, utilities, not retail consumers, should be charged with balancing electricity load.  This can be done by wheeling power into the distribution system and storing it there for consumer use on demand, rather than requiring consumers to alter their patterns of consumption.  That may not be a great solution if your business is selling software, consumer data, educational services or peak energy, but it would make a lot of sense for retail consumers and for the grid.

If President Obama makes his case on Tuesday, we may well see another wave of sorely needed investment in our national energy infrastructure.  But we need to use that new investment wisely and cost effectively if it is to help our country achieve its energy goals.