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International comparisons and research back up government figures suggesting the benefits of smart meters far outweigh their costs, says Will Siddall
The only way is up I
n the next decade every home and small business in Britain will have smart gas and electricity meters installed. The plan is the result of a business case produced by the Department of Energy and Climate Change (Decc) which forecasts that over the next 20 years the project will cost in excess of £9 billion, and deliver benefits of more than £17 billion. This seems to be exactly the kind of investment Britain needs right now – an economically advantageous long-term investment in critical infrastructure, helping the country move to a more sustainable low-carbon future. But is the business case convincing enough? Are the proposed costs and benefits consistent with experiences elsewhere in the world? Who should foot the up-front bill? And is it possible to make the business case for smart metering even more compelling? It is widely accepted that installing smart meters will be expensive. Government estimates are that this will cost £9.2 billion over the next 20 years, and two-thirds of this relates to the very visible components of the deployment – the purchasing and installation of meters and communications infrastructure. The remainder covers new operating costs, the cost of the change programme, and inefficiencies from operating smart and traditional meters in parallel during deployment.
To consider whether these estimates are reasonable, Britain can draw on the experiences of other markets, where millions of smart meters have been or are currently being installed. IBM’s analysis of 27 smart metering projects in North America shows that the up-front costs for deployments delivering a similar scope to that proposed for Britain range from £102 to £242 per meter. This covers the purchase and installation of the meter and communication assets, IT changes and project management. The estimate for Britain is £139 per meter. This appears sensible. Britain has complexities such as indoor metering, which will increase costs, but also opportunities to be more efficient – such as deploying smart gas and electricity meters simultaneously. Britain should also reap the benefits of expected decreases in smart meter component costs, which IBM analysis shows as falling by 5-10 per cent each year. In a similar manner it is possible to compare the detailed cost assumptions made. For example, Decc has assumed a purchase cost of £56 per smart gas meter. This is a conservative estimate compared with the £43 per meter Italy has assumed for its planned deployment of smart gas meters with similar functionality, due to commence in 2012. Further comparisons reveal simiwww.utilityweek.co.uk
lar answers – Decc’s assumptions appear robust, with a slight overall tendency towards being conservative. These analyses show that both the overall and detailed cost estimates for Britain appear reasonable and are consistent with other global deployments. Therefore the key question should no longer be, “are the cost estimates correct?” but instead, “are there sufficient benefits to justify the cost?” The government has identified £17.4 billion of expected benefits from smart metering over the coming two decades, the lion’s share of which comes from operational efficiency improvements for suppliers, consumer energy reductions, and carbon savings. Smart meters enable consumption to be read remotely and with much greater accuracy. For suppliers this should mean reduced manual meter reading costs, and reduced costs associated with having fewer estimated and inaccurate bills. It should also no longer ever be necessary to replace the meter when a customer changes supplier or moves on to a prepayment tariff. Hard efficiency benefits such as these are estimated at more than £5 billion. Experience from elsewhere is that these benefits are achievable. Enel in Italy has publicly stated that it has
seen a “dramatic reduction in cash-cost per customer”, with operational savings of €49 per customer per year – more than four times the forecast British savings. Integral to the smart metering benefits case is the premise that providing customers with more accurate and timely information will result in behaviour change: consumers using less energy and shifting consumption to times when power is cheaper and greener. This should help save money in the short term and reduce the level of generation and network asset investment required in the future. The British business case assumes a reduction in domestic energy consumption of 2.8 per cent. This is consistent, even slightly conservative, when compared with publicly available data such as analysis by the US Pacific North West National Laboratory (PNNL). This estimates a 6 per cent reduction. There is, however, a question mark about the longevity of changes in consumer behaviour, so provision of better information must be seen as a first step. To ensure that the full potential benefits are realised, effective consumer incentivisation through cost-reflective tariffs and smart devices which consume energy in a more intelligent way are necessary future steps. When such changes are put in place, the benefits can increase significantly. A pilot project run by PNNL integrating smart meters with smart devices and smart grids delivered reductions of 15 per cent in peak power demand and 10 per cent in consumer energy bills. So it would seem that the expected benefits are achievable; conservative when compared with other deployments; and sufficient to justify the costs of introducing smart metering in Britain. Perhaps the subject that has attracted the most column inches is who should pay for smart metering. Really, this is not the right question, because while the benefits to energy suppliers will cover some costs, ultimately most costs will be borne by the consumer. The right questions to ask are: who should finance the programme, and how and when should any costs not paid for by supplier benefits be passed on to consumers? Again, this is an area where Britain can learn from other markets, such as Ontario. Here, the regulator considered three payment options – general taxation, up-front consumer payment, and financing with tariff-based recovery from consumers. They chose a tariff recovery model. continued overleaf
The subject that has attracted the most column inches is who should pay for smart metering
this is the fourth in a monthly series of articles on smart metering
in association with
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Seeing is believing: real-time monitoring should encourage consumers to use less energy
Key to attracting finance at reasonable rates will be ensuring that the investment is seen as low risk
who should finance smart meters, and how should the costs be recovered from consumers?
continued from previous page For Britain, payment through taxation is inconsistent with a competitive utilities market, and asking consumers for up-front payment would be unpalatable and hard to enforce. It is therefore reasonable to assume a similar solution in Britain – industry paying the bill with recovery over time from consumers. ine billion pounds is a hefty bill for industry to foot, especially at a time of huge investment in areas such as nuclear power and renewables. This raises the likelihood of new investors being required. Attracting this investment should be achievable, but key to attracting finance at reasonable rates will be ensuring that the investment is seen as low risk. This will require a clear longterm industry plan, a stable and agreed functional specification, commercial meter interoperability and regulatory stability. Of course, even a great business case does not always translate into a successful project that enables the benefits originally envisaged. Success is dependent on recognising and acting now in key areas to minimise cost and risk, and maximise benefits. One of the most significant assumptions made is the timing of deployment. Any delay to the expected 2013 start date will significantly reduce the benefits achieved. This requires an efficient and effective change programme with a strong central industry design function. Actions can also be taken to accelerate the deployment start date – for example, defining the meter specification now. Once rollout has commenced, targets must be set that ensure suppliers do not delay deployment. Furthermore, Britain should be more aggressive
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in its deployment timescales. IBM analysis of 48 global deployments shows a typical duration of four to six years, and that additional net benefits of more than £1 billion could be achieved if the British deployment was delivered in five years, not eight as proposed. Achieving this would require delivery excellence from suppliers, and appropriate incentives (and penalties) for them to install in those timeframes – but again, this is nothing that has not already been achieved elsewhere. Imperative to efficient deployment and achieving enduring energy and carbon savings is effective consumer engagement. Government rightly identifies the value of consumer awareness campaigns and real-time energy displays in achieving this, but more is needed. Crucially, there must be greater awareness of the differences in behaviour among consumers. For example, IBM research shows that 27 per cent of consumers say that neither money nor environmental concerns will make them change their consumption of energy. Would installing a real-time energy display in these customers’ homes deliver any benefit? Conversely, 22 per cent of consumers want to take actions to change their energy usage, but are constrained by their available income. Should smart meter deployment target these customers first? If energy retailers in Britain are to see engagement with all consumer segments, they will need a range of approaches, from providing real-time consumption information to those who want to become engaged, to embedding energy management intelligence in the consumer goods of those who have neither the time nor inclination to change their consumption behaviour. Finally, the opportunity for smart metering to act as a catalyst for improvements in the structure and processes of the utilities industry must not be overlooked. Changes such as harmonising gas and electricity processes and data flows, improving the time it takes for a customer to change supplier, and ensuring infrastructure is able to support future smart water meters, are all changes that should be recognised now, even if they are delivered in a later phase of work. So, does this business case for smart metering stack up? The answer has to be yes. The responsibility on government and the utilities industry now is to deliver, and deliver quickly. l Will Siddall is advanced analytics & optimisation leader, energy & utilities industry, IBM Global Business Services™ Email: firstname.lastname@example.org
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