Interval or
‘smart’ meters
This page last altered 30 April
2003
2003
Smart Meters for Smart Competition: Will Current Proposals Hand Back
Power to Consumers? 2003 Update
produced for the Energy Action Group by Pareto
Associates
full report available on the following link
http://www.esc.vic.gov.au/apps/page/user/pdf/IMRO%20EAG%20-%20Pareto7%20April%2003.pdf
The following is the Executive Summary
Competition
is meant to deliver benefits to consumers by allowing them to choose a supplier
that best meets their individual needs. Through choice, consumers encourage
suppliers to develop products and services that meet needs defined by the
consumers. This gives consumers economic power that not only determines the
quality of products and services on offer but also the price. In truly
competitive markets, this process can deliver substantial and sustainable
social benefits.
It
is a matter of policy dogma in Australia (and many other countries) that it is
possible to develop competitive retail electricity markets for small consumers.
Costs of energy production and supply - which are highly dynamic over short
timeframes - are now clearly signalled and allocated to supply-side entities,
but the price to smaller consumers in particular contains no clear link to
these costs. Clear evidence is emerging that the mismatch between cost drivers
and price signals contributes to a growing need to invest substantially more in
production and supply capacity required for only short durations during
increasingly extreme peak periods. There is widespread consensus amongst
utility industry participants, governments and regulators that more
economically efficient outcomes may be possible if demand-side response could
be encouraged; that is consumers could be encouraged to change consumption
patterns during the infrequent periods of extreme peak demand or extreme
wholesale market price.
This
creates a challenge for consumers that is magnified by incentives, particularly
for Residential consumers, to take advantage of affordable energy intensive
appliances - particularly (relatively) high capacity and (relatively) rarely
used refrigerative air-conditioning. This would be less of a challenge for
consumers if the electricity supply infrastructure did not limit their ability
to respond to highly volatile cost drivers. Put simply, the ability of
consumers to respond is limited, in part, because they have no access to
proven, cost-effective technology that would allow them to do so easily and
conveniently.
There
are some aspects of the ESC’s proposals that would tend to address deficiencies in the
current ‘market’ arrangements - and, therefore, potentially provide benefits
to the majority of consumers who still do not have refrigerative
air-conditioning. This would come primarily from the potential to reduce
cross-subsidies in existing tariffs that clearly favour air-conditioning users.
However, the ESC proposals need further examination and improvement for the
reasons, and in the areas, outlined below.
Problems
with the ESC Proposals -
• The
proposals are supply-side focussed.
That
is, the proposal to roll-out manually read interval meters would clearly
address some of the 'problems' experienced by retailers (in particular with
settlement arrangements using the Net System Load Profile), and possibly allow
distributors and retailers to develop economically efficient,
cost-reflective tariffs that would more clearly allocate supply costs to
consumers.
The
clearest potential benefit to consumers is the 'hope' that time-of-use tariffs
would be developed by retailers that could lower the bills of those consumers
using low-cost energy. But if that were the case, consumers using high-cost
energy should expect higher (possibly very much higher) bills if they do
not change consumption behaviour.
There
is no guarantee that low-cost consumers would receive benefits. Even if
that did happen, delivery of these benefits could be delayed for many years
under a policy that provided for roll-out of ‘new and replacement’ interval
meters to low-volume consumers.
• The
Position Paper contains virtually no comment, and no analysis, on impacts on
different consumer sub-classes that would flow from the inevitable introduction
of time-of-use tariffs.
The
ESC concludes that 'average' consumers would be better off and that there are
potential, but unquantified, 'equity' benefits from a roll-out if interval
meters. This conclusion is very likely true, and is clearly indicated by the
analysis undertaken by CRA/KPMG. But consumers are entitled to ask the ESC to
clarify what the impact would be on particular groups of consumers before those
impacts are imposed on them.
• Relying
on manual reading of interval meters is not much of an improvement on manual
reading of accumulation meters because consumers would still have to wait weeks
to find out what the impact of usage on time-of-use tariffs actually was.
This
deficiency in the proposals is compounded by the near certainty that retailers
would still have to factor in similar price-consumption volatility risk if they
were relying on consumers to manually respond to price signals in time-of-use
tariffs.
A
good deal of the 'evidence' summarised by CRA and KPMG (which appears
reasonable) appears to be ignored by the ESC because it is being 'cautious'.
The main issue of concern is that the ESC appears not to accept it is feasible
to install and operate low-cost (to consumers) remotely activated load
management technology with interval meters; or that distributors are best
placed to roll-out this technology at low cost - in the almost certain
continuing failure of 'the market' to develop such capability.
CRA/KPMG
quite rightly report this sort of capability has the potential to greatly
increase willingness of consumers to respond to price signals - and therefore
gain benefit from time-of-use pricing. The ‘evidence’ presented
in the ESC Paper suggests access to remotely activated load management
technology could increase consumer response (more specifically Demand
Elasticity) by around 550%. If this occurred, it would make it far more
probable that individual consumers, and consumers overall, would benefit from
the introduction of time-of-use pricing.
Implementing
the ESC’s proposals in their current form would leave Victoria as
the only Region in the NEM that does not have any access to remote
load-management capability for small consumers, and the ESC Proposals include
no discussion or consideration of this issue.
The
2001 Pareto report on interval metering issues emphasised that there is no
example anywhere in the world where advanced metering has been rolled-out
without at least some form of remote reading capability. No new evidence has
emerged to suggest this has changed.
• The ESC
appears to retain an unfounded belief that 'the market' will develop products
and capabilities that will ensure delivery of benefit to consumers. This belief
appears misplaced because there is no evidence from anywhere in the world that
this is happening in competitive retail markets.
A
particular concern is that the major economic benefits identified by the ESC
(that are supposed to 'pay' for the roll-out) will not be delivered if
consumers don't respond to cost-
reflective
time-of-use pricing in sufficient numbers and at the same time of peak demand.
But the ESC appears not to accept that consumer response could be facilitated
by extending regulatory intervention to facilitate roll-out of low-cost two-way
communications and load-control technology similar in functionality to that
adopted by the Italians (or even more ‘antiquated’
technology that has been used in both NSW and QLD for decades).
How
the ESC proposals could be improved:
There
is clear evidence (summarised by CRA/KPMG in the ESC Paper) that roll-out of
interval meters will most probably deliver benefits to 'average' consumers. The
ESC has also correctly identified that better equity and economic outcomes are
virtually impossible without new metering technology and the introduction of
more cost-reflective time-of-use prices.
If
nothing is done to change the way price signals are communicated to all
consumers, 'average' consumers will, most likely, be faced with increasing
costs of energy and network services due to increasing growth and volatility of
consumption. This suggests that consumers could well be better off eventually
if there was a universal roll-out of low-cost interval meters.
However,
considerably more work is required to examine the impact and feasibility of low-cost,
two-way communications and load control capability that may best be delivered
by distributors. Implementation of this type of technology in Italy confirms
this is possible, and the Italian roll-out sets challenging benchmarks for
functionality and cost that would appear to deliver greater benefits to a
larger number of consumers than a roll-out of manually-read interval meters. If
all consumers had access to low-cost, automatic, load management
capability they could decide which 'discretionary' loads could be ‘managed’, more of
them would be willing and able to respond to cost-reflective time-of-use price
signals - and they would have a real choice other than accepting higher bills
(if they use ‘high-cost’ energy).
Pareto
has provided a preliminary analysis of the penetration of air-conditioning
amongst households. This shows:
• Around
50% increase in air-conditioning penetration across Australia over the last 5
years.
• Relatively
uniform penetration of air-conditioning across all household income groups in
Victoria with around 50% of all households having some form of
air-conditioning, and around 40% of most households having refrigerative
air-conditioning.
• Increasing
penetration of ‘higher-cost’, high capacity air-conditioning with rising household
income, with penetration rates below 10% in the lowest household income groups
rising to just under 30% amongst the highest household income groups.
• Significantly
higher penetration of air-conditioning or all types, including the ‘higher-cost’, high
capacity types amongst older aged households (in Australia).
• Significantly
higher penetrating of air-conditioners in South Australia than Victoria, and
significantly higher penetration of ‘higher-cost’, high
capacity types in both South Australia and NSW than Victoria. This suggests
Victoria may have some way to go yet with air-conditioning driven extreme peak
demand volatility.
• The
majority of households in Victoria still having no air-conditioning, and the
overwhelming majority having no air-conditioning or ‘lower-cost’, low
capacity air-conditioning.
On
the basis of this preliminary assessment it appears the majority of households
may benefit from the introduction of cost-reflective time-of-use tariffs, but a
significant number of low-income households could be substantially
disadvantaged without access to easy and convenient (and low-cost) remotely
activated, automatic load management capability.
Pareto
has also prepared a preliminary estimate of the impact of time-of-use prices on
different types of households. These estimates used actual household interval
meter data and rational time-of-use tariff structures based on tariffs
implemented by United Energy combined with the (hypothetical) tariff structure
adopted by CRA/KPMG for the analysis of costs-benefits that underpin the ESC
Proposals. Pareto’s analysis shows:
• Time-of-use
tariffs are very much more complex than existing tariffs, perhaps too complex
to be sustainable.
• The CRA/KPMG
tariff structure producing unusual (and unexpected) estimates of cost between
the different types of household load. This casts some doubt on the robustness
of the ESC’s cost-benefit analysis.
• Non
air-conditioner users being substantially better off on cost-reflective tariffs
than existing ‘standard’ tariffs, with annual savings at least 10.7% to 20.4% and
air-conditioner users without Off-Peak Hot Water being up to (a minimum of)
24.1% to 39.5% worse off.
• Air-conditioning
users with (relatively) high Off-Peak consumption incurring approximately the
same costs on time-of-use and standard tariffs.
• Air-conditioning
users with similar annual consumption, but significantly different Maximum
(monthly) Demand incurring significantly different costs.
These
estimates suggest non-AC users on average consumption may save around
$150-$200/year better off, and AC-users without Off-Peak Hot Water may pay
$400-$500/year more on 150% of average consumption. Consumers with very high
(say 6kW) air-conditioning demand may face total cost increases of $1,000/year
or more compared to current ‘standard’ tariffs.
However,
it is emphasised that these cost estimates are only preliminary. While the
estimates are based on actual household interval meter data and rational
time-of-use tariff structures, they provide only an indication of the likely
differences between existing ‘standard’ tariffs and prospective time-of-use tariffs. It is of some
comfort that the estimates are based on real data, but no other warranty is given
or implied.
Accordingly,
it is concluded that considerably closer examination is required of the
possible impact on different socio-economic groups, particularly the most
vulnerable members of our community. It is therefore recommended that the ESC do
more work on these matters before making any further commitment on its
proposals.
2002
Customer Energy Coalition Interval Metering Project 14 January 2002
The Customer Energy Coalition and a
group of like minded businesses commissioned a report by Pareto Associates on
Interval Metering as part of a submission to the Victorian Office of the
Regulator General’s 2000 Electricity Distribution Pricing Review.
The “Pareto
Report” indicated that it was feasible to roll out interval meter for
less-than-160 MWh consumers in the Australian National Electricity Market(NEM).
Since the Pareto Report, several jurisdictionally-based organisations have
indicated that a roll out of interval meters would be desirable. The Victorian
Government Victorian Government Infrastructure Planning Council (2002), Final
Report, August, Recommendation 24: Demand management and energy efficiency,
said:
“ensuring that consumers are aware of the full costs to society of their
energy use including removing consumption distorting cross subsidies between
different users;”
"encourage demand management and efficient use of energy, including
by requiring all households to be fitted with smart meters by 2007;”
(Page 70)
The Council of Australian
Governments’ Energy Review Market,(2002)Final Report, Towards a Truly National
and Efficient Energy Market, December, Recommendation 6.2, said:
“Installation of interval meters should be mandated for all consumers
with the installation program to be achieved over the next 10 years.”
(Page 54)
The Victorian Essential Service
Commission in November 2002 released a Position Paper, Installing Interval
Meters for Electricity Customers –Costs and Benefits. This paper recommends a
limited roll out for all customers between 160 and 40 MWh’s coupled with a new
and replacement interval meter policy as well as a limited roll out for off
peak electric hot water consumers.
The ESC Paper would appear to be the
lead document in the NEM metering debate as to how to proceed with interval
metering.
There are several choices:
1. Do nothing
2. Follow
the ESC preferred option of new and replacement plus roll out meters for 160 to
40 MWh customers.
3. Full
roll out over some given time period
It is the
Customer Energy Coalition’s contention that there are a number of deficiencies
with the Essential Service Commission Position Paper. The question that needs
to be examined is whether or not these deficiencies are sufficiently large to
argue that the ESC change its position on its proposed metering strategy.
Several of
the significant issues not included in the ESC Position Paper include:
Costs of
network augmentation
It is clear that consumer behaviour
and the move to Full Retail Competition in the NEM have lowered or are in the
process of lowering, the efficiency of network annual load duration curves.
Summer electricity peak load growth looks like costing NEM consumers around
$4.7 to 7 b over the next 4 to 5 years in network augmentation costs coupled
with the cost impact to consumers of this investment over the life of the
assets.
Smearing
of peak-load energy costs
Summer peak load growth also adds to
energy costs and retailer risk costs in the NEM. The use of price caps (deemed
standing offers and the like) by some jurisdictions further increased retailer
risk.
Gaming Net
System Load Profiles
The use of a range of jurisdictional
Net System Load Profiles (NSLP) has the potential to enable a second tier
retailer to game the incumbent retailer. Given that the market for less than
160 MWh customers is settled against the jurisdictional based NSLP, any second
tier retailer can acquire a high summer load customer, but does not wear the full
cost of this customer. It is possible for a significant part of the energy
costs of the 2nd tier high summer consumer to be offset on to the
host (1st tier) retailer. Currently this not a significant problem
with low levels of customer churn but once churn levels increase this will
develop into a significant issue if the market continues with NSLP.
Current
Market arrangements
The centralised NEMMCo Market
Settlements and Transfers System takes 30 weeks to settle 1 week’s market
trading. The full roll out of metering should simplify the issues of allocating
costs and transferring electricity consumers between retailers based on their
interval meter reading not just the next meter read or some estimate.
Simplification
of metrology procedures
The move to interval meters should
simplify jurisdictional metrology procedures and ensure that the market may be
more closely aligned between the jurisdictions.
Interval meters lead to more
accurate off-peak energy and Distribution Use of System pricing
Other
If the appropriate meters are used
in the roll out this should result in the better allocation of costs and the
monitoring of distribution company performance. (Enhancing consumer
protection!)
This would allow for a use pay cost allocation
for NEM directions and other pass through costs associated with the market.
Interval metering has the potential
to provide information that can be used for effective system planning.
Interval meters provide sufficient
information to move to time of use Distribution Use of System Pricing
arrangements.
Provides an information base to
minimise cost smearing between various groups and classes of consumers.
Enable retailers to better manage or
allocate market risk.
Additional
costs not considered in the ESC Report.
There will be considerable Metering
Demand Agent (MDA) cost increases as well as
Retailer IT costs that will have to
be met. For instance the 3 Victorian gas distribution company recoverable costs
approved by the ESC were in the order of $ 90 m. This neglected the VENCorp and retailer costs which look like
costing consumers between $250 and 3000 m over 5 years.
The volume of data is considerable
and there are questions that need to be answered about the various industry
gateways, B2B processes and their associated costs.
The CEC needs to establish whether
the costs exceed the benefits. The ESC Position Paper has only carried out the
easy part of the analysis.