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art metering

In 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 invest-

ment 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 else-

where 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 vis-

ible components of the deployment the purchas-

ing and installation of meters and communications

infrastructure. The remainder covers new operat-

ing 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 rea-

sonable, Britain can draw on the experiences of

other markets, where millions of smart meters

have been or are currently being installed. IBMs

analysis of 27 smart metering projects in North

America shows that the up-front costs for deploy-

ments 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 complexi-

ties 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 ben-

efits of expected decreases in smart meter compo-

nent 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 exam-

ple, Decc has assumed a purchase cost of 56

per smart gas meter. This is a conservative esti-

mate compared with the 43 per meter Italy has

assumed for its planned deployment of smart gas

meters with similar functionality, due to com-

mence in 2012. Further comparisons reveal simi-

lar answers Deccs 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 reason-

able and are consistent with other global deploy-

ments. 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 lions 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 achiev-

able. Enel in Italy has publicly stated that it has

seen a dramatic reduction in cash-cost per cus-

tomer, with operational savings of 49 per cus-

tomer 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 conserv-

ative, when compared with publicly available datasuch 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 ben-

efits 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 meter-ing. 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.

utility week 18 June 2010 19lity week 18 June 2010 www.utilityweek.co.ukwww.utilityweek.co.uk

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For Britain, payment through taxation is incon-

sistent 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.

N

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 reason-

able rates will be ensuring that the investment is

seen as low risk. This will require a clear long-

term 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 ena-

bles the benefits originally envisaged. Success isdependent 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

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 appropri-

ate 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 achiev-

ing enduring energy and carbon savings is effec-

tive consumer engagement. Government rightly

identifies the value of consumer awareness cam-

paigns and real-time energy displays in achieving

this, but more is needed. Crucially, there must begreater awareness of the differences in behaviour

among consumers. For example, IBM research

shows that 27 per cent of consumers say that nei-

ther money nor environmental concerns will make

them change their consumption of energy. Would

installing a real-time energy display in these cus-

tomers 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 engage-

ment 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 man-

agement 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 andelectricity processes and data flows, improving

the time it takes for a customer to change suppli-

er, and ensuring infrastructure is able to support

future smart water meters, are all changes that

should be recognised now, even if they are deliv-

ered in a later phase of work.

So, does this business case for smart metering

stack up? The answer has to be yes. The respon-

sibility 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: wsiddall@uk.ibm.com

20 utility week 18 June 2010

Smart metering

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