• Smart metering

Smart metering
A REPORT PREPARED FOR CENTRICA
October 2007
© Frontier Economics Ltd, London.
i Frontier Economics | October 2007 |
Smart metering
Executive summary.......................................................................................1
1.1 Introduction..................................................................................................1
1.2 The case for Visual Display Units .............................................................1
1.3 Smart meter roll-out for domestic and small business customers........4
1.4 Smart meter roll-out for large business customers .............................. 10
2 Introduction ....................................................................................... 13
3 Overall analytical framework ............................................................. 15
3.1 Introduction............................................................................................... 15
3.2 Overview of framework........................................................................... 15
3.3 Model structure ......................................................................................... 19
4 Visual Display Units...........................................................................23
4.1 Introduction............................................................................................... 23
4.2 Costs and benefits..................................................................................... 23
4.3 Assessment of case for VDUs ................................................................ 27
4.4 Policy implications.................................................................................... 30
5 Costs of smart meters for domestic and small business customers ..33
5.1 Introduction............................................................................................... 33
5.2 Dumb meter costs .................................................................................... 33
5.3 Smart meter costs...................................................................................... 33
6 Benefits of smart meters for domestic and small business customers
............................................................................................................ 41
6.1 Introduction............................................................................................... 41
6.2 Supplier benefits........................................................................................ 41
6.3 Green benefits ........................................................................................... 43
6.4 Other benefits ........................................................................................... 52
7 Results of smart meter CBA for domestic and small business
customers ...........................................................................................55
7.1 Introduction............................................................................................... 55
7.2 Net benefit assessment ............................................................................ 55
Contents
ii Frontier Economics | October 2007 |
7.3 Case for an accelerated roll-out .............................................................. 61
7.4 Case for co-ordinated roll-out ................................................................ 62
7.5 Distribution assessment ........................................................................... 63
8 Large business cost benefit analysis..................................................69
8.1 Introduction............................................................................................... 69
8.2 Costs ........................................................................................................... 70
8.3 Benefits....................................................................................................... 71
8.4 Results of cost benefit analysis ............................................................... 74
Annexe 1: Calculation of load shift in response to ToU tariffs...................77
Annexe 2: Smart meters and settlement .....................................................79
Contents
iii Frontier Economics | October 2007 |
Smart metering
Figure 1: Modelling approach...................................................................................... 21
Figure 2 Stylised example of market energy reduction across a sample daily load
................................................................................................................................. 44
Figure 3 Stylised example of market load shifting across a sample daily load ..... 46
Figure 4 Relationship between electricity load and cost.......................................... 49
Table 1: Summary results of CBA (base case) for domestic and small business
customers..................................................................................................................5
Table 2: Expected level of 'green' benefits (base case) under RFM (accelerated) ..6
Table 3: Summary results of CBA (base case) for large business customers ....... 10
Table 4: Costs of VDUs............................................................................................... 24
Table 5: NPV of costs and benefits associated with rolling out VDUs................ 28
Table 6: NPV of costs and benefits of VDU roll-out followed by smart meter roll
out........................................................................................................................... 30
Table 7: Smart meter purchase costs - Gas ............................................................... 34
Table 8: Smart meter purchase costs - Electricity .................................................... 34
Table 9: Smart meter installation costs - Gas............................................................ 35
Table 10: Smart meter installation costs - Electricity............................................... 35
Table 11: Smart meter annual maintenance costs - Gas......................................... 37
Table 12: Smart meter annual maintenance costs - Electricity............................... 37
Table 13: Smart meter annual comms costs - Gas ................................................... 37
Table 14: Smart meter annual comms costs - Electricity ........................................ 38
Table 15: Net present value of implementation and system costs: Gas and
Electricity............................................................................................................... 38
Table 16 Illustrative example of changes in energy consumption and resulting
benefits................................................................................................................... 44
Table 17: Results of CBA (base case) for domestic and small business customers
................................................................................................................................. 56
Table 18: Time of use pricing assumption (domestic electricity customers)........ 58
Table 19: Expected level of 'green' benefits (base case) under RFM (accelerated)
................................................................................................................................. 59
Tables & figures
iv Frontier Economics | October 2007 |
Table 20: Energy reduction sensitivity analysis assumptions.................................. 60
Table 21: Impact of variation of assumption on energy reduction........................ 60
Table 22: Impact of a one-year delay in a smart meter roll-out ............................. 60
Table 23: Impact of speed of roll-out ........................................................................ 61
Table 24: Results of CBA (base case) for gas and electricity customers by
payment type......................................................................................................... 65
Table 25: Large business customers: Electricity ....................................................... 69
Table 26: Large business customers: Gas .................................................................. 69
Table 27: BERR's meter cost assumptions for large business customers: Gas.... 70
Table 28: BERR's meter cost assumptions for large business customers:
Electricity............................................................................................................... 71
Table 29: Results of CBA (base case) for large business customers...................... 74
Table 30: BERR Cost benefit analysis of smart meters for large business
customers............................................................................................................... 75
Tables & figures
1 Frontier Economics | October 2007 |
Executive summary
1.1 INTRODUCTION
Frontier Economics has been engaged by Centrica to provide analysis of the
costs and benefits of proposals to introduce smart meters for domestic and
business customers within Great Britain. The key objectives of this work were as
follows:
• to provide a transparent and structured evaluation of the costs and
benefits of introducing Visual Display Units (VDUs) across the electricity
domestic sector;
• to produce a transparent and structured evaluation of the costs and
benefits of introducing smart meters across the domestic and business
sectors; and
• to compare the costs, benefits, risks and rewards of the rollout of smart
metering within the current market framework to those within other
market frameworks, such as the Regional Franchise Model (RFM).
The main contribution that this study attempts to make is to show how the net
benefit associated with a smart meter roll-out may be affected by the way in
which the roll-out can be undertaken.
In undertaking this work we have been able to utilise Centrica’s knowledge and
experience of meter procurement within the existing competitive metering
market, as well as its experience of deploying of smart meters within the current
industry structure.1
1.2 THE CASE FOR VISUAL DISPLAY UNITS
The Government is proposing that from May 2008, where technically feasible,
every household having an electricity meter replaced and every household
receiving a new connection should be given a real-time electricity VDU free of
charge. Analysis undertaken by the Department of Business Enterprise &
Regulatory Reform (BERR) purports to show that there will be a total net benefit
in the region of £205 million from such a scheme.2 We consider that this
analysis is misleading.
In evaluating the potential benefits of VDUs, it is important to consider the
VDU policy and the smart meter policy together.
1 Centrica has already installed 16,000 smart meters in the SME sector and undertook a trial of 50,000
residential AMR (one-way) meters in 2003/04.
2 “Energy Billing and Metering”, BERR (August 2007) p21.
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2 Frontier Economics | October 2007 |
The costs of a VDU are in addition to the costs of a smart meter. The type of
VDU that is currently available will not be suitable for use as a display device
with a smart meter and, therefore, would be rendered redundant on
installation of such a meter.
The benefits of a VDU are a subset of the benefits of a smart meter. The only
route by which a VDU can generate a potential benefit is via increased
customer awareness of the cost of energy consumption, leading to reduced
demand, whilst smart meters offer a much wider set of potential benefits. In
addition, there is reason to believe that the incentive to reduce consumption
that may come from a VDU will be lower than that which would be achieved
from a smart meter roll-out.3
These two factors mean that a VDU would be stranded in the event that a smart
meter was deployed in the same location. Any analysis of the case for VDUs
therefore needs to take into account the probability of a smart meter being
introduced at a point in time before a positive net benefit is generated.
Using BERR’s own estimates of the cost of providing a VDU4 and the associated
benefits5, the pay-back period for a VDU for a domestic electricity credit
customer will be around 9 years.6 Therefore, given the Government’s own
aspiration for a roll-out of smart meters to all customers within a 10 year period,
few if any VDUs will have been in place long enough to produce a positive net
benefit before they are stranded by installation of a smart meter. In addition, for
prepayment customers, VDUs are never expected to show net benefits over the
life of the asset. Requiring distribution of VDUs to these customers would
therefore fail BERR’s own test of being financially reasonable and proportionate.
In addition, we consider that the central case estimate of a 3.5% (credit) and
1.75% (prepayment meter) reduction in consumption continuing for 15 years is
imprudently high, given the lack of robust evidence to back up such assumptions.
A more prudent central case assessment would be for reductions in consumption
of 1% (credit) and 0.5% (prepayment). Making these changes would mean that
the deployment of a VDU to either a credit or a prepayment customer will not
generate a net benefit within the 15 year lifespan assumed by BERR.
Given this analysis, it is evident to us that a general roll-out of VDUs is not likely
to be in the public interest. However, since a VDU roll-out could start up to two
years before a smart meter roll-out, there are two cases where a limited roll-out
3 The likelihood that many customers would neither replace batteries when they expire nor update the
devices for new tariff information, combined with the absence of reinforcing billing information
from suppliers, means that VDUs are unlikely to produce reductions in consumption as large as
those from smart meters.
4 BERR’s central case cost estimate is £26 to purchase and install, annuitised over seven years at a
10% cost of capital, plus £2.71 per year running costs for seven years. Centrica believes that the
upfront costs under-estimate the actual costs that will be incurred in the roll-out, and there may be
at least another £14 incurred by suppliers at this time.
5 BERR’s central case estimate is for a 3.5% (for credit customers) and 1.75% (for prepayment
customers) reduction in energy consumption that will be sustained for a 15 year period.
6 This is based on BERR’s central case estimate for credit customers.
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3 Frontier Economics | October 2007 |
of VDUs in this intervening period could be beneficial, providing BERR can
substantiate its assumptions about the level of energy reduction that such devices
would promote.
If the Government relaxed its timetable for the roll-out of smart meters so
that the new meters were installed on a replacement basis over a 20 year
period, there could be a case for issuing VDUs on replacement in the interim
period until a smart meter deployment could commence. The customers
receiving VDUs in that interim period would not expect to get a smart meter
for a further 20 years and therefore, under BERR’s central case estimates,
would have a VDU long enough to expect to see a net benefit.
If VDUs could be provided exclusively to those customers that would make
the highest savings in their consumption, then their individual payback
periods may be reduced sufficiently to provide a net benefit before the
introduction of a smart meter. These customers are likely to be:
• those who actually want such a device and will use it;
• those who would have most discretionary load to reduce; and
• those with the largest energy consumptions.
With the exception of size of energy load, it is not clear that there will be any
way of identifying such customers in order to achieve a targeted roll-out.
However, it is possible that such customers would self-identify if the devices
were provided only on-request with some (nominal) associated charge.
In the event that the Government wishes to see an accelerated roll-out of smart
meters, we can only envisage a net loss resulting from a VDU roll-out scheme.
Our estimate of the size of this loss is £168m. This is based on the assumption
that VDUs are provided on replacement/installation of a new meter and on
request for a two-year period prior to the introduction of a smart meter roll-out
over a 10-year period.7
In addition to this estimate of the net loss to society from the Government’s
current proposals, we would also note that there are the following additional
downsides associated with a focus on a VDU roll-out.
VDUs can only be applied to a subset of the market.8 Although this does not
affect whether the proposal has a net benefit, it does alter the scale of any
benefit and the ability of VDUs to contribute as a policy measure to the 2010
carbon reduction targets. In the event that VDUs will not make a sufficient
contribution to this milestone, it may be better to focus on using a smart
meter deployment to meet the 2020 targets.
7 It is assumed that 10% of customers will request a VDU in each of the two years and that the roll
out of smart meters will take place on an accelerated 10-year replacement programme.
8 BERR assumes 75% of domestic electricity customers for all meters other than new meter
installations where the percentage is 95%.
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4 Frontier Economics | October 2007 |
Planning for a VDU roll-out programme will take up time and resources that
could be better employed on achieving a faster start to a smart meter roll-out.
In the event of an accelerated smart meter roll-out, the VDU devices would
end up being discarded within a short period of time. This could have a
detrimental impact on public opinion of the value of investment in such
devices.
It is therefore our opinion that, in the event that the Government requires an
accelerated roll-out of smart meters, it would not be in society’s interest to see a
roll-out of VDUs as an interim measure.
1.3 SMART METER ROLL-OUT FOR DOMESTIC AND
SMALL BUSINESS CUSTOMERS
In order to produce a transparent and structured evaluation of the costs and
benefits of introducing electricity and gas smart meters across the domestic and
small business sectors, we have undertaken a detailed Cost Benefit Analysis
(CBA) of the introduction of smart meters to these customer groups. This CBA
considered the net benefit for “GB plc” and followed HM Treasury’s Green
Book principles. Our analysis focussed on the incremental costs associated with
introducing smart meters to domestic and small business customers, compared to
the existing dumb meter programme, over a 20 year period. As such, the analysis
takes into account the impact of the timing of the roll-out. It uses data provided
by Centrica and collected from other studies recently undertaken in this area.
One of the aims of this study was to understand how the net benefit associated
with a smart meter roll-out may be affected by the way in which the roll-out can
be undertaken. In order to do this we considered three base case scenarios of
how the roll-out could be managed:
Supplier Hub Model (SHM) (replacement): This scenario involves a roll-out
of smart meters using the existing industry framework. Metering would
continue to be undertaken competitively by multiple agents. In the event of a
smart meter roll-out, each supplier would be responsible for installing a smart
meter into each of its customers’ premises. The speed of the roll-out would
be determined by the requirement to replace dumb meters at the end of their
certified life.
Supplier Hub Model (SHM) (accelerated): This scenario also envisages
continuation of the current industry framework. However it assumes that
meters will be replaced on an accelerated basis, the base case being that this
would happen over 10 years.
Regional Franchise Model (RFM) (accelerated): This scenario envisages re-
integration of the metering functions. In the event of a roll-out of smart
meters under this framework, one party would be responsible for installing
smart meters into all customers’ premises within a defined geographic area.
We assume that such reform of the industry would only be undertaken if the
roll-out was to be accelerated and, given the increased co-ordination offered
by the re-integrated structure, could be undertaken over a shorter time period
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 5 Frontier Economics | October 2007 |
than an accelerated roll-out under the Supplier Hub Model. Our base case
assumption is that a smart meter roll-out could be undertaken over a seven
year period.
To provide structure to the assessment of a smart meter roll-out programme, it is
useful to break the analysis down into three stages:
• Is there a net benefit associated with the introduction of smart meters to
domestic and small business customers?
• Is there a case for accelerating such a smart meter programme?
• Is there a case for co-ordinating the roll-out of smart meters to achieve
cost savings in deployment?
We consider each question in turn.
Case for smart meters
We present a summary of the results of our Cost Benefit Analysis using our base
case assumption in Table 1.
SHM (replacement) SHM (accelerated) RFM (accelerated)
Incremental costs (£4,663m) (£6,738m) (£6,109m)
Supplier9 benefits £1,889m £2,994m £4,804m
‘Green’ benefits £2,636m £3,999m £4,477m
Other benefits £192m £292m £327m
Total net benefit £54m £546m £3,499m
Table 1: Summary results of CBA (base case) for domestic and small business
customers
The results show that, given the scale of the costs and benefits, there is not
currently a business case for suppliers to roll-out smart meters to their domestic
and small business customers. This result is consistent across both SHM
scenarios. In addition, we find that there is still a significant gap between the
level of supplier benefits and the cost of the meters and therefore it is not clear
that this situation will change in the short to medium term. This does not mean
that there are no market segments where there would be a supplier case for a roll-
out. However, it does mean that if the Government leaves it to suppliers to
decide whether to roll-out smart meters to these customers then, based on
current evidence, it appears to be extremely unlikely that this will occur for all
customers within the next 10 years.
9 It should be remembered that ‘supplier’ benefits will be expected to be transferred to customers,
given the competitive energy supply market.
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 6 Frontier Economics | October 2007 |
The case for a mandated roll-out of smart meters to domestic and small business
customers depends on the expected level of ‘green’ benefits that may be
generated by customers altering their energy consumption behaviour. This
change in consumption behaviour may be a result of:
• a reduction in the level of gas and electricity consumption in response to
better information about the cost of energy consumption; and
• a movement in the timing of electricity consumption from peak to off-
peak periods in response to time of use tariffs.
These changes would be expected to generate three potential benefits:
• a reduction in the cost of energy used;
• avoided peak capacity costs; and
• reduced carbon emissions.
Our base case assumes a reduction in consumption of 2% for domestic gas and
electricity credit customers, 1% for domestic gas and electricity prepayment
customers and 0.25% for gas and electricity small business customers. In
addition, we assume 20% of domestic electricity customers will take up a time of
use tariff. The carbon reduction associated with each scenario by 2020 is:
• SHM (replacement) – 1.8MtCO2;
• SHM (accelerated) – 3.2 MtCO2; and
• RFM (accelerated) - 3.2 MtCO2.
In order to illustrate the contribution that is made by each source of ‘green’
benefit, we provide the breakdown for the RFM (accelerated) total ‘green’ benefit
of £4,476.6m in Table 2 below.
Energy reduction Energy reduction Peak shift
(Gas) (Electricity) (Electricity)
Reduction in cost of £1750m £857m £27m
energy consumed
Avoided peak £33m £625m £156m
capacity
Carbon reduction £519m £516m (£7m)
Total ‘green’ £2,302m £1,998m £177m
benefit
Table 2: Expected level of 'green' benefits (base case) under RFM (accelerated)
Source: Frontier Economics’ analysis
These results lead us to make the following observations.
We consider that our assumptions for the take-up of the time of use tariffs,
and the load movement that they would be expected to generate, are
conservative. However, the results would indicate that, under current
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7 Frontier Economics | October 2007 |
conditions, such a benefit is unlikely to be large enough to make the case for
a mandated smart meter roll-out. It is important to recognise that this could
change in the future, particularly if a summer peak demand associated with
air-conditioning materialised.
The potential of gas smart meters to deliver significant ‘green’ benefits should
be recognised. Average gas consumption is higher than average electricity
consumption and therefore may be expected to result in greater savings for
any fixed percentage reduction in consumption.
The case for a smart meter roll-out, at present, rests on confidence about its
ability to deliver a reduction in average consumption. A relatively small
change in the average percentage reduction in consumption can lead to a
large variation in the size of benefit that such a policy may be expected to
generate. Under the base case assumptions, only the RFM (accelerated)
scenario shows a net benefit if domestic credit customers’ average reduction
in consumption drops to 1%.
Therefore, the case for rolling smart meters out to domestic and small business
customers now, rests on the expected level of customer and society benefits
associated with reductions in consumption. Assuming that the same reductions
are achieved by smart meters as those assumed by BERR in its central case for
VDUs, a positive net benefit of such a roll-out should arise. If Government
considers the achievement of these ‘green’ benefits to be based on sufficiently
robust assumptions, then, if it wishes to see a universal roll-out of smart meters,
it will need to mandate that policy.
Case for an accelerated roll-out
If Government decides that a mandated smart meter roll-out is the correct
policy, the time period over which smart meters should be introduced needs to
be decided.
There are three key benefits to an accelerated roll-out.
The benefits are received sooner. Clearly, if there are benefits to having a
smart meter, the quicker those benefits are received, the greater the value of
those benefits within the CBA.
The time over which the dumb and smart meters will need to be run in
parallel will be reduced. This has an associated cost saving as the unit cost
associated with managing a diminishing dumb meter stock will rise as the
stock of dumb meters falls.
There may be economies of scale associated with the purchase of a higher
number of smart meters per year.
Against these benefits there are additional costs associated with an accelerated
roll-out.
There will be higher levels of stranding of dumb meter assets as more dumb
meters are replaced before the end of their economic life.
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8 Frontier Economics | October 2007 |
The real cost of smart meters has fallen over recent years. If this trend were
expected to continue, then the total cost of purchasing the smart meter assets
could be higher rather than lower under an accelerated programme.
The analysis that we have undertaken indicates that the benefits of accelerating
the roll-out are likely to exceed the costs.
Cost savings from a co-ordinated deployment
There are three potential areas where significant cost savings could arise from
undertaking the smart meter roll-out in a co-ordinated manner across the
industry. The first is from undertaking the roll-out on a geographic basis, the
second is from undertaking the roll-out on a dual fuel basis and the third is from
increased supplier cost savings associated with the re-integration of metering
services. We discuss each in turn.
There are three key benefits associated with a geographic roll-out.
There would be a saving in the cost of installation due to the reduction in
travel time associated with being able to do a replacement meter programme
on a street by street basis.
There would be a reduction in the cost of managing the dumb meter network
during the roll-out period as the density of dumb meters in any remaining
area would remain constant. Further, if the dumb meter stock was
transferred to the smart meter roll-out provider, then there may well be
savings to be made in the intervening period as density will increase
compared with the supplier-led approach that is undertaken today.
A co-ordinated campaign of advertisement and education could be employed
in each area in which the roll-out was occurring to maximise both the chance
that customers would be in at the time their installation was scheduled (thus
saving the costs associated with re-visits) and the chance that they would
engage with the process and achieve a reduction in consumption.
The case for a dual-fuel roll-out is also strong.
There is a lower cost smart metering solution associated with being able to
“piggy-back” the gas meter with the electricity meter, resulting both in lower
one-off costs associated with the purchase of the equipment and ongoing
communications costs associated with the provision of meter reads.
There is a reduction in the average time to install a meter as only one site visit
is required (and therefore a saving is made both in travel time to the property
and the time taken to gain access to a meter).
There is a reduction in undertaking dumb meter reads during the roll-out as
both gas and electricity meters can be read at the same time.
It is clearly the case that the geographic benefits could only be achieved by a co-
ordinated industry approach to roll-out. However, most of the benefits
associated with a dual-fuel roll-out are also only likely to be achieved with a co-
ordinated roll-out for the following reasons.
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9 Frontier Economics | October 2007 |
If the roll-out was the responsibility of individual suppliers, they would only
be able to achieve the benefits associated with a dual-fuel roll-out in those
cases where they supplied both fuels. This immediately reduces the benefits
by over half given that 58% of customers with both a gas and electricity
meter still take their supplies from different gas and electricity suppliers.
In addition, there are strong arguments for why, even for the customers that
are on a dual fuel supply, suppliers (and therefore ultimately customers) will
not realise the dual fuel savings. First, on installation, we understand that, at
present, fitters are not trained to be able to install both gas and electricity
meters. The reduced density10 faced by a supplier, compared with a regional
franchisee, means that reorganising its workforce to undertake dual fuel
fitting is unlikely to be cost effective. Second, given that a dual fuel supplier
has no guarantee that it will not lose one or other of the fuels to an alternative
supplier, it will not risk installing the cheaper gas piggy-back solution as this
will face a greater risk of being stranded in the event the customer chooses to
revert to single fuel supplies.
Certain supplier costs associated with the provision of an energy supply are
expected to reduce following the introduction of smart meters. However, the
level of reduction will depend on the industry framework that is adopted. In
particular, if the current fragmented supplier hub model is retained, it is assumed
that costs will still be incurred dealing with the failure of data flows associated
with activities such as change of supplier. In the event that these are re-
integrated, the cost savings are expected to be greater.
The cost savings associated with a co-ordinated deployment are significant.
Utilising information provided by Centrica about the differences in costs
generated by the different scenarios, we estimate that the cost of roll-out will be
almost £3bn lower if the geographic and dual-fuel cost savings are realised.
Distributional impact
The standard cost benefit analysis considers costs and benefits for society as a
whole and does not concern itself with the impacts that a policy may have on
particular categories of stakeholders. In order to complete the analysis of a new
policy, it is therefore necessary to undertake an assessment of its impact on
different stakeholder groups. There are two potential impacts that warrant
further consideration:
Impact on particular groups: Given the nature of the benefits that are
expected to arise from smart meters, and the market structure that will deliver
them, it is likely that most of the net benefits associated with the policy will
accrue to customers. If the policy delivers a net benefit then it is likely that
customers will also derive a net benefit. On average both domestic credit and
prepayment customers appear likely to derive positive net benefits from the
10 If a supplier has half its customers on dual fuel and supplies one sixth of the market, then the
density of dual fuel properties it will face will be one twelfth of that faced by a monopoly roll-out
provider.
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 10 Frontier Economics | October 2007 |
policy. The case is less clear for small business customers, if the lower
reduction in consumption of 0.25% is accepted.
Impact of stranding existing assets: Under an accelerated roll-out scenario,
there will be a cost associated with the stranding of the existing metering
stock before the end of its expected useful life. Given that metering services
tend to be charged to customers on an annual basis over the expected life of
the meter, the cost associated with this stranding will rest with industry, rather
than customers. The different contractual arrangements that are currently in
place between suppliers and meter providers means different industry
stakeholders will face different liabilities. It is appropriate that some form of
industry-wide solution to stranding is found since parties have acted in good
faith in investing in the existing meter asset base and any Government
mandated accelerated roll-out would represent a change in policy that was not
signalled by Government prior to such investment being made. Failure to
recognise this and compensate those affected will be expected to raise the
financing costs of the smart meter roll-out.
1.4 SMART METER ROLL-OUT FOR LARGE BUSINESS
CUSTOMERS
The definition of large business customers that has been used for this analysis is
the one proposed by BERR, namely profile classes 5-8 of the electricity market
and non-daily metered gas sites consuming more that 732 MWh11 per annum.
We also use BERR’s proposed roll-out of smart meters to this group, namely that
it will take place as an accelerated five-year roll-out, starting in 2008. Given the
relatively small number of customers involved, we assume that it will be
undertaken within the current supplier hub industry framework. In addition, we
base the smart meter technology and costs on those that are currently available
within the market place.
We summarise the results of this roll-out in Table 3.
Gas Electricity Total
Incremental costs (£36m) (£76m) (£112m)
Supplier benefits £1m £62m £63m
‘Green’ benefits £77m £43m £119m
Total net benefit £41m £28m £70m
Table 3: Summary results of CBA (base case) for large business customers
These results show that, based on the input assumptions and methodology, there
is expected to be a small net benefit associated with the introduction of smart
meters to large electricity customers and data loggers to large gas customers.
This case is driven primarily by the expected benefits associated with the energy
11 We assume that the cut off point is anticipated to be 732 MWh and not 73,200 kWh, as referenced
in BERR (2007) p31.
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11 Frontier Economics | October 2007 |
reduction: even a small reduction in consumption will result in absolute savings
that may be expected to exceed the cost of the meters. However, the benefits
that accrue to suppliers are not, on average, expected to be sufficient to warrant
suppliers undertaking a complete roll-out under their own volition. In the case
of gas smart metering, the supplier business case is still a long way from being
positive. It is much closer for an electricity smart metering solution.
It is worth comparing two aspects of our results with those that have been
presented by BERR. First, the net benefit in our analysis is much smaller than
the one predicted by BERR. The main driver of this result is our lower
assumption of reduction in average energy consumed. Second, we note that
although BERR has calculated a positive net benefit to “Firms” from this policy,
we understand that this includes the cost savings associated with avoided peak
capacity that BERR as