Costs and Benefits of Smart Metering in Off-Grid and Remote Areas

Transcription

1 10 August 2010 Costs and Benefits of Smart Metering in A Final Report for the Ministerial Council on Energy s Smart Meter Working Group

2 Project Team Adrian Kemp Brendan Quach Tom Graham NERA Economic Consulting Darling Park Tower Sussex Street Sydney NSW 2000 Tel: Fax:

3 Contents Contents Glossary Executive Summary v vi 1. Introduction Stakeholder involvement Submissions to the draft report Structure of the report 2 2. Background and context What are smart meters? National cost benefit analysis of smart metering Roll out of smart meters in Australia Provision of electricity services in off-grid areas Customer service obligations and operational differences 8 3. Methodology and approach Scope of the analysis Case study selection The base case and scenarios for assessment The benefits and costs of smart metering infrastructure in remote communities Characteristics that influence the costs and benefits Preconditions necessary for smart metering in remote communities Costs of smart metering infrastructure Benefits of smart metering infrastructure Energy Conservation Benefits Prepayment metering Net benefits of smart metering Conclusions 41 Appendix A. Assumptions 44 A.1. Time period for the analysis 44 A.2. Roll out timeframe 44 A.3. Discount rate 45 A.4. Load control 45 A.5. Water meters 48 NERA Economic Consulting i

4 Contents A.6. Back-end IT costs 49 Appendix B. Smart metering in Northern Territory remote communities 50 B.1. Case study 1: Engawala 50 B.2. Case study 2: Nguiu (Bathurst Island) 57 B.3. Case study 3: Tennant Creek 62 Appendix C. Smart metering in Queensland remote communities 68 C.1. Case study 4: Birdsville 68 C.2. Case study 5: Erub (Darnley Island) 73 Appendix D. Smart metering in Western Australian remote communities 78 D.1. Case study 6: Denham 78 D.2. Case study 7: Karratha 84 D.3. Case study 8: Sandstone 88 Appendix E. The project steering group members 94 NERA Economic Consulting ii

5 List of Tables Table 3.1 Average Meter Purchase Cost 15 Table 4.1 Smart meter capital and installation costs 21 Table 4.2 Communications assumed for each case study 23 Table 4.3 Communications and backhaul costs 24 Table 4.4 Meter data management and network management system costs 25 Table 4.5 Cost of repairing damaged or failed meters and communications 26 Table 4.6 Total cost of a smart meter roll out in each case study 27 Table 4.7 Avoided meter reading costs 29 Table 4.8 Benefits of being able to provide remote connections/disconnections 30 Table 4.9 Avoided customer outage queries 31 Table 4.10 Avoided meter costs 33 Table 4.11 Total benefits of a smart meter roll out in each case study 33 Table 4.12 Potential net benefits from load control via smart metering in each case study 37 Table 4.13 Potential net benefits from a roll out of direct load control (scenario 2) 38 Table 4.14 Penetration of prepayment meters 39 Table 4.15 Net benefits of a smart meter roll out 40 Table A.1 Assumed Emission Permit Prices 48 NERA Economic Consulting iii

6 Glossary List of Figures Figure E.1 Net benefits of a smart meter roll out in each case study per meter viii Figure E.2 Net benefits of a smart meter roll out in each case study viii Figure E.3 Total costs of a smart meter roll out in each case study x Figure E.4 Total benefits of a smart meter roll out in each case study xi Figure 4.1 Total costs of a smart meter roll out in each case study 27 Figure 4.2 Total benefits of a smart meter roll out in each case study 34 Figure B.1 Costs of a smart meter roll out in Engawala 53 Figure B.2 Benefits of a smart meter roll out in Engawala 54 Figure B.3 Net impact of load control 55 Figure B.4 Net benefits of a smart meter roll out in Engawala 56 Figure B.5 Costs of a smart meter roll out in Nguiu 58 Figure B.6 Benefits of a smart meter roll out in Nguiu 59 Figure B.7 Net impact of load control 60 Figure B.8 Net benefits of a smart meter roll out in Nguiu 61 Figure B.9 Costs of a smart meter roll out in Tennant Creek 64 Figure B.10 Benefits of a smart meter roll out in Tennant Creek 65 Figure B.11 Net impact of load control 66 Figure B.12 Net benefits of a smart meter roll out in Tennant Creek 67 Figure C.1 Costs of a smart meter roll out in Birdsville 70 Figure C.2 Benefits of a smart meter roll out in Birdsville 71 Figure C.3 Net impact of load control 72 Figure C.4 Net benefits of a smart meter roll out in Birdsville 73 Figure C.5 Costs of a smart meter roll out in Erub (Darnley Island) 75 Figure C.6 Net impact of load control 76 Figure C.7 Net benefits of a smart meter roll out in Erub (Darnley Island) 77 Figure D.1 Costs of a smart meter roll out in Denham 80 Figure D.2 Benefits of a smart meter roll out in Denham 81 Figure D.3 Net impact of load control 82 Figure D.4 Net benefits of a smart meter roll out in Denham 83 Figure D.5 Costs of a smart meter roll out in Karratha 85 Figure D.6 Benefits of a smart meter roll out in Karratha 86 Figure D.7 Net impact of load control 87 Figure D.8 Net benefits of a smart meter roll out in Karratha 88 Figure D.9 Costs of a smart meter roll out in Sandstone 90 Figure D.10 Benefits of a smart meter roll out in Sandstone 91 Figure D.11 Net impact of load control 92 Figure D.12 Net benefits of a smart meter roll out in Sandstone 93 NERA Economic Consulting iv

7 Glossary Glossary COAG DLC DRED DUOS GPRS HAN IHD kwh kva MW MCE MDA MDM NEM NER NERA NMI NPV Off-grid PLC Prepayment meter PSTN PV Smart meter SMWG SWIS TOU Council of Australian Governments Direct Load Control Demand response enabling device Distribution use of system General packet radio service Home area network In-home display Kilowatt hour Kilovolt-ampere (measure of maximum demand) Megawatts (1,000,000 watts) Ministerial Council on Energy Meter data aggregation Meter data management National Electricity Market National Electricity Rules NERA Economic Consulting National Metering Identifier Net present value A community that is not connected to the main electricity networks in the National Electricity Market, the South West Interconnected System in Western Australia and the Darwin-Katherine network. Power line carrier A meter that operates (and so allows electricity to be used) when credit is placed onto it. Public switched telephone network (dial up) Photovoltaic (solar cells) An electricity meter that is capable of measuring and recording energy consumption in short intervals. Smart Meter Working Group South West Interconnected System Time of Use NERA Economic Consulting v

8 Executive Summary Executive Summary Electricity smart meters are being considered by energy utilities globally as a way of providing enhanced metering capabilities and so possibly lowering business costs and improving efficiency of the use of the network through better pricing signals. With Victoria having commenced a mandatory roll out of smart metering infrastructure and many other jurisdictions examining pilots and trials, this study seeks to consider the unique circumstances and so benefits and costs of smart metering infrastructure in remote communities. The study involved examining eight case studies across the Northern Territory, Queensland and Western Australia NERA Economic Consulting (NERA) has been engaged by the Smart Meter Working Group of the Ministerial Council on Energy to examine the costs and benefits of electricity smart metering infrastructure in remote communities located outside of the major urban and regional electricity networks of Australia the so called off-grid communities. These communities are highly diverse ranging from a small local network connecting houses to a dedicated small generator set (typically fuelled by diesel), to larger urban centres with characteristics similar to larger grid connected towns. To capture this diversity the study investigated a number of case studies, which were intended to represent some of the more unique characteristics present in these remote and regional communities, and so were most likely to lead to different conclusions on the associated costs and benefits. The reason for this approach was to explore the influence of community characteristics on the costs and benefits of smart meters and so ensure that the results were to the greatest extent possible transferable to other communities with similar characteristics in these areas. The study examined the principal differences in the costs and benefits estimated as part of NERA s earlier work examining a national mandatory roll out of smart metering infrastructure and a direct load control alternative the national cost benefit analysis. The national cost benefit analysis dealt solely with the National Electricity Market, the South West Interconnected System and the Darwin-Katherine network, and at that time did not consider off-grid areas due to the anticipated significant differences in the results and issues of relevance from the on-grid areas. The study involved a detailed examination of eight case studies, namely: in the Northern Territory: Tennant Creek Nguiu; and Engawala; in Queensland: Birdsville; and NERA Economic Consulting vi

9 Executive Summary Erub (Darnley Island); in Western Australia: Denham Karratha; and Sandstone. The case studies were selected to represent the major characteristics of off-grid communities that are likely to influence the costs and benefit estimates across a number of situations. To assist with our analysis a project stakeholder group was formed, which included representatives of the principal electricity businesses serving the chosen case study communities (ie, Ergon Energy, Power and Water Corporation, and Horizon Power). These businesses provide much of the more up to date information that was needed to assess the costs and benefits of smart meters in each of the case study communities. The net benefits of smart metering infrastructure is negative for most of the case studies The results indicate that the net benefits of smart metering infrastructure over a twenty year period in each of the case studies are almost all negative Figures E.1 and E These net benefits exclude any potential benefits that might be obtained from including direct load control of air conditioner capabilities in the meter. NERA Economic Consulting vii

10 Executive Summary Figure E.1 Net benefits of a smart meter roll out in each case study per meter Tennant Creek Nguiu Engawala Birdsville Erub Denham Karratha -400 Sandstone -900 $NPV/NMI -1,400-1,900-2,400-2,900-3,400-3,900 Figure E.2 Net benefits of a smart meter roll out in each case study 500,000 Tennant Creek Nguiu Engawala Birdsville Erub Denham Karratha 0-500,000 Sandstone -1,000,000 $NPV -1,500,000-2,000,000-2,500,000-3,000,000-3,500,000-4,000,000 NERA Economic Consulting viii

11 Executive Summary The largest negative net benefit arises for Erub (Darnley Island), with net benefits of negative $3,451 per meter in net present value terms over 20 years. Erub is a very remote, medium sized community where all of its residential customers have prepaid meters that do not require a periodic meter read visit. The large net negative result predominately reflects the high cost of establishing backhaul communications from this location, via satellite in the absence of access to 3G communications. The only case study with a positive net benefit was Sandstone, with a net benefit of $505 per meter. Sandstone is a small community, with a population of approximately 120 serviced by approximately 50 electricity meters, none of which are prepayment meters. These meters are read at least quarterly. The positive result reflects the high operational costs associated with providing metering services in this location, where significant technical problems require qualified tradespeople to travel at times thousands of kilometres to address the problem. The possibility to avoid these costs in addition to meter reading costs is sufficient to qualify a Sandstone roll out as a positive business case. The variance in the costs and benefits between the case studies highlights the diversity of characteristics of these communities, which in turn influence the results. Remoteness and isolation have an impact on the costs and benefits The study highlights that there are number of characteristics that have a significant impact on the resultant cost and benefit of a roll out of smart metering infrastructure. These include (amongst others): remoteness and isolation, which increases the cost of rolling out smart metering infrastructure due to the travel time involved, and also increases the potential avoided cost benefits from smart metering infrastructure providing business efficiencies through remote reading and metering control; availability of skilled tradespeople, which unlike major urban areas can result in relatively high comparative cost of providing call out services to repair connections, or undertake routine connection and disconnection of services; the type of communications infrastructure available, where access to 3G communications dramatically lowers the back haul costs associated with a roll out of smart meters; the prevalence of prepayment meters, whereby a smart metering alternative to existing prepayment systems might not be appropriate for many indigenous communities; regulatory customer service and safety obligations, which can affect the costs of a roll out and the potential to avoid costs; and the principal fuel source for electricity generation, which affects the potential avoided costs of energy conservation. In summary the costs and associated benefits of a roll out of smart metering infrastructure is affected by the local circumstances of a particular remote community being examined. That said a community that is more remote, does not have access to locally based skilled tradespeople, and has access to 3G communications will most likely have a higher net benefit (although at this stage this is still likely to be negative) as compared to a community with opposite characteristics all other things being equal. NERA Economic Consulting ix

12 Executive Summary This study has considered the deployment of smart metering infrastructure as a stand-alone project using a reasonably common set of assumptions about possible benefits and a similar assumed deployment approach across the different case studies, to maximise the opportunity to investigate the relationship between community characteristics and the costs and benefits. In practice there may be opportunities for a roll out of smart metering infrastructure to be implemented in conjunction with other planned infrastructure works, in order to maximise the net beneficial outcomes from such a roll out. The total costs range from between $920 and $3,978 per meter The total cost of a roll out of smart metering infrastructure range from between $920 in Karratha and $3,978 in Erub (Darnley Island). Figure E.3 sets out the total costs per meter for each of the case studies, broken into the principal cost components. These cost estimates assume that the off-grid metering provider obtains the benefits of scale with back-office system costs, through the use of third party providers of meter network management systems. These third party providers could be a larger network business located within the jurisdiction. Figure E.3 Total costs of a smart meter roll out in each case study 4,500 4,000 Retrofitting Water Meters with Communications Roll-Out Opex 3,500 Refresh Costs 3,000 Project Management $NPV/NMI 2,500 2,000 Back-End IT and NMS Initial Audit 1,500 Back-Haul Communications 1,000 Communications 500 Failed/Damaged Meters 0 Tennant Creek Nguiu Engawala Birdsville Erub Sandstone Denham Karratha Installed Meter Cost The reason for the differences relates mainly to the type of backhaul communications infrastructure available, and the mix of current meters (ie, there are higher costs for those communities with a greater proportion of three phase meters). NERA Economic Consulting x

13 Executive Summary The total benefits range from between $3,180 and $172 per meter The benefits ranged from as high as $3,180 per meter in Sandstone and as low as $172 per meter in Tennant Creek in net present value terms over 20 years Figure E.4. Figure E.4 Total benefits of a smart meter roll out in each case study 4,500 4,000 Manual condition monitoring of transformers 3,500 Avoided Meter Costs 3,000 $NPV/NMI 2,500 2,000 Customer Outage Queries Connect/Disconnect 1,500 1,000 Hand-Held Computers Tennant Creek Nguiu Engawala Birdsville Erub Sandstone Denham Karratha Meter Reading The high benefits in Sandstone reflects the disproportionately high cost of routine meter reading in that community given its particularly remote location and the opportunity cost of labour in the community, which is supported by a mine site. The low benefits in Tennant Creek reflect the limited number of connections and disconnections that occur in the community and so the limited availability of realisable business efficiency benefits. There are potentially considerable benefits associated with load control and other energy conservation measures The net benefit results do not include an allowance for potential energy conservation benefits associated with a smart metering system allowing air conditioner load to be cycled and so energy conservation benefits to be obtained. To consider this further we examined the potential additional benefits associated with using the smart metering infrastructure to control air conditioner load and so lower overall energy use. The principal benefit of such an approach is the avoided diesel fuel costs associated with the generation of electricity in these remote communities. Generally speaking a reduction of energy consumption of 1 kwh (ie, turning off an air conditioner for 30 minutes) can lower diesel fuel costs by as much as $0.46. NERA Economic Consulting xi

14 Executive Summary In addition, there are also potentially considerable benefits associated with reduced greenhouse gas emissions (potentially as high as $1.08 per kwh). In light of the high penetration of air conditioners that are frequently used in many of these communities (particularly Western Australia), the combination of avoided diesel fuel costs and greenhouse gas emission reduction benefits can amount to considerable savings over time. The appropriateness of direct load control of air conditioners in these remote communities relies on the scope to maintain thermal comfort while lowering energy use. In this way the energy efficiency of the appliance is enhanced and the benefits are translated through lower fuel costs and reduced greenhouse gas emissions. However, in many communities businesses provide employees with air conditioner allowances to subsidise or fully pay the cost of the electricity needed to run air conditioners. This means that there is likely to be a reluctance to introduce a direct load control system in circumstances where there are uncertainties about the implications for thermal comfort. Importantly these results highlight the potentially significant benefits from energy conservation in remote communities, given the relatively high generation fuel costs as compared to urban areas. This means that some form of energy conservation is likely to be warranted, however, whether that is through a direct load control program or alternative schemes such as buy back of older appliances or information programs has not been evaluated. We therefore believe there is merit in considering the likely risks and uncertainties surrounding the introduction of a direct load control program or alternative measures to lower electricity consumption. Prepayment via smart metering infrastructure needs further investigation In many remote indigenous communities, particularly in the Northern Territory prepayment meters provide flexibility and control over the cost of electricity to local residents and are also used as a way of managing bad debts. The current infrastructure involves the purchase of recharge cards that are then slotted into a card reader so that the credit is added to the meter in question. In contrast the provision of prepayment services for a smart metering infrastructure system involves the use of the remote connection/disconnection functions to automatically disconnect a premises when the billing system indicates that credit has expired. Similarly when credit is added the meter can be reenergised via the remote connect function. This approach to prepayment metering requires the user to contact the service provider and add credit to an account, generally via an electricity payment method. Over the course of this study we have become aware of the difficulties associated with this approach to providing prepayment services to remote indigenous communities. As a consequence a number of the businesses are investigating alternative infrastructure specifications in order to provide a similar user experience to existing arrangements, but via a smart metering system. This might involve the use of a card reader to communicate with the meter or alternatively the creation of a centralised console located in the general store that is used to add credit to a meter. NERA Economic Consulting xii

15 Executive Summary Ergon Energy indicates in its submission to the draft report that current smart metering infrastructure is unable to provide a feasible alternative to existing prepayment meters in remote communities. In its opinion any smart metering alternative to existing prepayment meters in remote communities should have the scope for a local retailer payment facility, given limited access to alternative methods of payment in these communities. While such systems do not currently exist, Ergon indicates that there are potential business savings from a smart prepayment metering system should local retailer payment facilities be developed. Further technical work needs to be undertaken to facilitate the introduction of smart meters in these remote locations in the future Our study highlights that a mass roll out of electricity smart metering infrastructure to remote communities is unlikely to be economically appropriate at this time. This is particularly the case if the principal benefits relate to business efficiency improvements. That said there may be considerable opportunities for obtaining benefits from implementing direct load control as part of a program to conserve electricity in remote areas. However, these opportunities are uncertain at this time and so have not been included in our main analysis. The uncertainties centre on the technical feasibility of controlling older airconditioners in remote communities and the practical difficulties of controlling load in communities where the cost of electricity is often subsidised or paid for by an employer. This suggests there are likely to be benefits from further practical investigation of the benefits of direct load control in these remote communities, but that there may be considerable difficulties in obtaining these benefits. Finally, over time the cost of smart metering systems is expected to fall as more utilities invest in these systems in Australia and abroad. This means that there is likely to be merit in continuing to examine the technical feasibility of smart metering systems in remote communities. NERA Economic Consulting xiii

16 Introduction 1. Introduction NERA Economic Consulting (NERA) has been engaged by the Ministerial Council on Energy s (MCE) Smart Meter Working Group (SMWG) to undertake a study analysing the costs and benefits of a roll out of smart metering infrastructure to off-grid areas (the off-grid study). This study builds upon an earlier national cost benefit analysis that examined the costs and benefits of a number of scenarios associated with a proposed roll out of smart metering infrastructure, and a non-smart metering direct load control alternative within the National Electricity Market, the South West Interconnected System in Western Australia and the Darwin-Katherine network. The aim of the off-grid study is to critically assess the costs and benefits of a roll out of smart metering infrastructure to those off-grid areas that were not considered as part of the previous study. The principal task therefore has been to assess the extent that the costs and benefits identified in the earlier study might differ for off-grid areas, and so estimate the likely costs and benefits of a roll out of smart metering infrastructure to those areas. The detailed project scope includes: providing critical analysis from an off-grid perspective to the national cost benefit analysis, examining where the costs and benefits may vary for the purpose of developing an analysis model relevant to off-grid; examining issues related to the provision of metering services, through consideration of a number of case study communities in Western Australia, the Northern Territory, and Queensland; and advice and analysis on the costs and benefits of smart meters and other direct load control systems in off-grid areas. The advice and analysis on the costs and benefits of smart meters and other direct load control systems also includes a consideration of the opportunities, risks, potential barriers and key sensitivities Stakeholder involvement To assist with our analysis of the costs and benefits of smart metering infrastructure in regional and remote off-grid areas a project stakeholder group was formed, which included representatives of the principal businesses for which the case studies have been drawn (ie, Ergon Energy, Power and Water Corporation, and Horizon Power) and representatives of the relevant jurisdictional departments. 2 The membership of this group was selected to provide the businesses with an opportunity to provide data directly to the project team, and explore collectively the detailed and at times confidential information that has been used throughout the analysis. 2 A full list of representatives is attached in appendix E. NERA Economic Consulting 1

17 Introduction On 17 July 2009, an inception workshop of the project stakeholder group for the cost benefit analysis of smart metering infrastructure in off-grid areas project (the off-grid project) was held in Darwin. The workshop followed a visit to the off-grid community of Nguiu located on Bathurst Island where the workshop participants were shown the key electricity and water infrastructure assets, and were able to discuss how the network was maintained and operated in practice. The purpose of the inception workshop was to set out the proposed work plan for the off-grid project, and discuss the principal findings and lessons learned from the earlier national cost benefit analysis of smart metering infrastructure in the main grid locations. The study team provided an overview to the project and the participants discussed the likely key benefit and cost differences that were expected to arise in an off-grid roll out as compared to an on-grid roll out of smart metering infrastructure. A presentation from Power and Water Corporation on projects that are being developed, which might also facilitate a roll out of smart metering infrastructure was also given. The workshop concluded with the development of a preliminary list of potential case studies for the project, which were subsequently refined and accepted by the Smart Meter Working Group. 3 Following the inception workshop, the project team developed and circulated a data collection template and conducted a series of face-to-face meetings with each of the three electricity businesses responsible for the case study areas. Preliminary results from the case study analysis were also discussed with the businesses, leading to some refinement prior to inclusion in this draft report. Finally, the businesses were provided with preliminary versions of the models used to estimate the costs and benefits, to allow a critical examination of all of the assumptions that have been made. In addition, a workshop was held in Sydney on 24 November 2009 to discuss the preliminary results. Refinements were made to the results based on the information shared by the businesses at the workshop. The project team is grateful for the enthusiasm and assistance provided by participants in the project steering group. The draft report results have benefited considerably from the discussions with, and information provided by, the businesses over the course of this study Submissions to the draft report A draft report was released for public consultation on 3 June 2010, and two submissions were received in response from Ergon Energy and Horizon Power. Both submissions were supportive of the conclusions made in the draft report and commented on some of the assumptions and conclusions that were made. The final report has taken into account the matters raised in the submissions Structure of the report The remainder of the report is structured as follows: 3 The case studies considered in the study are discussed in more detail in section 3.2 NERA Economic Consulting 2

18 Introduction section 2 details the context of the study including recent developments in the roll out of smart meters in Australia; section 3 sets out in detail the scope of, and methodology applied in the study; section 4 discusses the estimates of benefits and costs of smart metering infrastructure in off-grid communities; and section 5 concludes. In addition, the appendices provide additional, detailed information; appendix A: outlines the key assumptions using the cost benefit analysis; appendix B: sets out the detailed results of our analysis for the three off-grid communities in the Northern Territory; appendix C: sets out the detailed results of our analysis for the two off-grid communities in Queensland; and appendix D: sets out the detailed results of our analysis for the three off-grid communities in Western Australia. NERA Economic Consulting 3

19 Background and context 2. Background and context A combination of concern about peak demand growth, and desire to conserve energy due in part to concerns about emissions has led to considerable effort in examining the potential benefits and costs of introducing smart metering infrastructure within Australia. This section provides a very brief summary of the background and context for the cost benefit analysis of smart meters in off-grid areas What are smart meters? Smart meters are electricity meters that are capable of measuring and recording energy consumption in short intervals. There are a multitude of functions that can be incorporated within a smart meter, and part of the earlier study involved an incremental assessment of each function to inform an MCE decision on a national minimum functionality. The principal functions included as part of the national minimum functionality include: remote reading, remote disconnect/reconnect, and capability to support a home-area-network and so allow for in-home displays. 4 Importantly, smart metering allows electricity businesses to introduce innovative tariffs such as time of use, and critical peak pricing tariffs in order to align prices more directly with the cost of providing electricity (both generation and network capability) during different times of the day or periods in the year. For this to be beneficial, the cost of providing electricity must in turn vary according to the time of use. Further, customers are provided with more accurate information about their usage, with prices for energy more in line with demand, so are encouraged to reduce their energy bills. The smart meters and time-of-use pricing offers energy providers with capabilities that have the potential to deliver benefits, including: avoiding network augmentation and reducing unserved energy through the introduction of innovative tariff products and enabling direct load control capabilities that change the time-of-use of, and total demand for, electricity; lowering the cost of distribution network service providers and retail businesses services; and enhancing service performance. This study considers the opportunities available to obtain these and other benefits in the context of an off-grid community roll out of smart metering infrastructure. These benefits to smart meters must be weighed against the costs of a roll out of smart meters. Such costs include the cost of purchasing and installing the meters, costs of upgrading billing systems, communications costs and managements systems to process and store more detailed data. Costs and benefits to smart meters must also be weighed against costs and benefits which are associated with other demand management alternatives. 4 NERA, Cost Benefit Analysis of Smart Metering and Direct Load Control: Overview Report for Consultation, 29 February 2008, pages NERA Economic Consulting 4

20 Background and context 2.2. National cost benefit analysis of smart metering In April 2007, the Council of Australian Governments (COAG) committed to a nationally mandated roll out of advanced electricity metering infrastructure (smart meters) to areas where benefits were found to outweigh costs. This was to be informed by a national costbenefit analysis, overseen by the Smart Meter Working Group (SMWG). In July 2007 the MCE SMWG engaged a team of consultants to undertake the national cost-benefit analysis, which focused solely on a roll out in the National Electricity Market (NEM), the South West Interconnected System (SWIS) and the Darwin-Katherine networks, where Type 5 and 6 meters are currently used. 5 The national cost-benefit analysis was conducted in two phases. Phase 1 provided an incremental assessment of a list of smart metering functionalities. It concluded that there was sufficient evidence that inclusion of a specified number of additional capabilities in a minimum national functionality would result in positive net social benefits. A National Minimum Functionality document was developed by the MCE on this basis in December This consistent functionality ensures that the benefits across all stakeholders are maximised. Following further analysis in Phase 2, the MCE agreed to an addition to the National Minimum Functionality of an interface to a Home Area Network (HAN). Phase 2 of the project analysed whether the costs of the rollout of smart meters (or of undertaking an alternative direct load control scenario) exceeded the benefits. This took into consideration the particular circumstances of jurisdictions and regional differences within the jurisdictions ie remote, rural and urban areas. The principal costs of a roll out of smart meters were the: 7 cost of purchasing and installing meters; smart meter related operating costs; and associated backend IT system costs. The principal benefits were: 8 the avoided cost of routine meter reads; the avoided cost of special meter reads; and the avoided cost of current metering policies Type 5 is a manually read interval meter and type 6 is a manually read accumulation meter. The National Minimum Functionality is intended to be incorporated into the National Electricity Rules, MCE, 2007, A National Minimum Functionality for Smart Meters, Decision Paper, 13 December. NERA, Cost Benefit Analysis of Smart Metering and Direct Load Control: Overview Report for Consultation, 29 February 2008, page 72. NERA, Cost Benefit Analysis of Smart Metering and Direct Load Control: Overview Report for Consultation, 29 February 2008, pages 72 and 75. NERA Economic Consulting 5

21 Background and context Conclusions provided by Phase 2 were that a distributor-led smart meter roll out best satisfied the MCE s assessment objectives. The net present value of a distributor-led roll out was estimated to be between $147 million to $4.7 billion. 9 In order to provide a full cost-benefit analysis and analyse all areas that may be affected by a smart meter roll out it is also appropriate to assess the costs and benefits of smart meters in off-grid areas. Off-grid areas involve small grids that are not connected to the major electricity networks in Australia, ie, the NEM, SWIS and Darwin-Katherine systems Roll out of smart meters in Australia The MCE reviewed the CBA and noted a wide range of potential net benefits that existed, but also acknowledged the uncertainty of costs and benefits in some jurisdictions. As a result MCE agreed to further progress the smart meter roll-out by undertaking coordinated pilots and business-specific business case studies in most jurisdictions (not including South Australia and Tasmania). The MCE also took into account further commitments from Victoria and New South Wales 10. By June 2012, the MCE will consider further deployment timelines in all jurisdictions, based on the findings of the pilots at the time. The roll out and trials in various jurisdictions are outlined below Victoria Victoria already has a legislative commitment to roll-out smart meters based on an independent cost benefit analysis, and the MCE supports the Victorian initiative and notes the benefits of a lead jurisdiction. All of the electricity distributors in Victoria are required to roll out smart meters to all households and small businesses across Victoria over the next four years, starting from April Victoria agrees to work with other jurisdictions on the development of the national framework to support an agreed consistent business model for retailers and NEM arrangements. Victoria has also previously conducted extensive trailing of the technological feasibility of a number of communications technology options including power line carrier and mesh radio NERA, Cost Benefit Analysis of Smart Metering and Direct Load Control: Overview Report for Consultation, 29 February 2008, page 133. MCE Decision paper June NERA Economic Consulting 6

22 Background and context New South Wales New South Wales also expects to roll out smart meters to grid connected consumers as supported by the MCE cost benefit analysis. This should see those smart meters installed before EnergyAustralia, Integral Energy and Country Energy have ongoing extensive programs of pilots and trials to accurately establish the costs and benefits of smart meters in New South Wales as well as the likely impacts on demand from time-of-use tariffs, critical peak pricing and in-home displays. The New South Wales Government is working closely with these businesses to confirm the smart meter rollout timeline Queensland Queensland recognised the potential benefits and possibility of a roll out of smart meters. However, Queensland has some jurisdictional specific cost concerns and will consider rollout scope, and timeline after further investigation via pilots and further cost modelling have taken place. Queensland will also continue investigations into the benefits of direct load control Solar Cities The Australian Government s Solar Cities program is a partnership between all levels of government, industry, business and local communities to trial sustainable energy solutions. The program is trialling new technologies and gathering valuable data on energy use to inform a new energy future for Australia. Seven Solar Cities were announced between 2006 and One of these was Alice Solar City, which launched on 10 March 2008 and is an off-grid network. Included in the Alice Springs program is the installation of smart meters in businesses and homes, and the introduction of cost reflective pricing. This will encourage customers to become aware of and reduce their energy use at times of high demand on the grid. Over 800 smart meters will be installed in Alice Springs to help track energy consumption and generation (for homes and businesses with photovoltaic systems), as well as change behaviour patterns through the use of cost reflective pricing Other jurisdictions Other trials currently underway or being considered include: ETSA Utilities undertook trials on direct load control using specific direct load control systems in South Australia; Western Power is trialling 10,500 smart meters in South Perth and Denmark to test the scope for dynamic management of loads (including direct load control), automated meter reading (AMR), theft identification, time of use tariffs and in-home communications with customers regarding energy consumption; and ActewAGL is trialling a combined water, gas and electricity smart meter system in the ACT Provision of electricity services in off-grid areas Many communities in Western Australia, Queensland, and the Northern Territory are provided with electricity via dedicated electrical systems, including some form of generation and local network. These systems can service communities as small as ten connections, and NERA Economic Consulting 7

23 Background and context in some instances can be as large as 10,000 connections. The defining characteristic of these communities is remoteness and isolation from the major urban centres within the state or territory. Generally these communities are serviced by diesel generators, but increasingly these are being supported by some form of renewable generation, whether wind or solar. Fuel for the generators is supplied on a periodic basis according to the location and isolation of the community. Providing electricity services in these off-grid and remote areas can be challenging. A combination of remoteness, isolation and in many instances size means that there are generally only limited local operational capabilities and so when problems arise and repairs are needed, service crews from other locations need to be dispatched to resolve the problem. This can be both expensive and time consuming, depending on the nature of the problem and the extent of isolation. In some instances this might involve flying a crew into a remote location, taking a barge, or travelling thousands of kilometres to reach a community and investigate and repair a problem. Routine and straightforward maintenance and repairs, meter asset checking, and meter reading is provided by locally engaged contractors in some areas (such as Western Australia) to minimise the travel costs associated with providing these services in these locations. In the Northern Territory residents of remote communities are employed where possible to provide routine services. In addition, there are also considerable differences between the jurisdictions on the penetration of air conditioners. For example in Western Australia almost all remote community dwellings have air conditioners, including in indigenous communities, and rebates are provided for categories of users in many northern remote areas including the elderly, government employees and employees of mining companies, in order to offset the electricity cost of using air conditioners during the hottest months of the year. 11 Air conditioner penetration is similarly high in Queensland, while in contrast it is significantly lower in the Northern Territory where typically only community or government premises are air conditioned. Finally, in many indigenous communities, particularly within the Northern Territory, prepayment meters provide flexibility and control over the cost of electricity to local residents and are also used as a way of managing bad debts. They typically involve the purchasing of disposable cards that are used to transfer credit to a particular meter. These prepayment cards are for a single use only, and are retailed through a local distribution outlet (eg, the local general store) Customer service obligations and operational differences A key feature of the provision of metering services in off-grid communities are the different obligations imposed on the service provider in relation to service performance standards (eg, the time within which reconnections are required to be made amongst other matters) and the 11 The seniors rebate is described in greater detail in Appendix D. NERA Economic Consulting 8

24 Background and context safety obligations imposed. These jurisdictional customer service and safety obligations can result in significant differences between jurisdictions on the costs and benefits arising from a smart metering roll out to off-grid communities. The remainder of this section sets out the principal customer service differences between the case study jurisdictions Northern Territory Clause 9A of the Network Access Code applicable to Power and Water Corporation (P&WC) requires that it observe specified minimum standards of service to its non-contestable customers. In July 2006 the Northern Territory Utilities Commission (the economic regulator in the Northern Territory) released the Northern Territory Electricity Standards of Service Code (the Code), which sets out the process by which P&WC develops minimum standards for reliability, quality and customer service, and the process of complying with these standards. The associated Customer Contract is the statement that sets out the minimum standards in detail. 12 Importantly for the purposes of this study, the obligations set out in the Customer Contract only apply to the major urban areas of the Northern Territory and surrounding rural areas (eg, Darwin, Alice Springs, etc). This means that these standards to not apply to most of the remote communities that have been investigated in this study and so do not place obligations on Power and Water Corporation about the time required to undertaken reconnections, and the frequency of meter reading amongst other things. 13 This in part reflects the observation that almost all remote communities in the Northern Territory are serviced by prepayment meters where these obligations are not readily applied. Finally, Power and Water Corporation reads meters monthly, quarterly or annually, depending on the community and customer group Queensland The standard of service of electricity consumers in Queensland is regulated by the Electricity Industry Code (fourth edition), which came into effect from 4 August The Code provides the minimum service standards for Ergon and Energex in Queensland, establishes a guaranteed service levels system for small customers and imposes reporting and compliance obligations. Clause 2.5.5(a) sets out the minimum time within which a customer is obliged to be reconnected. For premises supplied through a long rural feeder or isolated feeder (ie, those premises not connected to the main grid), the reconnection must occur within 10 business days of a request for reconnection or as otherwise agreed with the small customer. Importantly this requirement provides flexibility to Ergon to manage the reconnection of a premise in a remote community in line with other operational requirements Power and Water Corporation, 2007, Customer Contract, February. The exception is Tennant Creek, which is covered by the Customer Contract minimum standards. NERA Economic Consulting 9

25 Background and context In addition, Ergon is required to make a Guaranteed Service Level payment of $80 for each interruption of service that lasts longer than 24 hours, or if the total number of interruptions in a financial year exceeds 21 clause Finally, Ergon is required to use its best endeavours to ensure that an actual meter reading is obtained at least once every 12 months clause In practice Ergon reads meters on a quarterly basis Western Australia Finally, in Western Australia Horizon Power is obligated to comply with the customer service requirements set out in the Code of Conduct for the Supply of Electricity to Small Use Customers, effective 1 July The Code is applied to retailers, distributors and electricity marketing agents and applies to all customers who consume no more than 160 MWh of electricity each year. The Code requires Horizon Power to issue a bill no less than once every three months, unless a customer provides consent to issue bills less frequently (clause 4.1), and use its best endeavours to read bills as frequently as required to prepare bills, and at least once every 12 months clause 4.7. In practice Horizon reads meters every two months. Horizon Power is also required to reconnect a premise that has been disconnected within its area within 5 business days of receipt of the request clause 8.2(2)(b). If it fails to reconnect within this time period then it must pay the customer $60 for each day that it is late up to a maximum of $300 clause 14.1(1) Summary Each of the three jurisdictions that we have considered as part of this study have different customer service obligations relating to billing cycles, and the time within which a reconnection should occur. These time periods are used by the businesses to ensure that sufficient operational capacity is provided in order to meet the required levels, and so can have implications for the costs that can be saved as a consequence of a smart metering roll out. In summary, the Northern Territory does not have any formal obligations relating to billing and customer connection in remote communities, mainly because of the large numbers of prepayment meters. The obligations on Ergon in Queensland generally provide greater flexibility to those imposed on Horizon Power, which would likely lower the potential benefits from smart metering infrastructure in Ergon s remote communities as compared to Horizon Power, assuming there were no other significant differences between the two service areas. 14 This replaces an earlier version: the Code of Conduct for the Supply of Electricity to Small Use Customers 2008, which came into effective on 8 January NERA Economic Consulting 10

26 Methodology and approach 3. Methodology and approach This chapter sets out the general methodology that underpins the cost benefit analysis and highlights some key areas of our approach. In particular this section covers: the scope of the cost benefit analysis; the selection process that identified the eight case studies considered by the analysis; and the smart metering and direct load control scenarios considered by the analysis Scope of the analysis This cost benefit analysis in this report has been conducted for remote and rural communities classified as off-grid. For the purposes of this study we have defined an off-grid community as one whose electrical supply is not connected to one of Australia s primary electrical grids, namely; the NEM, the SWIS and the Darwin-Katherine network. While off-grid communities exist throughout Australia, this analysis focused on eight case study communities spread across the Northern Territory, Queensland and Western Australia. The eight case studies and the selection process are outlined in detail below. The analysis focuses on the costs and benefits of a roll out of smart metering infrastructure to these off-grid communities and builds on earlier work conducted to assess a national smart meter roll out across the principal urban electrical networks. Off-grid communities, and the way that their services are provided, not only exhibit a great heterogeneity but they also differ significantly from on-grid communities. It is these differences that will drive whether a roll out of smart meters to a particular community is economically justified. The framework for assessing the national roll out is applied in the context of off-grid communities as part of this analysis Case study selection Our approach to selecting the case studies was to examine the principal characteristics that were expected to alter the costs and benefits of a roll out of smart metering infrastructure or direct load control, and then choose case studies that represented these characteristics. We have also taken into account how representative the selected case studies were, and the scope for the results to be transferred to other communities that are not being explicitly examined as part of the study. A number of characteristics of off-grid communities were identified by the Project Steering Group workshop as being likely to affect the costs and benefits of a smart metering rollout, namely: socioeconomic and demographic factors, such as: the community population; NERA Economic Consulting 11

27 Methodology and approach number of connections; the growth rate of the community; provision of subsidised electricity; and socio-economic characteristics of the community; geographic factors, such as: whether the community has a tropical or an arid climate; remoteness or isolation of the community, and whether roads connecting the community are impassable for parts of the year; and the presence of a local employee or contractor; the existing or planned infrastructure within the community, such as: the principal fuel type of generation (eg, diesel or gas) and the presence of hybrid generation (eg, solar/diesel or wind/diesel), and whether there are plans to upgrade these facilities; the provision of electricity from an adjacent mine; the existing or planned future communications infrastructure; the jurisdictional specific regulations and laws; and the prevalence of existing pre-payment meters. In choosing between the case studies our principal concern was to select case studies that highlight as many of these characteristics as possible, and were most likely to provide insights that were transferable to other off-grid communities. For example the case studies: are geographically diverse: Western Australian communities Sandstone, Denham and Karratha; Northern Territory communities Engawala, Nguiu and Tennant Creek; Queensland communities Birdsville and Erub; are of differing size: small communities Sandstone, Birdsville and Engawala; medium communities Erub, Denham and Nguiu; larger communities Tennant Creek and Karratha include a mix of pre-payment metering: high penetration, Erub, Nguiu, and Engawala low penetration Birdsville, Sandstone, and Karratha NERA Economic Consulting 12

28 Methodology and approach In addition, we also sought to include communities with some unique characteristics to allow an examination of matters relating to isolation and differences in the generation mix (eg, diesel, wind, geothermal, gas) The base case and scenarios for assessment As part of the analysis, we have examined two possible scenarios, namely: scenario 1: mandatory roll out of smart metering infrastructure to all customers within each of the case study areas; and scenario 2: mandatory roll out of non-smart metering direct load control to all customers within each of the case study areas. The scenarios selected were developed in consultation with the SMWG and the Project Steering Group members. Unlike the earlier national cost benefit analysis, the businesses that operate in off-grid areas are vertically integrated along the supply chain and so are responsible for all parts of the generation, transmission, distribution and retailing of electricity to off-grid customers. This means that a number of the scenarios included in the national cost benefit analysis are not relevant, specifically those scenarios that considered the differences of a distributor, retailer or centralised roll out of smart metering infrastructure. Both of these scenarios and the base, or business as usual, case are outlined in more detail below Base case The costs and benefits associated with each of the two scenarios are estimated relative to a counterfactual base case, which represents a continuation of business as usual. As a rule the comparison is achieved by estimating the incremental change in the net cost of providing the electricity services under each scenario. The one exception to this rule is our estimate of the cost of installing meters. Our analysis has estimated the gross cost of providing meters in each case study. That is we have included the costs of installing smart meters as well as the benefit that businesses would accrue from avoiding the cost of replacing the current metering stock. The reason for calculating both the cost of installing smart meters and the benefit from avoiding the cost of replacing meters is that: it is consistent the approach adopted in the national cost benefit analysis; 15 and provides greater transparency as to the actual costs of a roll out of smart meters in off-grid communities. The avoided cost of replacing existing meters in each community has been provided by the businesses. Information provided included the expected time that existing meters will be 15 Note that a gross approach to metering was necessary in the national cost benefit analysis as the avoided costs of metering would accrue to distributors. However, only in scenario 2 would distributors bear the cost of installing smart meters, in the other two scenarios retailers or a national metering business would roll out smart meters. NERA Economic Consulting 13

29 Methodology and approach replaced in the normal course of business. In addition, each business also provided the current cost of installing or replacing the meters in each case study community Scenario 1: Roll out of smart metering infrastructure Given the businesses that operate in off-grid areas are vertically integrated along the supply chain, scenario 1 represents the case where the distribution network businesses (Ergon Energy, Power and Water Corporation, and Horizon Power) are given the responsibility for rolling out smart meters in their respective off-grid communities. This responsibility includes owning, installing, maintaining the meter base as well as procuring all the applicable communications and data management systems associated with a smart meter roll out. The cost benefit analysis assumes that all existing meters are replaced by smart meters in year one. Further, all new residential or commercial buildings within the community will also have a smart meter installed. To take account of differences in the cost of installing smart meters in each case study we have disaggregated costs into the following categories: the cost of sending a team of technicians to each community to install smart meters; the cost of installing smart meters, in each community, including the cost of correcting faulty wiring and removing asbestos meter boards; the purchase cost of a smart meter; and the purchase cost of a plug-and-play mesh radio communications device. The businesses provided estimates of the costs in each community of sending technicians to each community as well as the cost of installing meters. While each business also provided an estimate of the purchase costs of meters and communications units, for the purposes of the cost benefit analysis we applied the average of these costs. 16 Table 3.1 sets out the average cost used in this study. 16 These costs were benchmarked against those meter costs used in the earlier national cost benefit analysis study, and publicly available information associated with the Victorian roll out of smart metering infrastructure. NERA Economic Consulting 14

30 Methodology and approach Table 3.1 Average Meter Purchase Cost Cost 3 Phase CT Connect $463 3 Phase Direct Connect $368 3 Phase Direct connect with 31.5A 240V integrated contactor 1 Phase Controlled load (2 element) with 31.5A 230V integrated contactor 1 Phase Controlled load (1 element) with 31.5A 230V integrated contactor $388 $300 $257 1 Phase without controlled load $197 Communications Unit $120 Each community would also contain a data concentrator and a number of relays depending on the size and topography of the community. Information collected by the data concentrator is sent to a centralised network management system and data management system via a commercial network. In most communities it was assumed that the communications path would be through a 3G wireless network, however where a 3G network was not available a satellite path was assumed. Further, given a large proportion of off-grid communities use diesel generators to generate electricity, one of the principal benefits of smart metering infrastructure in these remote communities is likely to be the potential to avoid generation costs. One way to achieve a reduction in generation costs is to control the load attributable to high energy using appliances, such as air-conditioners. For smart meters (or a DLC alternative) to achieve benefits through controlling air-conditioning load, air-conditioners have to be fitted with a demand response enabling device (DRED) Scenario 2: Roll out of direct load control The ability to control load directly can be provided through a variety of means including as part of a smart metering infrastructure system, or as a stand alone system. We have therefore also considered the provision of direct load control of air-conditioners via a non-smart meter direct load control systems, for each of the case studies. The approach we have used has been to draw upon the cost assumptions made as part of the national cost benefit analysis to provide a high-level estimate of these costs. For the purposes of this scenario we have assumed that the non-smart meter direct load control is provided via FM frequency, and so requires the installation of a DRED in the air-conditioner, and a control system by the business. NERA Economic Consulting 15

31 The benefits and costs of smart metering infrastructure in remote communities 4. The benefits and costs of smart metering infrastructure in remote communities This chapter summarises the costs and benefits of smart metering infrastructure and a direct load control alternative for each of the case studies. Detailed results, including a description of the communities being examined is provided in appendices B to D Characteristics that influence the costs and benefits Our detailed analysis of the costs and benefits of smart metering infrastructure in remote communities highlights that the results are very sensitive to local characteristics, which in turn affect the operational costs of providing electricity services to remote communities. This means that the net benefits of a roll out of smart metering infrastructure in remote communities is influenced by a number of factors, including: remoteness and isolation; availability of skilled tradespeople; the principal fuel type of the installed generation (eg, diesel); the prevalence of prepayment meters; the size of the community; the scope for load control; the type of communications infrastructure that is available (eg, 3G network); and regulatory matters relating to customer service obligations and safety. Remoteness and isolation generally increases the cost of electricity service provision in two distinct ways, namely by increasing the cost of transporting generation fuel (ie, diesel or gas) to the community, but also increases the time needed to send maintenance crews to the community, where there are no local tradespeople available to provide repairs and maintenance services. Remoteness and isolation therefore means that the cost of ordinary operational services (such as manual meter reading and connections/disconnections) is more expensive compared to large urban centres. This affects both the cost of a roll out of smart metering infrastructure, but also the potential avoided cost benefits. In many remote communities the population size is sufficiently small that the scope for an electricity business to use locally based tradespeople to perform maintenance and other fault finding tasks is limited. Similarly there may not be any locally based people that are available to undertake routine meter reading. A consequence of this lack of locally based staff or contractors is that the business incurs considerable costs responding to customer complaints or queries, undertaking routine meter reading, or completing connections/disconnections. These higher costs are due to the need to pay for travel time to the community, which could involve hundreds of kilometres, and due to the limited competition between contractors to provide services to the businesses leading to higher costs. NERA Economic Consulting 16

32 The benefits and costs of smart metering infrastructure in remote communities Most off-grid remote communities are serviced by diesel generation, sometimes supported by solar or wind generation systems. Diesel generation is generally more expensive per megawatt hour of electricity generated meaning that the potential benefits from any energy conservation that might be achieved through a smart metering system could be higher for these communities as compared to on-grid communities. All indigenous remote communities in the Northern Territory and some in Western Australia and Queensland are serviced by prepayment meters. The cost of a prepayment meter is generally in line with the cost of a smart meter and so the quantum of benefits needed to provide a positive business case is generally lower than for other communities. That said there are considerable practical issues associated with providing an acceptable prepayment service via a smart metering system that are yet to be resolved for these communities. These issues are discussed in greater detail in section 4.6. The size of a remote community has implications for the costs and benefits of a roll out of smart metering infrastructure. There are considerable economies of scale associated with a roll out of smart metering infrastructure in light of the relatively high fixed costs for a team to travel to these locations to complete a roll out. Similarly, there are generally higher benefits because the cost of providing metering services in remote communities is also higher because of an absence of economies of scale. For a smart metering system to provide energy conservation there must be scope for some of the load to be controllable in a manner that would be acceptable to the local residents. Two of the largest energy using appliances in these areas are refrigerators and air conditioners, but there is relatively little opportunity to control the load of refrigerators. This means that there needs to be a sufficient number of air conditioners that are used in a manner that some form of load control cycling has the potential to reduce total energy use and so avoid the diesel fuel and associated greenhouse gas emission costs. While many remote communities have a high proportion of premises with air conditioners (eg, particularly Western Australia), there are also a high number of indigenous communities in the Northern Territory with little or no air conditioner penetration. Customers on prepayment systems generally use substantially less electricity than the average non-prepayment customers suggesting there are limited opportunities for load control in many remote communities. In addition and as highlighted by the submission of Ergon Energy, energy conservation and demand management can be addressed successfully in remote communities through directly targeted education and energy conservation programs. Indeed, Ergon notes the initial success of its Powersavvy program that has cost effectively reduced energy use in seven of its largest isolated communities. Access to reliable communications infrastructure is also an important consideration for a roll out of smart metering infrastructure in remote areas. There are considerable economies of scale associated with a mesh radio system meaning that it is likely to be cost effective to use 3G communications for all meters in smaller communities. In addition, 3G backhaul communications is generally significantly cheaper than alternative satellite communications if this is the only form of communications available. NERA Economic Consulting 17

33 The benefits and costs of smart metering infrastructure in remote communities Customer service obligations and safety requirements can have considerable implications for both the cost of a roll out of smart metering infrastructure, and also the potential avoided costs. This is because it can affect the time of day that connections and disconnections can be conducted, which in turn has implications for the current costs of undertaking those tasks. It also affects the level of training necessary for a technician to replace a damaged or faulty meter or communications device, which in turn affects the costs of a smart meter roll out. Finally, there are also a number of specific differences between the jurisdictions that have implications for the benefits and costs of a smart metering infrastructure roll out in off-grid communities, namely (amongst other things): Horizon has the largest geographic operating area of the three businesses that have been investigated, and as a consequence the cost of a roll out is likely to be higher and the benefits also higher relative to the other businesses. regulatory requirements imposed on Horizon mean that the potential cost savings from smart metering infrastructure might be higher than other remote areas, arising from obligations on frequency and time limitations within which actions must be undertaken. These include for example: 17 requirements for the frequency of meter reading; and obligations regarding the process for re-connection/disconnection, including the provision of disconnection warnings. the off-grid communities in Western Australia generally have access to 3G communications, as compared to many of the off-grid communities in the Northern Territory and Queensland. This has implications for the technology options for backhaul communications and so decreases the costs of smart metering infrastructure. Power and Water Corporation is expected to have access to government sponsored satellite communications in remote communities, which decreases the cost of using satellite as the backhaul communications technology compared to the cost of setting up and using satellite communications in other locations (eg, Queensland). Power and Water Corporation has responsibility for both electricity and water metering, and so already receives many of the cost efficiencies associated with reading both meters at the same time. This therefore affects the benefit opportunities available and/or requires the installation of smart water meters in addition to smart electricity meters to obtain all of the benefits from avoided routine meter reads Preconditions necessary for smart metering in remote communities For smart metering infrastructure to be considered viable for remote communities there are three preconditions that must be satisfied. 17 These cost saving opportunities have been identified by Horizon in its submission in response to the draft report. Additional cost savings identified by Horizon but which are not necessarily related to regulatory obligations include the avoidance of tamper inspections and the avoidance of planned inspections of infrastructure. NERA Economic Consulting 18

34 The benefits and costs of smart metering infrastructure in remote communities First, the meters must be sufficiently reliable to minimise the potentially large costs of replacing unreliable meters in remote areas. We understand that there is some concern that the current generation of smart meters (and its associated communications device) are not reliable in the extreme temperature variations and humidity commonly found in the remote communities that are the subject of this study. We have been advised that in recent pilot studies meter fault rates have been as high as 4 per cent. With fault rates of that magnitude, the cost of smart metering infrastructure is unlikely to exceed the benefits. For the purposes of this study we have therefore assumed that the average fault rate for a meter and its associated communications device is 2.2 per cent per annum. 18 This reflects our expectation that the reliability in these remote communities is likely to improve over time especially as further pilots and trials are conducted. This suggests that in the first instance there is a need for ongoing technological trialling to ensure that smart metering technology is capable of operating in the conditions found in remote communities. In the absence of this work being completed, any net benefits that might be achievable from smart metering infrastructure in remote communities will be uncertain. For the purposes of this study we have therefore assumed that the smart metering technology is reliable in the climatic conditions associated with remote communities. Second, for a smart metering system to be viable the communications infrastructure also needs to be sufficiently reliable so that the meter data can be compiled on a periodic basis for the purpose of generating bills. We are aware that the smart metering technology trials on Magnetic Island, which uses power line carrier as the communications technology, has had some difficulties associated with the reliable accessing of meter data. Irrespective of the reasons for these problems, it highlights the importance of testing the preferred communications technology as part of any roll out of smart metering infrastructure, prior to a mass roll out. For the purposes of this study, we have therefore assumed that the communications technology used in each case study has been rigorously tested in remote conditions and is reliable. Note we have not included any costs associated with undertaking such testing as part of a roll out of smart metering infrastructure in the case study communities. Finally, a significant cost of implementing a smart metering system is the back end meter data management and network management systems. These systems can cost in the order of $4.3 million to $7.9 million and are potentially capable of managing a smart metering system with millions of meters. 19 The large fixed costs associated with these systems means that it is unlikely that a small network business could justify the expense of investing in its own system, unless there are other management or process related benefits that would result This assumption was calculated as the average of estimated fault rates provided by the businesses. It is also consistent with the assumption applied as part of the national cost benefit analysis (2 per cent). EMCa Cost Benefit Analysis of Smart Metering and Direct Load Control - Work Stream 6: Transitional Implementation Costs, February 2009, pages 123 stated that a network management system would cost a distributor between $2.5 million and $5.5 million. Page 125 of the EMCa report also suggests that a small meter data management system would be in the order of $1.8 million and $2.4 million. NERA Economic Consulting 19

35 The benefits and costs of smart metering infrastructure in remote communities For the purposes of this study we have therefore assumed that each business purchases these services from a third party supplier (which could be another electricity business) to minimise the cost of the back end infrastructure needed to support a smart metering system Costs of smart metering infrastructure The cost of providing smart meters and the associated communications and management infrastructure in remote communities is generally higher than for more urban communities due in part to: the higher costs associated with installing meters, due to the one-off travel time costs associated with installers travelling to the community to undertake the roll out; the higher communications network costs due to the inability to take advantage of the considerable economies of scale associated with the provision of a local network; and the higher back haul communication costs in very remote regions where satellite communications are required. This section provides an overview of the costs of smart metering infrastructure in the case study communities for each of the principal cost categories Meter costs and installation The primary cost of a smart metering system is the cost of the meter and its installation. Since the national cost benefit study the cost of smart meters has increased and so for the purposes of this study, we have used a value of $257 for a single phase smart meter with an integrated load control device. 21 For each of the case studies we have assumed that meters were rolled out within the same year, thereby allowing benefits to commence almost immediately. The total cost of installation included a component associated with the cost of installers travelling to the community, which for some of the case studies includes the cost of airline or boat travel from the nearest location where installers were likely to be available. The second installation component was based on the time expected for each meter replacement taking into consideration the proportion of installations that might be considered difficult due to the need to remove asbestos, repair damaged or faulty wiring, or the layout of the meter board making the installation difficult Ergon emphasises in its submission that in its opinion a roll out of smart metering in off-grid areas would not be feasible unless a distributor has established a stable smart metering technological platform with suitable meter data management and network management systems within the major on-grid network within the jurisdiction. The national cost benefit analysis assumed that the average cost of a smart meter with an integrated mesh radio would range between $164 and $217. NERA Economic Consulting 20

36 The benefits and costs of smart metering infrastructure in remote communities Table 4.1 sets out the total meter and installation costs associated with a smart metering roll out (excluding difficult installations involving asbestos and other factors) 22 in each of the case study communities. 23 Table 4.1 Smart meter capital and installation costs Case study Average cost per Total cost (NPV) Total cost per NMI NMI 24 (NPV/NMI) Tennant Creek $288 -$861,389 $382 Nguiu $257 -$322,624 $506 Engawala $257 -$58,980 $707 Birdsville $319 -$79,441 $854 Erub (Darnley Is.) $267 -$100,733 $463 Sandstone $283 -$47,588 $952 Denham $270 -$303,428 $313 Karratha $323 -$3,547,815 $422 The observed differences in the meter costs on a per NMI basis, reflects differences in the mix of meters in each community and range between $257 for Nguiu and Engawala in the Northern Territory, and $323 in Karratha in Western Australia. The generally higher average meter costs in Western Australia reflect the greater number of premises with three phase meters as compared to the Northern Territory. The meter cost assumptions across each of the case studies are the same and reflect the average market prices for these meters estimated by each of the businesses. The travel time costs ranged from $26 to $500 per NMI reflecting the comparative remoteness and size of each of the case study communities. The highest travel time costs for installation were for Sandstone and Engawala, with the lowest being Karratha. The high cost of travelling to Sandstone is due to the need for installers to travel up to 1,980 kilometres in a round trip to undertake the roll out. 25 This is the furthest of any of the case study communities The cost of difficult installations was calculated separately based on an estimate of the additional time and materials involved and the applicable labour rate. The cost of meters and its installation were annualised through the 20 year study frame and so the need to replace the meters after an assumed 15 year life is directly included in the estimates. The actual cost for each type of meter is used for each case study and then averaged to provide these estimates. Horizon would dispatch a maintenance crew to Sandstone from Carnarvon service depot. NERA Economic Consulting 21

37 The benefits and costs of smart metering infrastructure in remote communities In practice, and assuming that smart metering infrastructure was rolled out in a number of communities, the travel time costs might in practice be lower than those estimated as part of this study. Since installation teams could be dispatched to install smart meters in a number of smaller communities in a single trip. Finally, the installation costs ranged from $41 per NMI in the Northern Territory to $167 per NMI for Birdsville. The differences reflect the higher proportion of difficult installations in Birdsville and the requirement to have an external antenna compared with the other case study communities. Overall, the case studies highlight that meter costs and installation represent between 29 per cent and 64 per cent of the total NPV cost of a smart metering infrastructure roll out in remote areas Communications infrastructure There are a number of communications technologies potentially available for providing communications to a meter, and back haul communications to the meter data management system, namely: power line carrier; mesh radio; 3G; and satellite. The cost profile of each communications technology differs with some having a relatively high fixed cost associated with the installation of a data collector, but relatively small incremental cost associated with each additional meter (eg, power line carrier). In contrast 3G communications systems have a relatively high incremental cost per meter but little or no fixed set up costs. These cost characteristics mean that the choice of communications system will depend on the size of the community involved. For example, a point to point 3G communications network may be more cost effective in very small communities as compared a mesh radio system as the cost of the data collector is shared by less connections. In all of the case studies, it was assumed that a mesh radio network was used. 26 This necessitated the installation of a mesh radio communications module for each meter at an additional cost of $120 per NMI. In addition, a data concentrator and mesh radio relay antennas were also required in each community. The mesh radio system is installed to transmit data from the meter to a local collector, before being sent through to the meter data management system using the back haul 26 Horizon indicates in its submission in response to the draft report that for some communities 3G communications technology might be more cost effective for the local network and so result in lower communications costs. NERA Economic Consulting 22

38 The benefits and costs of smart metering infrastructure in remote communities communications infrastructure Table 4.2. For smaller communities we have assumed that 3G communications is the prevailing technology. Table 4.2 Communications assumed for each case study Case study Communications technology Back-haul technology Tennant Creek Mesh radio 3G Nguiu Mesh radio 3G Engawala Mesh radio Satellite Birdsville Mesh radio Satellite Erub (Darnley Is.) Mesh radio 3G Sandstone Mesh radio 3G Denham Mesh radio 3G Karratha Mesh radio 3G For all of the case studies apart from Birdsville and Engawala, the back haul communications technology has been assumed to be 3G. For Birdsville and Engawala the assumption is that satellite communications is used as the back haul technology. Table 4.3 sets out the total communications costs (ie, the mesh radio system) and back-haul costs for each of the case study communities. NERA Economic Consulting 23

39 The benefits and costs of smart metering infrastructure in remote communities Table 4.3 Communications and backhaul costs Case study Communications technology (NPV/NMI) Back-haul technology (NPV) Tennant Creek $287 $10,187 Nguiu $284 $2,129 Engawala $284 $13,137 Birdsville $295 $122,876 Erub (Darnley Is.) $259 $203,245 Sandstone $295 $16,845 Denham $274 $16,845 Karratha $290 $15,905 The results highlight that the choice of communications technology and so the communications infrastructure costs is critically dependent on the availability of a 3G network, and the total number of meters within the community. The lack of a 3G network results in the back haul communications technology being a commercial satellite, which as demonstrated by the Birdsville case study is likely to be prohibitively large. However, the cost of satellite falls dramatically where a distributor is able to take advantage of an existing satellite communications agreement, such as Engawala where Power and Water is able to take advantage of an existing agreement for satellite bandwidth negotiated by the Northern Territory government. It is very unlikely that a smart metering system could deliver sufficient benefits to justify such a large initial communications set up cost. In contrast the set up costs for 3G backhaul communications was assumed to be as low as $0.23 per meter. This reflects the costs associated with purchasing a 3G modem to provide back haul data services. The exception to the relatively low cost of establishing 3G communications is Erub in light of the very high accommodation and travel costs for the installation team, logistics costs of transporting hardware by barge, plus the need to erect a radio mast and directional antenna due to existing 3G reliability concerns Meter data management and network management systems There are two back end systems that are needed in order to manage a smart metering network and to convert the data that is collected into bills that are sent to customers. There are considerable economies of scale with meter data management systems, and network management systems. These systems have the capability of managing millions of meters and so the cost per meter of providing these systems to management relatively small numbers of meters can be prohibitively high. As described in section 4.2, our approach has involved assuming that back end meter data management and network management systems NERA Economic Consulting 24

40 The benefits and costs of smart metering infrastructure in remote communities is provided by a third party provider, allowing the off-grid network business to benefit from the economies of scale involved without investing in the system themselves. To implement this approach we have taken information on the cost of network management systems and meter data management systems and estimated the per NMI cost of providing these services. This is then summed across the total number of meters for the case study community to estimate total meter data management and network management services. Table 4.4 sets out the estimated cost of meter data management and network management system costs for each of the case studies. Table 4.4 Meter data management and network management system costs Case study MDMS/NMS capital expenditure per NMI MDMS/NMS operating expenditure per NMI Tennant Creek $20.96 $39.39 Nguiu $21.05 $39.46 Engawala $20.95 $39.29 Birdsville $38.00 $64.22 Erub (Darnley Is.) $40.25 $68.03 Sandstone $50.00 $5.00 Denham $51.72 $5.09 Karratha $50.50 $ Damaged and failed meters/communications The businesses have indicated that repairing a damaged or failed smart meter (or its associated communications device) must be undertaken by a qualified electrician or communications technician. The businesses also indicated that in the event of a failed or damaged meter a maintenance crew would be immediately dispatched. Since maintenance crews capable of replacing (or repairing) smart meters (or its associated communications device) are stationed in only a few communities, a broken device requires a crew to first travel to the community. As a result, the cost of repairs increases the further that the maintenance crew must travel to reach the community. For example, a maintenance crew would be dispatched from Thursday Island or Cairns to fix a failed device on Erub, which substantially increases the cost of a broken meter or communications device in the community. However, where a community contains a maintenance depot, such as Karratha, the travel time is trivial and as a result the cost of a broken device is minimal. NERA Economic Consulting 25

41 The benefits and costs of smart metering infrastructure in remote communities Table 4.5, sets out the estimated cost of damaged meters (or associated communications devices) for each of the case studies. Table 4.5 Cost of repairing damaged or failed meters and communications Case study Total cost (NPV) Total cost per NMI (NPV/NMI) Tennant Creek $546,990 $243 Nguiu $466,094 $731 Engawala $28,438 $341 Birdsville $25,190 $271 Erub (Darnley Is.) $320,588 $1,473 Sandstone $34,150 $683 Denham $456,894 $472 Karratha $370,765 $ Other costs In addition to the costs set out above, we have also made assumptions about the likely costs of conducting an initial audit of meters in a location prior to a roll out, to ensure that any difficult meter installations are identified and appropriate preparations are made to install a smart meter at the installation. 27 This will be particularly important for remote communities because of the potentially significant costs associated with travelling to a community only to discover that particular circumstances mean that a roll out at that time cannot proceed. We have also assumed project management and mobilisation costs of 6 per cent of the total cost of the roll out, as indicated by the businesses. Finally, we have included estimates of the cost of undertaking an initial audit of metering infrastructure in each community Summary Table 4.6 and Figure 4.1 summarises the total costs of smart meter infrastructure for each of the case studies, on a per meter basis. 27 Difficult meter installations arise due to the need to remove asbestos, faulty or damaged wiring, or the configuration of the meter board makes placing the new meter on the board a more complex task. NERA Economic Consulting 26

42 The benefits and costs of smart metering infrastructure in remote communities Table 4.6 Total cost of a smart meter roll out in each case study Case study Total cost (NPV) Total cost per NMI (NPV/NMI) Tennant Creek $4,173,003 $1,851 Nguiu $1,264,262 $1,982 Engawala $178,018 $2,134 Birdsville $364,250 $3,917 Erub (Darnley Is.) $872,039 $4,007 Sandstone $133,749 $2,675 Denham $1,178,969 $1,217 Karratha $7,733,195 $920 Figure 4.1 Total costs of a smart meter roll out in each case study 4,500 4,000 Retrofitting Water Meters with Communications Roll-Out Opex 3,500 Refresh Costs 3,000 Project Management $NPV/NMI 2,500 2,000 Back-End IT and NMS Initial Audit 1,500 Back-Haul Communications 1,000 Communications 500 Failed/Damaged Meters 0 Tennant Creek Nguiu Engawala Birdsville Erub Sandstone Denham Karratha Installed Meter Cost The total cost of a roll out of smart metering in the case studies ranged from around $900 per NMI (Karratha) to approximately $4,000 per NMI (Erub). This reflects mainly differences in NERA Economic Consulting 27

43 The benefits and costs of smart metering infrastructure in remote communities the cost of providing communications infrastructure, and the types of meters being installed in the community (ie, single phase etc) Benefits of smart metering infrastructure The benefits of smart metering infrastructure in remote communities are generally higher than those associated with major urban areas because of the potential to avoid the significantly higher meter reading and repair call out costs associated with servicing these communities. In estimating the benefits, we have been mindful of ensuring that the benefits are practically achievable, given that in many instances the costs may not be capable of being avoided because the meter reading task or routine maintenance task is undertaken by a single company representative as one of a number of operational tasks. While there may be a benefit in that the person s time may be freed up for lower priority tasks, there might not be a financial benefit attributable to the business associated with smart metering infrastructure. This highlights how the operational practicalities of managing remote electrical systems may have implications for the benefits of smart metering infrastructure Business efficiency benefits Avoided meter reading costs Avoiding the cost of routine and special meter reading is typically the largest business cost reduction benefit associated with a roll out of smart metering infrastructure. In the national cost benefit analysis, avoided meter reading costs accounted for between 39 and 44 per cent of the total business efficiencies associated with smart metering infrastructure. The amount of avoided meter reading costs varies across the case studies, reflecting different meter reading periods. For example, in Queensland meters are read on a quarterly basis, in Western Australia meters are read every two months and in the Northern Territory meters are read monthly, quarterly or annually depending on the community and customer group. In addition to routine meter reading, each case study area can have special meter reads, associated with changes in the resident of a premise or required to check the routine meter reads. These special meter reads require a dedicated visit to the premises by a meter reader, and so are generally more expensive as compared to a routine meter read. The avoided meter reading costs have been estimated for each case study based on the actual costs incurred by each of the businesses, according to the cost of a routine or special meter read multiplied by the number of these reads undertaken in each case study. Table 4.7 sets out the routine, special and checked meter reading avoided costs for each of the case studies. NERA Economic Consulting 28

44 The benefits and costs of smart metering infrastructure in remote communities Case study Tennant Creek Nguiu Engawala Birdsville Erub (Darnley Is.) Sandstone Denham Karratha Table 4.7 Avoided meter reading costs Routine reads (NPV/NMI) Special reads (NPV/NMI) Checked reads (NPV/NMI) $27.82 $21.45 $13.16 $ $5.32 $48.29 $ $40.72 $82.64 $ $59.88 $0 $0 $0 $0 $ $78.55 $78.55 $ $17.40 $17.40 $ $71.48 $71.48 Note: Erub has no scope for avoided meter reads because it is currently predominately prepayment meters. This assumption assumes that an annual manual read of the meter is undertaken as part of standard asset management practices, which cannot be avoided by a smart metering system. The avoided meter reading costs show a great deal of variation across the case studies. Isolation is likely to play a key role in these differences, e.g. Sandstone, which is an extremely isolated community without local personnel available to read meters, has large realisable benefits. Further, the penetration of prepayment meters lowers the extent that routine meter reads can be avoided, as shown most obviously in Erub where there is no potential to avoid meter reading costs. In general however, the great divergence across case studies is down to the local operations of the businesses servicing these communities. Avoided connection/disconnection costs The second largest category of benefits is associated with smart metering infrastructure allowing for premises to be remotely disconnected or reconnected, as a consequence of nonbill payment or move in or out. This avoids the need for a special visit to the premises to manually disconnect or reconnect the property. The size of this benefit is typically related to the operational approach of the business to move in and move outs. Generally, for these case studies premises are not disconnected as a consequence of move in and move out. Similarly, for many of the case study regions the number of move in or move out circumstances is significantly lower and so the potential avoided costs is also less. There has been some concern amongst electrical safety regulators in Australia as to the safety of remotely reconnecting a premise without first warning the resident that the power is being reconnected. This has led to a requirement in Victoria that a switch be attached to the meter that would need to be pressed by the resident prior to the house becoming reenergised. NERA Economic Consulting 29

45 The benefits and costs of smart metering infrastructure in remote communities For the purposes of this study we have not included the cost of additional safety mechanisms that might need to be installed to satisfy local electrical safety regulators to then obtain the benefits from remote reconnection. The benefits of remote connection/disconnection have been estimated as the cost of a connection/disconnection that can be avoided multiplied by the average number of connections/disconnections in the community each year. The results are presented in Table 4.8. Table 4.8 Benefits of being able to provide remote connections/disconnections Case study Tennant Creek Nguiu Engawala Birdsville Erub (Darnley Is.) Sandstone Denham Karratha Total number of connect/ disconnects (per annum) Cost of a connect/ disconnect Proportion of costs that can be avoided Benefit (NPV/NMI) 300 $ % $ $ % $ $ % $ $1, % $ $0 0 $ $ % $ $ % $ $ % $24.85 Note: Erub has no scope for remote connect/disconnects because all residential premises are supplied by prepayment meters. The case study results highlight that the benefits of smart metering infrastructure for avoiding the costs of manual connections and disconnections varies considerable. This is in part because in some case study communities there are limited instances of connections and/or disconnections due to the operational approach to move in and move out arrangements (ie, some businesses do not automatically disconnect a premises on move out) and the limited residential churn in these communities. The highest benefit for avoiding connection/disconnection costs arises in Birdsville, where the cost of each connection and disconnection is significantly higher due to its remote location compared with the other case studies. In locations where there are prepayment meters, these avoided costs are zero. Customer outage queries A potentially large cost is incurred by businesses servicing remote communities when a customer complaint about the quality of service is investigated, with the cause of the NERA Economic Consulting 30

46 The benefits and costs of smart metering infrastructure in remote communities complaint being faulty or defective household wiring, not the responsibility of the business. In these circumstances the business can incur the costs associated with a service crew being dispatched to investigate the complaint, only to discover no faults with the household s connection or meter. In some instances these costs can be in excess of $1,000 per call out 28. The capability of smart metering infrastructure to remotely detect whether the connection is operating normally would allow the business to avoid these call-out costs by identifying whether the problem is a consequence of the meter connection and so the responsibility of the business, or by default some other cause, which is the responsibility of the resident. To estimate the potential benefits from customer investigation costs, we multiplied the average number of call-outs each year that were found to not be the responsibility of the business, by the cost of these call-outs which would now be avoided. These avoided costs ranged between $0 and $177 per meter each year. Table 4.9 sets out the assumptions and results for each of the case studies. Table 4.9 Avoided customer outage queries Case study Tennant Creek Nguiu Engawala Birdsville Erub (Darnley Is.) Sandstone Denham Karratha Number of outage queries (per annum) Cost of investigating a query Proportion of costs that can be avoided Benefit (NPV/NMI) 5 $50 100% $ $1, % $ $1, % $ $1, % $ $0 0% $ $300 25% $ $0 0% $0.00 1,000 $300 25% $94.14 Engawala was found to have the highest avoided cost of all of the case studies, reflecting the large number of erroneous customer outage queries that arise in that community. This compares with Tennant Creak, Nguiu, Erub and Denham where there are almost no customer outage queries. 28 This will depend on jurisdiction and whether they have necessary staff on site NERA Economic Consulting 31

47 The benefits and costs of smart metering infrastructure in remote communities Avoided prepayment retailing costs Prepayment meters are found in all indigenous communities in the Northern Territory and Queensland, and have been introduced on a trial basis in a number of communities in Western Australia. The prepayment meters are typically disposable card based, whereby a customer purchases a fixed amount via a card and transfers that credit to the meter via a card reader which is part of the prepayment meter. The prepayment cards are generally for a single use only, and are retailed through a local distribution outlet (eg, the local general store). While there have been valid concerns raised with us about the scope to use a smart metering system to provide prepayment services in these remote communities, 29 our approach has involved assuming that retailing costs would remain unchanged with the introduction of a smart metering system. In practice this might not be practically feasible. Other business efficiency benefits In addition to the business efficiency benefits set out above we have also included, where relevant, benefits associated with avoiding manual condition monitoring of transformers, and avoiding the cost of hand-held devices to manually collect meter information Avoided meter costs The estimated cost of smart meters and installation are based on the full cost of the meter. As a consequence it is also necessary to take account of the costs that the business would avoid by not having to replace meters and install new meters as part of the business as usual case over the period of assessment. These avoided meter costs can be treated as a benefit for the purposes of assessing the overall costs and benefits. The avoided meter costs are estimated by modelling the age profile of the current stock of installed meters, taking into account the numbers of each meter type installed (eg, the number of prepayment meters, single phase plug in meters, etc). Using assumptions about failure rates and the life of these meters a replacement profile is developed. This results in an estimate of the number of meters that would need to be replaced in each year of the study timeframe, which is multiplied by a meter cost including installation to estimate the total avoided meter costs. Table 4.10 sets out the avoided meter costs for each of the case studies both in total and on a per meter basis This is considered further in section 4.6 below. These costs have been estimated by NERA taking into account independent meter cost information and information provided by the businesses about the age profile of the currently installed meters. NERA Economic Consulting 32

48 The benefits and costs of smart metering infrastructure in remote communities Table 4.10 Avoided meter costs Case study Total costs (NPV) Total costs per NMI (NPV/NMI) Tennant Creek $222,623 $98.74 Nguiu $129,518 $ Engawala $10,022 $ Birdsville $35,471 $ Erub (Darnley Is.) $114,704 $ Sandstone $22,742 $ Denham $382,676 $ Karratha $3,288,831 $ The observed differences in avoided meter costs per meter reflect differences in the types of meters currently installed in each case study community Summary The total benefits from a smart metering infrastructure roll out across the case studies ranged from $82,447 to $6,527,673. On a per meter basis the range was between $172 and $3,180 Table 4.11 and Figure 4.2. Table 4.11 Total benefits of a smart meter roll out in each case study Case study Total benefits (NPV) Total benefits per NMI (NPV/NMI) Tennant Creek $387,491 $172 Nguiu $400,334 $628 Engawala $91,209 $1,093 Birdsville $82,447 $887 Erub (Darnley Is.) $114,704 $527 Sandstone $158,992 $3,180 Denham $560,112 $578 Karratha $6,527,673 $777 NERA Economic Consulting 33

49 The benefits and costs of smart metering infrastructure in remote communities Figure 4.2 Total benefits of a smart meter roll out in each case study 4,500 4,000 Manual condition monitoring of transformers 3,500 Avoided Meter Costs 3,000 $NPV/NMI 2,500 2,000 Customer Outage Queries Connect/Disconnect 1,500 1,000 Hand-Held Computers Tennant Creek Nguiu Engawala Birdsville Erub Sandstone Denham Karratha Meter Reading The differences in benefits reflect the opportunities available to avoid costs, the current cost of providing metering services and the customer service obligations on the businesses Energy Conservation Benefits Load control devices and systems A potentially significant benefit of a smart metering system in remote communities is the potential scope to control air conditioning load to conserve energy and so avoid the high costs incurred in generating electricity in these locations. While load control can be provided through a variety of alternative means, and indeed energy conservation can also be achieved through community education and other energy efficiency programs such as appliance buyback programs, we have focused on the potential benefits of energy conservation provided via load control through a meter. For this study we have assumed that the only controllable load is associated with airconditioners. While it is possible to control other load (eg, hot water systems), the scope for this to result in energy conservation is significantly limited. Controlling hot water systems is generally undertaken to shift load from peak to off-peak periods and so make better use of both the network and a cheaper cost of generation. For off-grid communities with a single type of generation and no network constraints, these benefits are not present. NERA Economic Consulting 34

50 The benefits and costs of smart metering infrastructure in remote communities To support the controlling of air conditioning load, it is necessary to retrofit a device in existing air conditioners to enable the controlling of the operation of the air conditioner. We have assumed a cost of $90 for the purchase and installation of a demand response enabling device (DRED), which is in line with the assumptions made in the national cost benefit analysis. In the national cost-benefit analysis we included the costs of the back end systems that were required to interact with the DREDs. However, unlike the national study the primary benefit of the DRED in off-grid communities is energy conservation (ie, reduction in total consumption) rather than demand management (ie, reduction in peak load). Consequently, the back end infrastructure necessary to achieve energy conservation is less extensive as the system is not required to react in real time to information on system load. For the purposes of this study we have assumed that the cost of these systems is included in the network management costs Energy conservation benefits In addition to the business efficiency benefits, smart meter technology has the ability to affect both the level and timing of customer demand however this is somewhat limited in remote communities. Generally it has the potential to deliver benefits by: avoiding or delaying the need for network augmentation by lowering electricity demand during peak periods; avoiding or delaying peak generating capacity; and fuel cost savings and reductions in the amount of carbon emissions. The mechanisms by which smart meters influence customer demand include: facilitating the application of time-varying tariffs; and/or through direct load control of certain appliances, such as air conditioners. These mechanisms influence customer demand by encouraging customers to shift demand to periods where the marginal cost of supply is relatively smaller, or directly reducing demand via direct load control. The scope for benefits to arise from shifting load to lower cost periods is in practice very limited for off-grid communities, because there is generally only one type of generation for each community and so there would be no benefits from shifting demand throughout the day. This highlights that the benefits from influencing customer demand will most likely only arise in circumstances where load is directly controlled and so results in overall energy conservation. In all of the case studies and the majority of off-grid communities electricity demand, including both average and maximum demand, is not growing and so the scope for demand control to deliver network and generation investment deferral benefits is very limited. This is in contrast with the results set out in the national cost benefit analysis. The only demand response benefit that might be achievable in some remote off-grid communities is through direct load control leading to overall energy conservation and so NERA Economic Consulting 35

51 The benefits and costs of smart metering infrastructure in remote communities avoided generation fuel costs and reduced carbon emissions. The size of these energy conservation benefits via direct load control will be influenced by: the size of the potentially controllable load, which is based on the penetration and use characteristics of air conditioners, and the type of air conditioner in the community; the proportion of premises with air conditioners that participate in the direct load control program; and the frequency that air conditioner load is controlled (ie, daily for 1 to 2 hours). For the purpose of this study we have estimated the size of the potentially controllable load for each case study based on information where available on the penetration of air conditioners and the likely contribution to electricity demand in the community. Based on this information we then assumed that 100 per cent of all air conditioners participate in the direct load control program. This assumption was considered to be reasonable given the nature of the load in these communities. Finally, we assumed that the air conditioners were cycled for up to 2 hours each day. 31 In our opinion this approach estimates the potential maximum benefits attributable to direct load control because we are assuming that all air conditioners in each community are controlled. Whether this is a sensible assumption will critically depend on the acceptability of obliging all households with air conditioners to be subject to load control in these communities. A relevant consideration in assessing this is that the provision of air conditioning in these remote communities is often part of a package of employment to encourage people to live and work in these locations. Often the entire electricity bill is paid by the employer or a generous allowance is made to offset the costs of air conditioning. If imposing direct load control is viewed by residents as a diminishment of their employment entitlements, then this could affect the feasibility of imposing load control in these regions. In addition, over time the benefits from load control may be eroded if customers attempt to circumvent the load control policy by purchasing oversized air-conditioner units. For this reason, the benefits from load control will need to be assessed in detail for each community for which a smart metering infrastructure roll out is being contemplated, taking into account all of the surrounding circumstances. Indeed, there may also be other more effective and cost efficient means to encourage residents in these communities to conserve energy and these alternative approaches might deliver better outcomes as compared to controlling air conditioner load. That said, we believe that the total benefits from direct load control is likely to range from between zero and an amount reflecting that all load is controlled. In practice this is a very large range, highlighting the considerable uncertainty involved. Table 4.12 sets out the benefits from load control in terms of avoided fuel costs and greenhouse gas reduction benefits for each of the case studies under a smart meter controlled load scenario. 31 This assumption was the same applied in the national cost benefit analysis. NERA Economic Consulting 36

52 The benefits and costs of smart metering infrastructure in remote communities Table 4.12 Potential net benefits from load control via smart metering in each case study Case study Cost (NPV $,000) MWh saved (p.a) Cost per MWh Avoided fuel costs (NPV $ 000) GHG saved (tonnes) GHG benefit (NPV $ 000) Net benefit (NPV $ 000) Tennant Creek $ $464 $4,098 20,764 $320 $4,175 Nguiu $ $283 $525 2,578 $40 $460 Engawala $7 15 $304 $ $4 $50 Birdsville $17 64 $299 $ $13 $168 Erub (Darnley Is.) $35 81 $291 $355 1,971 $30 $350 Sandstone $9, $394 $ $10 $135 Denham $ $394 $2,331 12,212 $186 $2,352 Karratha $1,522 5,274 $60 $3,337 70,147 $1,083 $2,898 The results highlight the potentially significant benefits arising from energy conservation in these remote communities. This reflects the high cost of supplying electricity, particularly in relation to the fuel costs as compared to the prices paid by electricity users. Differences across the case studies are primarily driven by the varying generation costs and penetration of air conditioners as well as the expected growth in community demand. Finally, these results should be treated with considerable caution because of the practical and technical uncertainties associated with implementing direct load control in these communities, as described above. As discussed above, the ability to control load directly can be provided through a variety of means including as part of a smart metering infrastructure system, or as a stand alone system. Scenario 2 of this analysis considers the provision of direct load control of air-conditioners via a non-smart meter direct load control systems for each of the case studies. For the purposes of this scenario we have assumed that the non-smart meter direct load control is provided via FM frequency, and so requires the installation of a DRED in the air-conditioner, and a control system by the business. Scenario 2 assumes that the same amount of load is controlled as for scenario 1, and so the estimated avoided fuel and greenhouse gas reduction benefits, are the same. To assess the costs of scenario 2, we have used the cost assumptions made as part of the national cost benefit analysis. Table 4.13 outlines the benefits from load control in terms of avoided fuel costs and greenhouse gas reduction benefits for each of the case studies under scenario 2. NERA Economic Consulting 37

53 The benefits and costs of smart metering infrastructure in remote communities Table 4.13 Potential net benefits from a roll out of direct load control (scenario 2) Case study Total cost (NPV $,000s) Avoided fuel costs (NPV $,000s) GHG benefit (NPV $,000s) Net benefit (NPV $,000s) Tennant Creek $487 $4,098 $320 $3,931 Nguiu $255 $525 $40 $310 Engawala $40 $53 $4 $17 Birdsville $52 $173 $13 $134 Erub (Darnley Is.) $84 $355 $30 $301 Sandstone $42 $134 $10 $102 Denham $327 $2,331 $186 $2,190 Karratha $3,096 $3,337 $1,083 $1,324 The results indicate that the controlling of load via an FM frequency system is likely to generate net benefits in all case studies. While this scenario is expected to generate net benefits for all case studies, the benefits are expected to be lower than including the load control functionality in a smart meter roll out for Tennant Creek, Sandstone, Denham and Karratha. This reflects, amongst other things, the relatively small incremental cost of providing the load control functionality as part of a smart meter roll out as compared to installing a separate system Prepayment metering Providing a prepayment service via smart metering infrastructure involves using the remote connect/disconnect capabilities of the meter, in combination with information of the amount of credit available for a particular metering connection. Generally, credit can be added to the meter by either calling the electricity provider, or using an online portal and providing credit card details for the amount to be added to the meter. While this approach has the potential to result in significant savings to the electricity provider by avoiding entirely credit retailing services by third party providers, there are concerns about the practicality of adopting such an approach in remote indigenous communities where prepayment metering dominates, particularly in the Northern Territory. This is because many indigenous customers do not have access to credit card facilities, or scope to conduct online transactions in order to put credit on the meter. Table 4.14 outlines the current penetration of prepayment meters in each of the case studies. NERA Economic Consulting 38

54 The benefits and costs of smart metering infrastructure in remote communities Table 4.14 Penetration of prepayment meters Case study Penetration of prepayment meters (%) Tennant Creek 23 Nguiu 51 Engawala 29 Birdsville 0 Erub (Darnley Is.) Sandstone 0 Denham 0 Karratha 0 As a consequence all of the businesses that have been involved with this study (ie, Power and Water Corporation, Horizon Power, and Ergon) are investigating alternative and appropriate means of providing prepayment metering services in remote indigenous communities, taking into account the opportunities available to indigenous customers accessing payment options. Some of the options being examined include: maintaining the card based credit system, and incorporating a card reader as part of the smart metering infrastructure, possibly via wireless communications with the meter; and having a centralised portal embedded in the mesh radio network, say within the local general store or community centre, where a payment for electricity is transferred to the meter by the retailer receiving payment. The scope for either of these approaches to create business efficiency savings for the electricity provider is limited, although greater under a centralised portal approach. The centralised portal approach would eliminate the need to purchase proprietary credit cards, and distribute these across remote communities, thereby creating some business savings. For the purposes of this study, and because a prepayment smart metering system that is likely to be acceptable in remote communities is yet to be developed, we have not sought to estimate the possible business savings that might be involved. Our approach has involved examining other business efficiency benefits that might be available to determine whether smart metering infrastructure might be beneficial in other ways in communities where prepayment metering is dominant. That said the case studies involving prepayment metering Erub, Nguiu and Engawala have relatively limited other business efficiency benefits, suggesting that a smart metering 32 All residential meters are prepayment, with the remaining meters associated with commercial premises. NERA Economic Consulting 39

55 The benefits and costs of smart metering infrastructure in remote communities infrastructure roll out would not be justified on these other grounds. This suggests that a closer examination of the opportunities for prepayment metering via a smart metering system should be examined, particularly if current prepayment meters become obsolete in the medium term as smart metering technology begins to dominate metering supply Net benefits of smart metering The net benefits of smart metering infrastructure roll out for the case study communities ranged from negative $3.8 million (Tennant Creek) to positive $25,000 (Sandstone). However, if energy conservation could be facilitated by smart metering then there is potential for a positive net benefit to occur in Tennant Creek, Sandstone, Denham and Karratha. The positive net benefit outcome for Sandstone reflects the very high costs of providing meter reading, connect/disconnect and customer outage services in a very remote location with little or no local tradespeople capable of undertaking this work. Replacing these high costs with remote meter reading and monitoring technology thereby creates an opportunity for Horizon to lower its costs. Table 4.15 Net benefits of a smart meter roll out Case study Costs (PV) Benefits (PV) Net Benefits (NPV) Tennant Creek Nguiu Engawala Birdsville Erub (Darnley Is.) Sandstone Denham Karratha $4,173,003 $387,491 -$3,785,512 $1,264,262 $400,334 -$863,928 $178,018 $91,209 -$86,809 $364,250 $82,447 -$281,803 $872,039 $114,704 -$757,335 $133,749 $158,992 $25,243 $1,178,969 $560,112 -$618,857 $7,733,195 $6,527,673 -$1,205,522 Note: the net benefits are calculated excluding any load control benefits. The remaining case studies have negative net benefit outcomes. This reflects the very high back-haul communications costs for Birdsville and Erub in the absence of access to a 3G network to provide these communications services. The relative closeness of Nguiu and Denham to major servicing centres, means that there is limited potential to avoid operational costs in these two communities as compared to the costs of a smart metering infrastructure roll out. A similar reason explains the negative net benefit outcome in Karratha, although there may be opportunities for load control in Karratha that might outweigh the otherwise negative benefit outcome. NERA Economic Consulting 40

56 Conclusions 5. Conclusions This study has focused on considering the costs and benefits of a roll out of smart metering infrastructure in remote and regional off-grid communities that range in size from as few as ten meter connections up to the larger remote communities with as many as 10,000 meter connections. For the purposes of this study, we have examined eight case study communities that were selected so as to represent the principal characteristics of the majority of off-grid communities. The results demonstrate that the economics of a roll out to these communities differs considerably from the results set out in our earlier report of a roll out of smart metering infrastructure in the major urban and rural centres. The differences mainly reflect the remoteness and size of the communities we have examined, but are also influenced by other local factors such as access to 3G backhaul communications. In summary our results suggest that the costs of a roll out of smart metering infrastructure to these communities are not unanimously outweighed by the business efficiency benefits that are expected to result. Indeed, the business efficiency benefits range from as low as 9 per cent of the costs to slightly greater than the costs, for the case studies we have considered. 33 These results also do not take into account our general concerns about the reliability of smart meters and the associated communications units in the extreme temperature and humidity ranges commonly found in these locations. While we have not sought to independently verify the failure rates that have been presented to us, ultimately we would expect these to reduce over time as the metering technology becomes more commonplace and is refined for all climatic conditions. Further pilots and trials would therefore be appropriate to address these technical concerns prior to a full roll out. The only case study with positive net benefits was for Sandstone in Western Australia. The positive net benefits were driven mainly by the relatively high cost of servicing this community due to its extreme remoteness and the inability to use local residents for manual meter reading and transformer monitoring. This means that there are significant costs that could be avoided through remote meter reading as a consequence of a smart meter roll out. This result suggests that there may be other high cost to serve communities in Western Australia for which a smart metering roll out might therefore be cost effective. That said the other case studies in Western Australia (Denham and Karratha) had negative net benefit results similar to the other case studies considered in our study. For Denham the costs of $1,217 per meter installed in net present value terms exceeded the benefits of $578 per meter by a wide margin (ie, benefits were 47 per cent of costs). The ratio of benefits to costs for Karratha in contrast was relatively close (benefits represented 84 per cent of the costs). This higher ratio in Karratha likely reflects the scale efforts of a roll out in a larger community in the absence of remoteness benefits. As indicated further below, if significant energy conservation benefits could also be realised through a smart metering roll out then the benefits of a roll out in many communities including Karratha become clearer. 33 The Tennant Creek case study had the lowest ratio of benefits to costs (with benefits representing 9 per cent of the costs), while Sandstone was the only case study with positive net benefits (with benefits being 18 per cent higher than costs). NERA Economic Consulting 41

57 Conclusions The two Queensland case studies (ie, Birdsville and Erub) represent small and midsized communities that are both very remote. Erub is a remote indigenous community that is serviced almost entirely by prepayment meters. The opportunity for business cost savings in that community is therefore very low (benefits represent 13 per cent of costs). For Birdsville the benefits represent 22 per cent of the costs of a smart metering roll out, reflecting the very high cost of using satellite to provide secure back haul for the metering data because alternative communication technologies (ie, 3G) are not available in Birdsville. Finally, the three case studies in the Northern Territory range from the lowest benefit to cost ratio (Tennant Creek where benefits represent only 9 per cent of costs), to Nguiu (31 per cent), and Engawala (51 per cent). Tennant Creek s low benefits reflect that it is relatively low cost to provide metering and other services (compared for example with Karratha). This likely reflects relative low labour costs and service requirements as compared to those faced by providers in other jurisdictions. Nguiu and Engawala also have relatively low benefits because of the high proportion of prepayment meters (51 per cent and 29 per cent respectively), which therefore reduce the avoided meter reading and remote connection/disconnection benefits. So in summary, the case study results vary mainly because of differences in the individual cost to service characteristics of each community, and so the potential to deliver realisable benefits. It has been clear from this study that each of the three providers faces different challenges with the provision of metering services reflecting jurisdictional requirements, the high proportion of prepayment meters in some locations, and the need in some instances to use satellite communications technology for back haul. Interestingly, the size of the community did not seem to correlate with the benefit cost ratio results (ie, both large and small communities had both large and small benefit cost ratios). When the potential benefits of direct load control are also included, then the case studies of Tennant Creek, Sandstone, Denham and Karratha become significantly positive. The reason for the dramatic change in the results when direct load control is included is the relatively high fuel costs associated with each MWh produced as much as $460/MWh as compared to an average wholesale electricity price in the National Electricity Market of between $34/MWh and $58/MWh in When the benefits from lowering greenhouse gas emissions are also taken into account then the benefits become even higher. These results do not mean that smart metering in remote communities should be undertaken in order to achieve significant energy conservation benefits. This is because there may be a number of more cost effective means of achieving energy conservation in these communities (eg, general information provision, appliance buyback programmes, etc) and there are considerable hurdles for controlling air conditioner load in communities that are characterised by hot and humid conditions. In addition, many households in these communities are paid an allowance from their employer, or indeed do not pay the electricity bill as a condition of employment, and so might consider the implementation of load control as a diminishment of their employee entitlements. 34 Source: AEMO website, available at: NERA Economic Consulting 42

58 Conclusions As we have previously acknowledged, the amount of possible demand reduction is very sensitive to: 35 the amount of load that is available for participation in a direct load control program; the cycling rates applied; and the length over which cycling can be made, without impacting on the thermal comfort of customers. In our opinion there is considerable merit in exploring the opportunities that a smart metering system could provide for direct load control in light of the potentially significant economic benefits that our results indicate. As we have indicated earlier, in the absence of these energy conservation benefits which are highly uncertain, then a roll out of smart metering is not economically appropriate at this time. Addressing these uncertainties will necessarily require improved information on the amount of load available for control, the cycling rates applied and the length of cycling so as to not affect thermal comfort. That said such an approach should only be part of a comprehensive energy conservation effort in these communities in order to lower the high cost of generating electricity in remote communities. Finally, we have examined the role of smart metering infrastructure for the provision of prepayment metering a service that is widely provided in remote communities in the Northern Territory, and also in a number of communities in Queensland and Western Australia. To maximise the acceptability of a smart metering approach to prepayment in these communities there is a need to minimise the complexity of payment options. This might involve the development of a prepayment card reader as part of a smart meter so that cards can continue to be used to place credit on the meter. Alternatively this could involve a central payment station where credit can be allocated to meters by payment at a general store or community centre. The technology for these systems is yet to be developed but we acknowledge that this will be an important part of providing prepayment services via a smart metering system in these remote communities. Our study indicates that while there may be potential net benefits associated with the deployment of smart meters in some remote communities, there are also a number of risks and uncertainties that need to be taken into account. This highlights the importance of businesses continuing to examine in more detail the technical feasibility of deploying smart metering infrastructure in remote communities. 35 See page 114, NERA, (2008), Cost Benefit Analysis of Smart Metering and Direct Load Control Work Stream 4: Consumer Impacts Phase 2 Consultation Report, A report for the Ministerial Council on Energy Smart Meter Working Group, February. NERA Economic Consulting 43

59 Appendix A Appendix A. Assumptions This appendix outlines the key assumptions used in the cost benefit analysis of the eight case studies. A.1. Time period for the analysis We have used a 20 year time period for quantifying the relative costs and benefits of a smart meter roll out in each of the case studies. No particular year was chosen as a start date for the assessment period as it was considered more appropriate to allow each of the three electricity businesses the discretion as to when to commence a roll out, to best fit their respective operations. A 20 year time period was chosen to ensure that the costs and benefits of a smart meter roll out could be assessed over the full life cycle of the meters. Further, a 20 year time period ensures consistency with the earlier national cost benefit analysis, allowing a meaningful comparison of results. The electricity businesses indicated differences in asset lives, both across case studies as well as across meter types, which highlight how the characteristics of these communities can affect the life of the equipment. To account for these different asset lives we have annualised the costs of meters and their communications. 36 That is, we have calculated a constant real annual cost that when paid over the expected life of the equipment is equal in present value terms to the purchase cost. This translates to an annual cost for meters with an asset life of 40 years being less than for meters with an expected life of 15 years, all else held constant, as the cost of the meter is spread over its assumed life. To ensure consistency we have assumed that the expected life of similar smart metering infrastructure is the equivalent in each case study. Following consultation with the businesses we have agreed to use the following average effective lives: 15 years for smart meters; 5 years for plug-and-play mesh radio communications devices; 4 years for all backhaul communications devices; and 14 years for air-conditioning units. A.2. Roll out timeframe In the national cost benefit analysis, conversion of the existing meter stock to smart meters required the replacement of approximately 10 million meters, necessitating a roll out over a number of years. The remote and rural communities included in this analysis are significantly smaller, with the largest being Karratha with approximately 7,600 NMIs. We have therefore assumed that for each community a complete roll out could be performed 36 This approach was followed in the national cost benefit analysis. See page 28, NERA, (2008), Cost Benefit Analysis of Smart Metering and Direct Load Control: Overview Report for Consultation, A report for the Ministerial Council on Energy Smart Meter Working Group, February. NERA Economic Consulting 44

60 Appendix A within one year, which the three electricity businesses confirmed as appropriate. As a result, we have assumed that any benefits from the roll out of smart meters are accrued in the first year of the roll out. As outlined above, specific start dates for the roll outs were not assumed as it was considered more appropriate to allow the businesses the discretion in when to roll out smart meters in these communities. A.3. Discount rate To ensure that costs and benefits over time are meaningfully compared it is necessary to use an appropriate discount rate. The discount rate is used to put the estimated costs and benefits over the 20 year time period into present value terms. In determining the discount rate we have had regard to the objective of the cost benefit analysis, being to assess the net benefits of a decision to invest in a roll out of smart meters (or a DLC alternative) to off-grid communities. Given this objective, it is appropriate to use a discount rate that reflects the project specific cost of capital. Our analysis has therefore applied a real pre-tax discount rate of 8 per cent to all costs and benefits attributable to smart meter infrastructure in off-grid communities. This is consistent with current market estimates of the commercial discount rate of a private enterprise investment in the electricity sector. 37 This discount rate was also used in the earlier cost benefit analysis of a proposed roll out of smart metering infrastructure, and a non-smart metering direct load control alternative within the National Electricity Market, the South West Interconnected System in Western Australia and the Darwin-Katherine network. 38 However, to assess the robustness of our analysis we have undertaken sensitivity testing with discount rates of 6.5 per cent and 9.5 per cent. The lower bound sensitivity approximates the real pre tax weighted average cost of capital (WACC) commonly used by energy regulators in Australia. A.4. Load control In both scenarios it was assumed that the load control benefits came from controlling the airconditioning load in off-grid communities. This is consistent with the national analysis except that load control targeted both air-conditioning and pool pumps. It was assumed that for the purposes of this study, the penetration of pool pumps in off-grid communities will be negligible An 8 per cent discount rate was applied by VENCorp in its Regulatory Test application. VENCorp, New Large Transmission Network Asset: Additional 500/220kV Transformation to Support West Metropolitan Melbourne and Geelong Area Load Growth, September 2005, p27. It is also the discount rate that applied by Powercor: in its most recent Regulatory Test application. Powercor, Proposed Augmentation of Bendigo Terminal Station Application Notice, June 2009, page 22. NERA, Cost Benefit Analysis of Smart Metering and Direct Load Control: Overview Report for Consultation, 29 February 2008, page 31. NERA Economic Consulting 45

61 Appendix A To enable smart meters (or a DLC alternative) to achieve benefits through controlling airconditioning load, air-conditioners have to be fitted with a demand response enabling device (DRED). In the national cost benefit analysis, it was assumed that: 39 the cost of a DRED device for air-conditioners was $80 to $100 per device; the cost of installing a DRED, when installed by the same person who is installing the meter, would be between $40 to $90 per device; and the average life of an air-conditioning unit was 14 years. For the purposes of this analysis we have costed the installed cost of a DRED device at the mid-point of the national estimates, ie $155, with an average life of 14 years. We have also assumed that every existing off-grid air-conditioning unit would need one to be installed as part of the smart meter roll out. Further, we have assumed that for new air-conditioners the DRED device would be installed at the customers site inline with the assumption made in the national analysis. In communities where the distribution business believed there was scope for load control benefits, we have made the following assumptions to estimate the amount of load under control: each business has provided an estimate of the air-conditioner penetration; an average air-conditioner size of 1.9kW is assumed, which is consistent with the national cost benefit analysis; that every air-conditioner would have its load controlled over a period of 2 hours per day; and that a 50 per cent rating reduction would be applied to each air-conditioner for the period of load control, which is consistent with the national cost benefit analysis. To calculate the level of energy conservation potentially achieved by smart metering, or a DLC alternative, we have assumed based on discussions with the businesses that load control would operate every day of the year. Energy conservation delivers the following two benefits: avoided fuel consumption from the reduction in demand; and reductions in greenhouse gas emissions from the reduction in fossil fuel consumption through controlling load. The annual amount of fuel conserved has been calculated by multiplying the annual energy avoided by the thermal efficiency of the margin generator, which was provided by each of the 39 NERA, Cost Benefit Analysis of Smart Metering and Direct Load Control: Overview Report for Consultation, 29 February 2008, page 42, and NERA, Cost Benefit Analysis of Smart Metering and Direct Load Control Work Stream 4: Consumer Impacts Phase 1 Report, September 2007, page 165. NERA Economic Consulting 46

62 Appendix A businesses. 40 In most off-grid communities the marginal generator is a diesel generator. The only exception is Karratha, which operates open cycle gas turbines. To calculate the annual benefit of avoided fuel consumption we have multiplied the avoided fuel consumption by an estimate of the fuel costs. Fuel cost for diesel generators has been estimated by reference to: the average 2009 terminal gate price of diesel in each state; 41 plus a transportation cost of either 5 cents or 10 cents for rural and remote communities, respectively. 42 The 2009 fuel costs for the open cycle gas turbines in Karratha were provided by Horizon. We have assumed over the assessment period that the real cost of fuel does not change. Since the marginal generator in all off-grid communities use fossil fuels to generate electricity there are also significant greenhouse gas benefits. The volume of carbon dioxide produced from the consumption of fossil fuels has been sourced from the website of the US Government Energy Information Administration. 43 We have assumed that the cost of emitting a tonne of carbon dioxide price is consistent with price of emissions permits published ACIL Tasman in their report to the Australian Energy Market Operator (AEMO) in April Table A1, sets out the assumed real prices of emission Where business have been unable to provide us with data on the thermal efficiency we have assumed that generators have thermal efficiency equivalent to the diesel generator at Angaston and the Ladbroke Grove gas turbine. See ACIL Tasman, (2009), Fuel resource, new entry and generation costs in the NEM, April p. 28. The 2009 price is calculated as an arithmetic average of the terminal gate price (less GST) from 1 January 2009 to 27 November 2009, see The only the Tennant Creek and Karratha case studies are considered rural all other communities are deemed to be remote. See ACIL Tasman, Fuel resource, new entry and generation costs in the NEM: Final report, April 2009, page 23. NERA Economic Consulting 47

63 Appendix A A.5. Water meters Table A.1 Assumed Emission Permit Prices Emission permit price ($/tonne CO2 e) Note: Real dollars. Data source: ACIL Tasman based on Treasury figures. Power and Water Corporation s operations in the Northern Territory imply that unless water meters can be read remotely, the scope for avoided electricity meter reading in some communities is minimal. The Power and Water Corporation is horizontally integrated whereby both electrical and water services are provided to off-grid communities, usually involving the alignment of routine electrical and water meter reads. Of the three Northern Territory case studies included in this analysis, Power and Water Corporation has indicated that this is the case for Tennant Creek. Therefore, to allow the cost of routine meter reading to be avoided in Tennant Creek it has been assumed that water meters are retrofitted with communications to allow a smart metering infrastructure network to capture information from the water meter and so avoid water meter reading costs in addition to electricity meter reading costs. This additional upfront cost has been annualised across the 20 year time horizon, incorporating the life of water meter communications. NERA Economic Consulting 48

64 Appendix A A.6. Back-end IT costs A roll out of smart meters in off-grid communities will require each of the businesses to upgrade a number of their information technology systems. Systems that have been identified as requiring an upgrade to accommodate smart meters include: network management systems (NMS); meter data management systems (MDM); and retailing systems such as billing and customer relationship management systems. The cost of these systems to each of the businesses has been allocated to each case study community on a per NMI basis. This is equivalent to assuming that smart meters have been rolled out within the on-grid system, thereby allowing the cost of the system to be shared across all meters within the control of the business (ie, both off-grid and on-grid meters). A key difference with businesses operating in the interconnected networks of the NEM and SWIS is that off-grid networks operate as a vertically integrated electricity utility. As a consequence, the introduction of smart meters in off-grid communities will not require additional investment in market settlement and meter transaction management systems. The vertical integrated structure also means that the additional investment in business-to-business portals required to allow full retail competition will not be required. NERA Economic Consulting 49

65 Appendix B Appendix B. Smart metering in Northern Territory remote communities This appendix sets out the results of our analysis for the small remote community case studies of Engawala, Tennant Creek, and Nguiu (Bathurst Island) in the Northern Territory. The Power and Water Corporation (Power and Water) provides electricity and/or water and sewerage services to 72 remote communities in the Northern Territory (NT). 45 For the purposes of this study we have defined all communities that are not connected to the Katherine/Darwin electricity grid as remote (off-grid) communities. The Indigenous Essential Services Pty Ltd (IES) is a not-for-profit subsidiary of Power and Water and provides electricity, water and sewerage services to remote Indigenous communities. The Northern Territory Government subsidises the provision of these services, with revenue collected from the sale of electricity, water supply and sewerage services targeting 20 per cent of the cost of service delivery. 46 Of the eight case studies selected for this analysis, three are in Power and Water s jurisdiction and a description of each of these communities is provided below. B.1. Case study 1: Engawala B.1.1. Community characteristics Engawala is one of the off-grid case studies classified as a small community. It has 68 electricity meters, of which 29 per cent are prepayment meters Power and Water generate electricity in 64 remote communities and provide electricity services in a further 8 communities where electricity is generated outside the community, either by Power and Water grids or by mining company grids. Power and Water, Power and Water Corporation Indigenous Essential Services Report NERA Economic Consulting 50

66 Appendix B Located 172 kilometres from Alice Springs in the Northern Territory, Engawala is primarily an indigenous community with an approximate population of The main languages spoken are Anmatyerre and Eastern Arrernte. 48 Access to Engawala is mainly via road but there is also a day/night airstrip located at the Alcoota cattle station which is 4 kilometres from Engawala. 49 The road from Alice Springs to Engawala is largely bitumen except the last 28 kilometres, which is gravel. 50 The internal roads however, are both sealed and unsealed. 51 The community facilities in Engawala include: a shire council office, which is responsible for Centrelink and aged care; 52 a women s centre; an Australian Government Business Manager; Community Development Employment Projects (CDEP), which in 2000 had 40 people, of the then 75 people living in Engawala, on the CDEP program; 53 a laundry; a workshop; a health centre which is serviced by the Atitjere Health Service (90 kilometres away) with a district medical officer visiting once a month and a registered nurse visiting two days per fortnight; 54 a school which has one teacher, two teacher assistants and two tutors; 55 and a community owned grocery store. 56 The primary sources of local employment/industry for Engawala residents are the CDEP program. The services and sources of employment that the program offer include garbage disposal, essential services, parks and gardens, the community store, the Alcoota cattle station, roads maintenance and an orchard. 57 Power and Water is responsible for water, sewerage and electricity serviced in the community. Power and Water have a contractual arrangement with the shire council whereby the council employ a person from the local community for the maintenance and running of their essential infrastructure, which includes the reading/checking of electricity meters. 58 Electricity is generated by three diesel generators with a combined capacity of 0.18 MW NT Government Bushtel website, available at: General Practice Network NT Ltd, Community Profile Engawala, available at: Ibid. Ibid. Ibid. Discussions with Power and Water. Bastable, P., (2000), Interview on PM, Radio National. 24 October, Available at: General Practice Network NT Ltd, Community Profile Engawala, available at: Ibid. Ibid. Ibid. Discussions with Power and Water. NERA Economic Consulting 51

67 Appendix B Community water is supplied from the artesian water basin. The main bore is solar powered while the back-up bore has a diesel powered pump. 59 The community does not have residential water meters instead there are community level water meters. 60 Telecommunications infrastructure in Engawala is limited to Telstra s copper wire network. Broadband services are only available through a satellite service. B.1.2. Costs of smart metering The total cost of a roll out of smart metering infrastructure in Engawala has been estimated at approximately $180,000 in net present value terms. These costs include the initial up front roll out costs plus an amount reflecting the additional operational costs associated with managing and operating a smart metering system. The majority of these costs are associated with the meter and its installation (33 per cent), with the remainder including costs associated with the communications infrastructure, backend systems and ongoing operational expenses Figure B.1. In addition, the costs include approximately $155 for each household with an air conditioner, for the purchase and installation of a demand response enabling device (DRED) to allow the air conditioner load to be controlled General Practice Network NT Ltd, Community Profile Engawala, available at: Discussions with Power and Water. NERA Economic Consulting 52

68 Appendix B Figure B.1 Costs of a smart meter roll out in Engawala Refresh Costs 0% Project Management 2% Roll-Out Opex 9% Installed Meter Cost 34% Back-End IT and NMS 18% Initial Audit 1% Back-Haul Communications 7% Communications 13% Failed/Damaged Meters 16% B.1.3. Benefits of smart metering The total benefits from a roll out of smart metering infrastructure in Engawala have been estimated at approximately $90,000 in net present value terms. This results in negative net benefits from a roll out of approximately $86,000. The breakdown of benefits for each of the categories is set out in Figure B.2. NERA Economic Consulting 53

69 Appendix B Figure B.2 Benefits of a smart meter roll out in Engawala Avoided Meter Costs 11% Customer Outage Queries 16% Connect/Disconnect 1% Meter Reading 54% Hand-Held Computers 18% The majority of benefits (54%) in Engawala are expected to arise in avoided meter reading, which reflects the remoteness of the community. B.1.4. Load control As outlined above, a smart meter roll out in Engawala without controlling any load is expected to result in negative net benefits. When the load control function of smart meters is assumed, as outlined in Chapter 4, then negative net benefit falls to $37,000 in present value terms. The reduction in the negative result is driven by the net impact of allowing smart meters to control load, quantified at approximately $50,000 in present value terms. The net impact of using smart meters to control load in Engawala is set out in Figure B.3. NERA Economic Consulting 54

70 Appendix B Figure B.3 Net impact of load control $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Cost of Retrofitting Airconditoners with a DRED Reduced GHG Emissions Reduced Energy Generated As we have explained in chapter 4, these benefits are highly uncertain and sensitive to the acceptability of controlling air conditioning units in these communities, and so the proportion of air conditioning units that in practice would be controlled. B.1.5. Summary of the results and conclusions Engawala is a small community that is located in relatively close proximity to the nearest service centre (Alice Springs). While it is mainly an indigenous community, unlike many other indigenous communities in the Northern Territory it does not have a large proportion of prepayment meters. As such, the main benefit is the avoided meter reading (approximately $63 per meter each year). The results are summarised in Figure B.4 below. NERA Economic Consulting 55

71 Appendix B Figure B.4 Net benefits of a smart meter roll out in Engawala $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 SMI Costs Business Efficiencies Meter Reading Avoided Meter Replacements Net Impact of Load Control Even when we include the potential benefits of control load, we estimate a smart meter roll out will result in negative net benefits. Without the load control benefits of reduced air conditioning consumption the benefits are outweighed by the costs by just over $1,000 per NMI, in present value terms. The results indicate that the cost of a smart metering meter as compared to replacing the existing meter stock when they fail is approximately the same. This means that the communication s costs need to be recovered through the benefits that are derived from the capability of remote reading amongst others as a consequence of the smart metering infrastructure. The Engawala case study highlights that for smaller communities being considered for a smart metering roll out, it is likely that even with some form of load control benefits it would still not be sufficient to deliver economic benefits. For Engawala as compared to Sandstone, 61 it is not located in a sufficiently remote area of the Northern Territory such that the cost of providing communications infrastructure as part of a smart metering infrastructure roll out would be outweighed by the anticipated avoided meter reading costs alone. 61 See appendix D.3 for more details on the results for Sandstone in Western Australia. NERA Economic Consulting 56

72 Appendix B B.2. Case study 2: Nguiu (Bathurst Island) B.2.1. Community characteristics Nguiu has been included as a medium sized community off-grid case study. It has 520 electricity meters, of which 51 per cent are prepayment meters. Located 70 kilometres north of Darwin on Bathurst Island, Nguiu is primarily an indigenous community with a population of approximately 1, Tiwi is the language of the indigenous population on the island. 63 Outlined in the following table is a selection of socioeconomic and demographic statistics for Nguiu. Average age Per cent indigenous Unemployment rate Median individual weekly income (per cent of national) 25 94% 11% 44% Source: ABS 2007: Cat. No Census Tables Nguiu experiences tropical conditions and well-defined wet and dry seasons. The monsoon wet season runs from around October/November to February/March with extended periods of continuous heavy rainfall. During the wet season, day and night temperatures are on average lower than in the dry season. There are no roads to Nguiu and all supplies are transported either via a barge from Darwin or through the airport. The Bathurst Island airport has a night and day tarmac landing strip and there are daily flights to and from Darwin, except during severe storms. 64 The services/facilities available in Nguiu include: a licensed club/pub; a medical clinic; a Centrelink agency; EFTPOS; a Commonwealth Bank agency; a post office; a grocery store Northern Territory Police website, available at: General Practice Network NT Ltd, Community Profile Nguiu, available at: Ibid. NERA Economic Consulting 57

73 Appendix B offering basic groceries, basic hardware, some whitegoods and a limited range of fresh produce; a child care centre; an aged care facility; local council; and a catholic school, which runs a bilingual education program. Power and Water provide utility services on Nguiu including water and sewerage and electricity. Electricity is generated from three diesel generators with a combined capacity of 3.3 MW and water is supplied from a series of bores, all of which are electro submersible and are metered at both the community and household levels. 65 Telecommunication infrastructure in Nguiu includes the Telstra land line and mobile broadband networks. Broadband services would also be available through a commercial satellite service. B.2.2. Costs of smart metering The estimated total cost of a smart metering roll out in Nguiu is approximately $1,260,000 in present value terms. Unlike Engawala, there are a significant number of failed and damaged meters in Nguiu, which is attributed to climatic conditions. This means that an additional 38 per cent of costs are associated with failed or damaged meters Figure B.5. Figure B.5 Costs of a smart meter roll out in Nguiu Back-End IT and NMS 19% Refresh Costs 0% Roll-Out Opex 2% Project Management 1% Installed Meter Cost 26% Initial Audit 0% Back-Haul Communications 0% Communications 14% Failed/Damaged Meters 38% 65 Discussions with Power and Water. NERA Economic Consulting 58

74 Appendix B B.2.3. Benefits of smart metering The total benefits of a smart metering infrastructure roll out in Nguiu are approximately $400,000 in present value terms. Despite assuming reasonably substantial demand control benefits, the net benefits remain negative for Nguiu. This is because unlike Engawala, there are considerably lower customer outage queries, and the cost of meter reading in Nguiu is approximately one third lower than Engawala. This means that the benefits are overall lower in Nguiu as compared to Engawala. The breakdown of benefits for each category is set out in Figure B.6. Figure B.6 Benefits of a smart meter roll out in Nguiu Avoided Meter Costs 32% Customer Outage Queries 4% Connect/Disconnect 0% Hand-Held Computers 4% Meter Reading 60% B.2.4. Load control Power and Water operate three diesel generators on Nguiu, with the communities fuel supply transported by a barge dispatched from Darwin. A consequence, of operating diesel generators is that the marginal cost of producing electricity is substantially greater than in main interconnected networks. This cost differential is further exacerbated by the requirement to transport fuel to isolated communities. The high generation costs mean that there are considerable savings from cycling airconditioners at 50 percent for two hours per day. In Nguiu it is estimated that it would result in savings of approximately $525,000 (in NPV terms) during the assessment period. In NERA Economic Consulting 59

75 Appendix B addition, the reduction in energy consumption would also lower the level of green house gas emissions by $40,000 in present value terms. We have assumed that the penetration of air-conditioning in Nguiu is 92 percent of all households and businesses with a credit meter consistent with the average estimated for the Katherine-Darwin interconnected network. Due to the lower average consumption by customers on pre-payment meters we have assumed that these customers would not have an air-conditioning unit. As a result the level of air-conditioner penetration on Nguiu is assumed to be 47 per cent. The results are summarised in Figure B.7 below. Figure B.7 Net impact of load control $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Cost of Retrofitting Airconditoners with a DRED Reduced GHG Emissions Reduced Energy Generated Again including the potential benefits of control load is not sufficient to present a positive case for the introduction of smart meters in Nguiu. B.2.5. Summary of the results and conclusions Nguiu is a mid sized remote indigenous community that is situated in relatively close proximity to Darwin. That said, as a consequence of the need for equipment and diesel to be transported to Nguiu by barge, the potential load control benefits are significant because diesel is relatively expensive in the community as compared to other locations. This is offset by relatively lower costs of servicing customers by Power and Water Corporation in light of the proximity of Nguiu to Darwin. NERA Economic Consulting 60

76 Appendix B Figure B.8 summarises the results for Nguiu. Figure B.8 Net benefits of a smart meter roll out in Nguiu $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 SMI Costs Business Efficiencies Meter Reading Avoided Meter Replacements Net Impact of Load Control The results indicate that improvements in business efficiencies are not sufficient to warrant the investment in a smart metering system for a community with similar characteristics to Nguiu. In addition, the relatively limited availability of controllable load, because most premises do not have air conditioning, means that the associated potential load control benefits are also not sufficient to deliver a positive net benefit outcome. The Nguiu case study highlights that the availability of a sizeable amount of potentially controllable load in combination with diesel generation and relatively high diesel costs is critical to a net beneficial business case in remote communities. In addition, where meters are read by locals then this is usually achieved at a reasonable cost to the business and so the potential avoided costs of meter reading is relatively low. NERA Economic Consulting 61

77 Appendix B B.3. Case study 3: Tennant Creek B.3.1. Community characteristics Tennant Creek is one of the two off-grid case studies classified as a large community. It has 1,937 electricity meters, of which 23 per cent are prepayment meters. Situated 990 kilometres south of Darwin and 510 kilometres north of Alice Springs, Tennant Creek is a major supply centre in the Northern Territory and has a population of approximately 3,500. The most commonly spoken language is English and of the indigenous languages spoken, the main two are Warumungu and Walpiri. 66 Outlined in the following table is a selection of socioeconomic and demographic statistics for Tennant Creek. Average age Per cent indigenous Unemployment rate Median individual weekly income (per cent of national) 31 49% 7% 76% Source: ABS 2007: Cat. No Census Tables Access to Tennant Creek is by road, along the Stuart Highway, or through the airport. The Stuart Highway is one of the main roads in the NT, however, it is occasionally closed during the wet season due to heavy flooding. Flights between Darwin and Alice Springs stop at Tennant Creek three times a week. 67 Tennant Creek was established in 1934, following one of Australia's last gold rushes. 68 Today, the main industries in Tennant Creek are: General Practice Network NT Ltd, Community Profile Tennant Creek, available at: General Practice Network NT Ltd, Community Profile Tennant Creek, available at: Northern Territory Police website, available at: Tourism NT s Northern Territory Travel Site website, available at: NERA Economic Consulting 62

78 Appendix B farming - Tennant Creek is surrounded to the east by a large expanse of land that supports some of Australia s largest outback cattle stations; mining of gold and other valuable minerals, like manganese and copper; and tourism. Tennant Creek offers all the services you would expect from a major supply centre, including: a police station; schools (including a high school, primary school, pre-school and a child-care centre); service stations; training centres; a supermarket; a butcher; a chemist; a church; service stations; banks; hairdressers; and a motel and caravan parks. Power and Water operates a depot in Tennant Creek and is responsible for the community s water, sewerage and electricity systems. Electricity is generated from a mix of gas and diesel generators. Water is sourced from the artesian basin by bores of which all are electric except for one, which is diesel. 70 There are residential level water meters and a mix of credit and pre-payment meter systems in place for electricity. Pre-payment meters are primarily used on residential indigenous households in and around Tennant Creek. 71 Telecommunication infrastructure in Tennant Creek includes the Telstra land line and mobile broadband networks. Broadband services would also be available through a commercial satellite service. B.3.2. Costs of smart metering The total cost of a smart metering infrastructure roll out in Tennant Creek has been estimated to be approximately $4,200,000 in present value terms. Figure B.9 provides a breakdown of the costs by cost category Discussions with Power and Water. Ibid. NERA Economic Consulting 63

79 Appendix B Figure B.9 Costs of a smart meter roll out in Tennant Creek Retrofitting Water Meters with Communications 15% Roll-Out Opex 1% Refresh Costs 0% Project Management 1% Installed Meter Cost 21% Failed/Damaged Meters 13% Back-End IT and NMS 34% Communications 15% Initial Audit 0% Back-Haul Communications 0% An additional cost in this case study is the cost associated with retrofitting water meters with communications to allow the smart metering infrastructure network to capture information from the water meter and so avoid water meter reading costs in addition to electricity meter reading costs. These costs are relatively substantial, representing 17 per cent of the total costs. B.3.3. Benefits of smart metering The total benefits of smart metering infrastructure in Tennant Creek have been estimated to be approximately $390,000 in present value terms. Figure B.10 outlines the relative benefits from a smart meter roll out in Tennant Creek. NERA Economic Consulting 64

80 Appendix B Figure B.10 Benefits of a smart meter roll out in Tennant Creek Meter Reading 36% Avoided Meter Costs 57% Hand-Held Computers 5% Connect/Disconnect 1% Customer Outage Queries 1% B.3.4. Load control Power and Water operate a mixture of gas turbines and diesel generators in Tennant Creek. However, we have been informed that the marginal generator unit (ie, the one that would not operate in the event of some level of load control) would be the diesel generator. A consequence, of operating diesel generators is that the marginal cost of producing electricity is substantially greater than in main interconnected networks. The high generation costs mean that there are considerable savings from cycling airconditioners at 50 percent for two hours per day. In Tennant Creek it is estimated that it would result in savings of approximately $4.1 million (in NPV terms) during the assessment period. In addition, the reduction in energy consumption would also lower the level of green house gas emissions by $320,000, in present value terms. We have been informed that the penetration of air-conditioning in Tennant Creek is 60 percent of all households and businesses. The results are summarised in Figure B.11 below. NERA Economic Consulting 65

81 Appendix B Figure B.11 Net impact of load control $5,000,000 $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Cost of Retrofitting Airconditoners with a DRED Reduced GHG Emissions Reduced Energy Generated The relatively higher air conditioning penetration in Tennant Creek increases the potential benefits from control load. Higher load control benefits are sufficient to generate a positive case for the introduction of smart meters in Tennant Creek. B.3.5. Summary of the results and conclusions Tennant Creek is a relatively large community compared to other communities in remote areas and so skilled tradespeople and meter reading staff are readily available at a more reasonable cost as compared to more remote and isolated areas. As a consequence the avoided costs associated with a smart metering roll out are relatively more modest. However, the higher penetration of air conditioning in this town as compared to the other two Northern Territory case studies means that the potential demand response benefits are significantly higher. That said, the size of these benefits are critically dependant on the proportion of the load being controlled, which for this study we have assumed a mandatory load control obligation and so the benefits can be considered to be a maximum potential demand response benefit. The net benefits of a roll out of smart metering infrastructure are estimated to be almost $390,000 in net present value terms. Figure B.12 summarises the cost and benefit results for Tennant Creek. NERA Economic Consulting 66

82 Appendix B Figure B.12 Net benefits of a smart meter roll out in Tennant Creek $5,000,000 $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 SMI Costs Business Efficiencies Meter Reading Avoided Meter Replacements Net Impact of Load Control The Tennant Creek case study highlights the link between larger communities and the availability for relatively lower cost staff to provide metering and maintenance services. This reflects the economies of scale associated with the provision of these services in a larger labour market pool. NERA Economic Consulting 67

83 The Costs and Benefits of Smart Metering in Appendix C Appendix C. Smart metering in Queensland remote communities This appendix sets out the results of our analysis for the remote community case studies of Birdsville and Erub (Darnley Island) in remote Queensland. Ergon Energy (Ergon) supply electricity services to 33 communities in Western Queensland, the Gulf of Carpentaria, Cape York, the Torres Strait Islands, as well as Palm and Mornington Islands. All of these communities are isolated and too remote for connection to the national electricity network. Ergon owns and operates 33 off-grid power stations, which provide electricity generation in these remote communities. 72 C.1. Case study 4: Birdsville C.1.1. Community characteristics Birdsville is included in the investigation as a small off-grid case study. It has 93 electricity meters, with no prepayment meters. Located 1700 kilometres west of Brisbane, 1200 kilometres east of Alice Springs and on the border of Queensland and South Australia means that Birdsville is an isolated community. The population of Birdsville is approximately 113 with a relatively low indigenous population (approximately 30 per cent) and English is the primary language spoken. 73 Outlined in the following table is a selection of socioeconomic and demographic statistics for Birdsville Ergon Energy Annual Stakeholder Report 2007/08. ABS 2007: Cat. No Census Tables NERA Economic Consulting 68

84 The Costs and Benefits of Smart Metering in Appendix C Average age Per cent indigenous Unemployment rate Median individual weekly income (per cent of national) 36 30% 8% 125% Source: ABS 2007: Cat. No Census Tables The main road connections to Birdsville are north on the Eyre Developmental Road to Bedourie and east on the Birdsville Developmental Road to Farrars Creek. Birdsville can also be accessed via the airport which has four aircraft services per week on the Brisbane- Mount Isa Circuit as well as weekly flights between Port Augusta and Birdsville. 74 The main source of income in Birdsville is 4WD tourism with the Simpson Desert national park located 65 kilometres to the west. Birdsville also supports the surrounding cattle stations. The services/facilities that Birdsville offers include: an auto and general store; an airport; a police station; a post office; a Queensland Government Agent Program office; a race club; a state school; a pub; a hotel; a caravan park; a community health centre; two petrol stations; a public library; and a museum. Telecommunication services in Birdsville include the Telstra fixed line network, the Optus 2G mobile network, or a satellite network. Ergon is responsible for the electricity supply in Birdsville. Birdsville s electricity is generated through a combination of diesel, LPG and Organic Rankine Cycle (geothermal) generators. There are no pre-payment meters in Birdsville and Ergon has a local contractual arrangement in Birdsville for reading the credit meters. 75 C.1.2. Costs of smart metering Birdsville is a small and very remote community that does not have easy access to communications infrastructure to provide back haul services to support a smart metering system. As a consequence the cost of providing smart metering infrastructure is estimated at approximately $360,000 in present terms, which is almost $4,000 per meter installation. The large cost is a consequence of the significant investment in communications infrastructure that would be required to provide reliable backhaul communications for a smart metering system in the absence of access to a 3G network. The proposed system reflects the cost of setting up a mesh radio system linked to satellite communications, in the absence of Ergon having pre-existing data bandwidth with a satellite communications provider. Backhaul communications infrastructure costs reflect over 33 per cent of the total cost of a roll out of smart metering infrastructure in Birdsville Figure C Diamantina Shire council website, available at: Discussions with Ergon. NERA Economic Consulting 69

85 The Costs and Benefits of Smart Metering in Appendix C Figure C.1 Costs of a smart meter roll out in Birdsville Refresh Costs 0% Project Management 2% Roll-Out Opex 8% Installed Meter Cost 22% Back-End IT and NMS 17% Failed/Damaged Meters 7% Initial Audit 3% Communications 8% Back-Haul Communications 33% C.1.3. Benefits of smart metering The total benefits of smart metering infrastructure in Birdsville have been estimated at approximately $80,000 in present value terms. The relatively low amount of costs to be avoided by the business reflects access to relatively low cost providers of meter reading services and the relatively low number of connections and disconnections in Queensland based on operational policies (eg, a premise is not automatically disconnected upon a resident moving out). This means that the opportunity to avoid costs is lower in Ergon Energy s area of operations as compared to Power and Water Corporation and Horizon Power, which have different operational approaches to connections and disconnections. As a consequence, the benefits are dominated by avoided manual meter reading costs, followed by avoided customer outage queries and avoided meter costs Figure C.2. NERA Economic Consulting 70

86 The Costs and Benefits of Smart Metering in Appendix C Figure C.2 Benefits of a smart meter roll out in Birdsville Meter Reading 28% Avoided Meter Costs 42% Connect/Disconnect 18% Customer Outage Queries 12% C.1.4. Load control The electricity grid in Birdsville is powered by diesel generators, as a result the marginal cost of producing electricity is substantially greater than in main interconnected networks. The high generation costs mean that there are considerable savings from cycling airconditioners at 50 percent for two hours per day. The potential benefits from load control in Birdsville level is higher than the Northern Territory case studies as the average household consumption in 2008 was 10,399 kwh per annum with air-conditioner penetration of 99 per cent. The higher annual consumption rate reflects the higher median income of Birdsville as well as its attributes as a tourist destination. We estimated that load control could result in potential savings of around $173,000 (in present value terms) during the assessment period. In addition, the reduction in energy consumption would also lower the level of green house gas emissions by $13,000, in present value terms. The results are summarised in Figure C.3 below. NERA Economic Consulting 71

87 The Costs and Benefits of Smart Metering in Appendix C Figure C.3 Net impact of load control $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Cost of Retrofitting Airconditoners with a DRED Reduced GHG Emissions Reduced Energy Generated C.1.5. Summary of the results and conclusions The net benefits of a roll out of smart metering infrastructure in Birdsville are negative $280,000 in present value terms, excluding potential load control benefits. Including the maximum potential load control benefits lowers the negative net benefit to $113,000 in present value terms. While this large negative outcome is dominated by the high communications infrastructure costs, it also reflects the relatively smaller avoided cost benefits believed to be achievable from a smart metering system. Figure C.4, summarises the costs and benefits results for Birdsville. NERA Economic Consulting 72

88 The Costs and Benefits of Smart Metering in Appendix C Figure C.4 Net benefits of a smart meter roll out in Birdsville $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 SMI Costs Business Efficiencies Meter Reading Avoided Meter Replacements Net Impact of Load Control This case study highlights the additional costs associated with providing a dedicated backhaul communications system to support smart metering infrastructure in the absence of readily available alternatives such as 3G in a remote community. It demonstrates that smart metering infrastructure is unlikely to be economically viable for communities for which access to a cost effective communications backhaul infrastructure is available. C.2. Case study 5: Erub (Darnley Island) C.2.1. Community characteristics Erub (Darnley Island) is included in the study as one of the three medium sized community case-studies. It has 118 electricity meters, of which all residential meters are prepayment. NERA Economic Consulting 73

89 The Costs and Benefits of Smart Metering in Appendix C Erub is an indigenous community situated in the Torres Strait, 840 kilometres north of Cairns with an approximate population of 320. Australian indigenous languages are the most commonly spoken at home on Erub. 76 Outlined in the following table is a selection of socioeconomic and demographic statistics for Darnley Island. Average age Per cent indigenous Unemployment rate Median individual weekly income (per cent of national) 24 91% 6% 55% Source: ABS 2007: Cat. No Census Tables Erub is supplied via either a barge or through the island s airport. The main sources of employment on the island are in either local government administration or the local fishing industry. Major facilities available on Erub include: a health centre; a school; a post office and an Island Industries Board store. Ergon provides electrical supply on Erub through four 125 kw diesel generators. All household electricity meters on Erub are pre-payment, which are read once a year as part of Ergon s annual audit process. Ergon maintains a presence on Erub with a local community liaison officer responsible for the general maintenance of the electricity system, including meters. In the event that a meter requires replacement or repair, Ergon dispatches maintenance teams from Thursday Island or Cairns. C.2.2. Costs of smart metering The total cost of a roll out of smart metering infrastructure on Erub has been estimated to be approximately $870,000 in present value terms. Like Birdsville, Erub is not serviced by a 3G network being located closer to Papua New Guinea than Australia, and as a consequence would be required to install a dedicated backhaul communications system to support a smart metering infrastructure roll out. Figure C.4 sets out the proportion of total costs for each of the main cost categories. 76 ABS 2007: Cat. No Census Tables NERA Economic Consulting 74

90 The Costs and Benefits of Smart Metering in Appendix C Figure C.5 Costs of a smart meter roll out in Erub (Darnley Island) Back-End IT and NMS 15% Refresh Costs 0% Project Management 1% Roll-Out Opex 4% Installed Meter Cost 12% Initial Audit 2% Back-Haul Communications 23% Failed/Damaged Meters 37% Communications 6% C.2.3. Benefits of smart metering The benefits of a roll out of smart metering infrastructure on Erub have been estimated to be approximately $114,000 in present value terms. The opportunities for a smart metering system to deliver business efficiency benefits on Erub are limited because all of the meters on Erub are prepayment meters and so are not manually read by Ergon. This also means that there are no connection /disconnection costs incurred by Ergon. The only benefit is therefore those associated with the avoidance of costs for replacing the existing meter stock. While these costs are relatively high compared to the other case studies, reflecting the relatively high cost of a prepayment meter, the avoided costs are not sufficient to justify the roll out of smart metering infrastructure. C.2.4. Load control Ergon owns and operates a number of diesel generators on the island and as a result the marginal cost of producing electricity is substantially greater than in main interconnected networks. The higher cost of generation in Erub is also exacerbated by the community s isolation which increases the cost of transporting fuel to the island. The potential benefits from load control in Erub level is also high with an average household consumption of 8,455 kwh in 2008 and an air-conditioner penetration rate of 99 per cent. NERA Economic Consulting 75

91 The Costs and Benefits of Smart Metering in Appendix C We estimated that load control could result in potential savings of around $355,000 (in present value terms) during the assessment period. In addition, the reduction in energy consumption would also lower the level of green house gas emissions by 1,971 tonnes over the assessment period. The value of reduced emissions is estimated to be $30,000, in present value terms. The results are summarised in Figure C.6 below. Figure C.6 Net impact of load control $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 Cost of Retrofitting Airconditoners with a DRED Reduced GHG Emissions Reduced Energy Generated C.2.5. Summary of the results and conclusions The net negative benefit of a smart metering roll out on Erub has been estimated as approximately $757,000 in net present value terms without load control benefits. The inclusion of the maximum potential load control benefits does not result in a positive case with the net negative benefits falling to $407,000, in present value terms. The large negative result reflects the lack of any substantial benefits from such a system in light of existing metering stock being prepayment meters, and the very high back haul communication costs that would need to be installed. Figure C.7 summarises the costs and benefits associated with a roll out of smart metering infrastructure on Erub. NERA Economic Consulting 76

92 The Costs and Benefits of Smart Metering in Appendix C Figure C.7 Net benefits of a smart meter roll out in Erub (Darnley Island) $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 SMI Costs Avoided Meter Replacements Net Impact of Load Control The Erub case study highlights the relatively limited benefits of a smart metering infrastructure system in communities dominated by prepayment meters. NERA Economic Consulting 77

93 The Costs and Benefits of Smart Metering in Appendix D Appendix D. Smart metering in Western Australian remote communities This appendix sets out the results of our analysis for the small remote community case studies of Denham, Sandstone, and Karratha in Western Australia. Horizon Power (Horizon) supply electricity services to remote communities not connected to the South West Interconnected System (SWIS). Horizon s service area covers 2.3 million square kilometres and covers the Kimberley, Pilbara, Gascoyne, Mid West and southern Goldfields (Esperance) regions. Within this area Horizon provided electricity to 35 noninterconnected systems, which are serviced by 6 Horizon depots. 77 Many customers of Horizon Power also receive rebates designed to offset the cost of using air conditioners during the hottest months of the year. For example, the WA Government provides a rebate for up to 200 kilowatt hours of electricity per month to WA Seniors Card holders who also holds either a Pensioner Concession Card, Commonwealth Seniors Health Card or are eligible for the Dependent Child Rebate. The persons must live north of the 26 th parallel and/or north of the 50 day Relative Strain Index line determined by the Bureau of Meteorology. D.1. Case study 6: Denham D.1.1. Community characteristics Denham is included as a medium sized community and has an approximate population of 610. It has 670 electricity meters, with no prepayment meters. Located 830 kilometres north of Perth on the Peron Peninsula, Denham was once a pearling port but is now better known for its prawns, oysters and fishing. Denham serves as the main township for tourists wanting to visit Monkey Mia and Shark Bay. Denham is also a 77 Horizon Power Annual Report NERA Economic Consulting 78

94 The Costs and Benefits of Smart Metering in Appendix D retirement destination. Outlined in the following table is a selection of socioeconomic and demographic statistics for Denham. Average age Per cent indigenous Unemployment rate Median individual weekly income (per cent of national) 47 12% 3% 88% Source: ABS 2007: Cat. No Census Tables As well as road access, there is also an airport located at nearby Shark Bay, 7 kilometres to the north east. Facilities and services available in Denham include: a Water Corporation depot; a police station; the Department of Environment office; motels and other forms of accommodation; restaurants; a primary and high school; a hospital; supermarkets; two petrol stations; and a hardware store. The WA State government provides an air conditioning rebate to eligible seniors and to concession card holders with dependent children. The rebate is equivalent to cost of 200 kwh per month over the months of December to January to offset the electricity cost of operating an air conditioner. Horizon provides electricity services within the community with power being generated by combination of wind and diesel generators. Horizon has a contractual relationship with a local electrical tradesman that deals with most electricity faults. Those issues that cannot be dealt with by the local contractor will require a maintenance crew to be dispatched from the Carnarvon service depot (660 kilometres round trip by road). Telecommunication services available in Denham for metering includes 3G mobile services, satellite broadband and the public switch telephone network. Water Corporation, not Horizon, is responsible for the provision of water services in Denham. D.1.2. Costs of smart metering The cost of a roll out of smart metering infrastructure in Denham has been estimated as approximately $1,200,000 in present value terms. The largest cost is associated with the smart meter, followed by a high proportion of failed/damaged meters and then communications costs 78 Figure D.1. Denham has a relatively high average cost of smart meters compared with the other case studies, reflecting the higher proportion of three phase meters installed in the community. 78 We have assumed that a mesh radio system is used to communicate within the local network. It is possible that a 3G local network might be more cost effective particularly in smaller communities in which case the local network costs would be lower than assumed in our case study. NERA Economic Consulting 79

95 The Costs and Benefits of Smart Metering in Appendix D Figure D.1 Costs of a smart meter roll out in Denham Refresh Costs Project Management 1% 2% Back-End IT and NMS 7% Back-Haul Communications 1% Roll-Out Opex 3% Installed Meter Cost 25% Communications 23% Failed/Damaged Meters 38% D.1.3. Benefits of smart metering The total benefits of a roll out of smart metering infrastructure have been estimated as approximately $560,000 for Denham. In addition to replacing expensive three phase meters, the principal benefit arises from avoided manual meter reading costs (27 per cent of total benefits). This reflects the relatively high cost of having meters read every two months in remote communities. The breakdown of benefits for each category is provided in Figure D.2. NERA Economic Consulting 80

96 The Costs and Benefits of Smart Metering in Appendix D Figure D.2 Benefits of a smart meter roll out in Denham Manual condition monitoring of transformers 2% Meter Reading 27% Avoided Meter Costs 69% Hand-Held Computers 1% Connect/Disconnect 1% D.1.4. Load control Horizon owns and operated a mixture of wind and diesel generators around Denham. However, we have been informed that the marginal generator (ie, the generator that would lower its output in the event that energy conservation were to occur) is the diesel generator and as a result the marginal cost of producing electricity is substantially greater than in main interconnected networks. The potential benefit from load control in Denham is relatively high as air-conditioner penetration is estimated to be 100 per cent. We estimated that maximum possible savings from load control would be in the region of $2.3 million (in present value terms) during the assessment period. In addition, the reduction in energy consumption would also lower the level of green house gas emissions by 12,212 tonnes over the assessment period. The value of reduced emissions is estimated to be $186,000, in present value terms. The results are summarised in Figure D.3 below. NERA Economic Consulting 81

97 The Costs and Benefits of Smart Metering in Appendix D Figure D.3 Net impact of load control $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Cost of Retrofitting Airconditoners with a DRED Reduced GHG Emissions Reduced Energy Generated D.1.5. Summary of the results and conclusions Denham is a medium sized remote tourist town community where the cost of a smart metering roll out is not expected to outweigh the benefits, despite the relatively high avoided manual meter read costs. The net benefits of a smart metering roll out in Denham have been estimated as negative $618,000 in net present value terms. The overall costs and benefits for Denham are summarised in Figure D.4. NERA Economic Consulting 82

98 The Costs and Benefits of Smart Metering in Appendix D Figure D.4 Net benefits of a smart meter roll out in Denham $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 SMI Costs Business Efficiencies Meter Reading Avoided Meter Replacements Manual Condition Monitoring of Transformers Net Impact of Load Control The Denham case study highlights that a roll out of smart metering infrastructure is not likely to be economically justifiable at this time for most medium sized remote communities. Denham together with the other Western Australian case studies has significantly higher avoided meter replacement costs compared to the case studies in Queensland and the Northern Territory. This reflects the requirement on Horizon to replace existing meters to meet the WA meter accuracy standards. However, if air conditioner load control is feasible in Denham then the opportunity for a smart metering system to be economically net beneficial increases substantially. This highlights the considerable economic benefits arising from energy conservation in circumstances where customers do not currently pay the actual cost of providing electricity in each region. Providing energy conservation via direct load control or alternative policy measures has not been examined as part of this study. NERA Economic Consulting 83

99 The Costs and Benefits of Smart Metering in Appendix D D.2. Case study 7: Karratha D.2.1. Community characteristics Karratha is the largest of the case studies chosen, with an approximate population of 12,000. It has 7,600 electricity meters, with no prepayment meters. Karratha is located approximately 1,500 kilometres north of Perth and 850 kilometres south of Broome on the North West Coastal Highway. Outlined in the following table is a selection of socioeconomic and demographic statistics for Karratha. Average age Per cent indigenous Unemployment rate Median individual weekly income (per cent of national) 30 6% 2% 202% Source: ABS 2007: Cat. No Census Tables In addition to the port at Dampier, there is both road and air access to Karratha. The Karratha airport is the second busiest in Western Australia, with Perth being the busiest. 79 Karratha has a tropical climate and experiences a wet and dry season, with the wet season starting approximately in January and ending around July. Karratha borders the Dampier Port, which services the area s iron ore operations, sea-salt mining, ammonia exports and natural gas exports. The majority of employment stems from these operations as well as the service industry within Karratha. As a result, a significant portion of the population of Karratha are employed by large energy and mining companies. A common entitlement for energy and mining employees is for the electricity bills to be paid by the company. Furthermore, the WA State government provides an air conditioning rebate to eligible seniors and to concession card holders with dependent children. The rebate is equivalent to cost of 200 kwh per month over the October to April period to offset the electricity cost of operating an air conditioner. 79 Karratha_Airport. Reference.com. Wikipedia, the free encyclopaedia. Available at: NERA Economic Consulting 84

100 The Costs and Benefits of Smart Metering in Appendix D Karratha offers all the facilities and services expected from a significant community, ie, police stations, hospitals, schools, shops, government etc. Karratha is also the location of Horizon s head office and service depot. Horizon is responsible for distributing and retailing electricity in Karratha. Currently, electricity is purchased by Horizon from mining companies. However, two 40 MW open cycle gas turbines will be commissioned by Horizon in the first half of With the commissioning of the new generators Horizon will also be responsible for generating the power needs for Karratha. Telecommunication services available in Karratha for metering includes Next-G mobile services, satellite broadband and the public switch telephone network. Water Corporation, not Horizon, is responsible for the provision of water services in Karratha. D.2.2. Costs of smart metering Karratha is the largest community that has been examined as part of this study, with over 7,600 meters in total. As a consequence the total cost of a roll out of electricity smart metering infrastructure in Karratha is the highest of all of the case studies at over $7.7 million. The largest cost is associated with the provision of smart meters, followed by the cost of establishing a localised (ie, mesh radio) and backhaul communication system Figure D Figure D.5 Costs of a smart meter roll out in Karratha Back-End IT and NMS 10% Refresh Costs 1% Project Management 3% Roll-Out Opex 4% Installed Meter Cost 46% Communications 31% Failed/Damaged Meters 5% 80 Horizon notes in its submission that the cost of communications in the draft report for Karratha was extraordinarily high. This relatively high cost reflects an assumption that smart metering infrastructure in Karratha would be serviced by a mesh radio system for which there would be once off set up costs. These initial communications costs would be significantly lower in those small remote communities (eg, Sandstone) where an existing 3G network was used to communicate directly with meters. NERA Economic Consulting 85

101 The Costs and Benefits of Smart Metering in Appendix D D.2.3. Benefits of smart metering The total benefits of a roll out of smart metering infrastructure in Karratha have been estimated as approximately $6,500,000 in present value terms. The principal benefit after the avoided meter costs are the avoidance of customer outage queries, followed by avoided manual meter reading costs and costs associated with customer outage queries Figure D.6. Figure D.6 Benefits of a smart meter roll out in Karratha Manual condition monitoring of transformers 0% Meter Reading 34% Avoided Meter Costs 51% Hand-Held Computers 0% Connect/Disconnect 3% Customer Outage Queries 12% D.2.4. Load control Horizon will commission two CCGT units in Karratha by mid As a result, the marginal cost of producing electricity is less in Karratha compared to the other case studies, with the cost of generating electricity more in line with that observed in the main interconnected networks. However, the potential benefits from load control in Karratha are significant due to the near universal ownership of air-conditioners by households and businesses. We have estimated that load control could result in potential savings of around $3.3 million (in present value terms) during the assessment period. In addition, the reduction in energy consumption would also lower the level of green house gas emissions by 70,147 tonnes over the assessment period. The value of reduced emissions is estimated to be $1.1 million, in present value terms. NERA Economic Consulting 86

102 The Costs and Benefits of Smart Metering in Appendix D We understand that it is unlikely that this level of load control savings could be achieved in Karratha due to the significant subset of customers that are employed by large mining and energy companies and have their electricity costs included in their remuneration package. The results are summarised in Figure D.7 below. Figure D.7 Net impact of load control $5,000,000 $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Cost of Retrofitting Airconditoners with a DRED Reduced GHG Emissions Reduced Energy Generated D.2.5. Summary of the results and conclusions The net benefits of a roll out of smart metering infrastructure in Karratha is negative $1,200,000 in present value terms if no load control benefits are considered. On a per NMI basis the net benefits are negative $143 which reflects the relatively lower costs of rolling out smart meters in large communities combined with the requirement for Horizon to replace existing meters. When potential load control benefits are included there is a positive case for the introduction of smart meters in Karratha. Figure D.8 summarises the benefits and costs of a roll out of smart metering infrastructure in Karratha. NERA Economic Consulting 87

103 The Costs and Benefits of Smart Metering in Appendix D Figure D.8 Net benefits of a smart meter roll out in Karratha $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 SMI Costs Business Efficiencies Meter Reading Avoided Meter Replacements Manual Condition Monitoring of Transformers Net Impact of Load Control The Karratha case study highlights that there are unlikely to be significant economies of scale associated with a roll out of electricity smart metering infrastructure. As such, in the absence of wider demand control benefits, it is unlikely that many remote communities in Western Australia could justify a roll out of smart metering infrastructure at least based on current costs. D.3. Case study 8: Sandstone D.3.1. Community characteristics Sandstone is one of the case-studies classified as a small community, with a population of approximately 120. It has 50 electricity meters, with no prepayment meters. NERA Economic Consulting 88