September A report for British Gas

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1 The The economic value of contribution smart metering of BAE to Systems to the Great UK in Britain 2009 September 2012 A report for British Gas

2 Contents Executive Summary Introduction Smart metering in GB Study objectives Benefits of smart metering to GB Energy demand reduction Literature review of energy reduction from smart metering Meter reading savings for customers Carbon savings Energy demand shift - consumer savings Efficiency savings for the energy industry Competition benefits Market Development Smart Grid Benefits of the supplier-based approach to smart metering roll-out Costs of smart metering Net benefits of smart metering to GB Appendix A Appendix B Appendix C... 28

3 Executive Summary The Government has committed to a programme of rolling-out smart gas and electricity meters into homes and smaller businesses in Great Britain by the end of In-home displays providing real-time energy use and cost information will also be offered to every home. Smart metering will have wide ranging benefits for consumers, businesses, energy suppliers, energy networks and wider society. An assessment of the benefits and costs of the smart metering programme in this study concludes there is expected to be a positive Net Present Value of just under 14 billion to Great Britain from (cumulative, 2011 prices). Cumulative net benefits rise throughout the assessment period to Energy use savings for households and businesses are one of the key benefits. A review of the literature in this study led to a conservative estimate of a 5% reduction in household electricity and gas consumption. Businesses are assumed to reduce their electricity and gas consumption by just under 5% due to smart metering, which is towards the low end of the savings range found in past studies. Quantified benefits of smart metering include energy use reduction, meter reading time savings for customers and efficiency savings for the energy market. The total of quantified benefits is 25.3 billion in present value terms from (cumulative, 2011 prices). Though not quantified other important benefits of smart metering include increased competition in the energy market, reduced costs of billing and other enquiries for customers, and potential bill savings for customers through Time-of-Use tariffs. With respect to consumer benefits it is likely that a significant part of energy industry efficiency savings may be passed on to consumers due to competitive pressures in the energy market. Studies by OFGEM, HM Treasury and DECC confirm that the GB energy sector is one of the most competitive in Europe. Smart meters are an essential component of a UK Smart Grid, in which the different parts of the energy network (customers, suppliers, network operators and generators) form an integrated, reliable and secure network to deliver energy at minimum cost and with minimal environmental impact. The smart meter roll-out programme will be achieved through a supplierled approach in which suppliers are responsible for delivering meters and IHDs to all customers that they serve. The supplier-led approach means firms have commercial incentives to reduce costs and maximise consumer benefits from smart meters, which would not be achieved under a "network" approach. A supplier-led approach is thus consistent with customer benefits being at the heart of the case for smart metering. 1

4 Estimates of smart metering costs are based on figures published by DECC. Total costs in present value terms are expected to be 11.5 billion from (cumulative, 2011 prices). 2

5 1 Introduction Box 1.1: Key points The Government has committed to a programme of rolling-out smart gas and electricity meters into homes and smaller businesses by the end of In-home displays providing real-time energy use and cost information will also be offered to every home. The smart meter roll-out will be achieved through a supplier-led approach in which suppliers are responsible for delivering meters and IHDs to all customers that they serve. This study will assess the benefits, costs and net benefits of smart metering from Smart metering in GB The Government has committed to a programme of delivering smart gas and electricity meters 1 into all homes and businesses by the end of Smart meters allow accurate consumption information to be sent automatically to suppliers which will mean an end to estimated-billing. In-home displays (IHDs) will also be provided which will enable households to track their energy usage and costs in real-time. These measures will encourage consumers and businesses to reduce energy use and lead to lower bills. New and innovative energy tariffs enabled by smart metering will potentially stimulate further savings by customers. Reduced energy use will lower GB s carbon emissions and GB companies obligations under the EU Emissions Trading Scheme via lower permit purchases. Smart metering will also enable customers to switch suppliers faster and more easily through the centralising of registration functions within the Data Communications Centre (DCC). This will enhance competition between suppliers, providing further benefits to consumers. Suppliers and energy networks will also benefit from smart metering as it means energy can be delivered to customers more efficiently. A supplier-led approach has been chosen as the most effective way of delivering the programme, as opposed to an alternative network-led approach. Energy suppliers will be required to roll-out smart meters and in-home displays (IHDs) to all households which they serve, and smart meters to all smaller businesses by the end of A smart meter is defined as a meter which, in addition to traditional metering functionality (measuring and registering the amount of energy which passes through it) is capable of providing additional functionality for example two-way communication allowing it to transmit meter reads and receive data remotely. 2 For businesses advanced meters may be installed instead of smart meters if a contractual obligation for an advanced meter is entered into on or before April 2014, and the obligation is satisfied before An advanced meter is defined as a meter which, either on its own or with an ancillary device, stores measured electricity or gas consumption data for multiple time periods, and provides remote access to such data by the licensee. Advanced meters do not have the full functionality of smart meters. 3

6 1.2 Study objectives This study seeks to provide a robust assessment of the benefits to households, small businesses 3 4, suppliers, energy networks and wider society from the proposed roll-out programme of SMETS 5 compliant smart meters. This includes: An assessment of aggregate gross and net benefits (i.e. benefits minus costs) of those elements which can be quantified for the period A discussion of those benefits which cannot be specifically quantified (for example due to a lack of available data or methodological issues) but evidence and theory nevertheless suggests clear benefits will be enabled by smart metering e.g. competition benefits. This report is structured as follows: - Chapter 2 will detail benefits from smart metering for GB consumers, businesses, suppliers, networks, energy generators. This includes those sources of benefits which can be quantified and those which are non-quantified. - Chapter 3 will discuss the benefits of the government s preferred supplier-led approach to rolling out smart meters, as opposed to an alternative network-led approach. - Chapter 4 will present the costs associated with the GB smart meter programme. - Chapter 5 will report net benefits (benefits less costs) of smart metering. The analysis will include discounting future benefits and costs (i.e. present value) to arrive at a net present value (NPV). 3 Small businesses are defined in this study as electricity sites within profile classes 3 and 4, and gas sites with consumption below 732MWh per year. 4 Benefits and costs for smaller businesses under the programme are assessed relative to a counterfactual in which smart/advanced meters penetration reaches almost 50% by 2030 in the absence of intervention. 5 The Smart Metering Equipment Technical Specifications (SMETS) set out the technical specification of meters which are to be rolled-out to UK households and smaller businesses. 4

7 2 Benefits of smart metering to GB Box 2.1: Key points Smart metering will have wide ranging benefits for consumers, businesses, energy suppliers and energy networks. Energy use savings for households and businesses are one of the key benefits. A review of the literature in this study led to a conservative estimate of a 5% reduction in household electricity and gas consumption. Businesses are assumed to reduce their electricity and gas consumption by just under 5% due to smart metering, which is towards the low end of the savings range found in past studies. Quantified benefits of smart metering include energy use savings, meter reading time savings for customers and efficiency savings for the energy market. The total of quantified benefits is 25.3 billion in present value terms from (2011 prices). Though not quantified, other important benefits of smart metering include increased competition in the energy market, reduced costs of billing and other enquiries for customers, and potential bill savings for customers through Time-of-Use tariffs. A significant part of these energy industry efficiency savings may be passed on to consumers due to competitive pressures within the energy market. Studies by OFGEM, HM Treasury and DECC confirm that the GB energy sector is one of the most competitive in Europe. Smart meters are an essential component of a UK Smart Grid, in which the different parts of the energy network (customers, suppliers, network operators and generators) form an integrated, reliable and secure network to deliver energy at minimum cost and with minimal impact on the environment. Smart metering will have wide ranging benefits for consumers, businesses, energy suppliers, energy networks and the wider country. These are summarised below: 1. Energy demand reduction: smart metering and IHDs will encourage households and businesses to reduce electricity and gas consumption. 2. Efficiency savings for the energy market: suppliers, network operators and energy generators will benefit from reduced operational and investment costs in a number of areas, for example avoided meter reading visits, reduced customer queries and quicker fault fixing. A competitive energy market should mean a significant proportion of these savings are likely to be passed on to customers. 3. Carbon-related savings: The generation of electricity and use of gas for consumption in GB causes greenhouse gas emissions. Lower energy demand from smart metering reduces the amount of electricity generated and gas consumed in GB. Smart metering will therefore: 5

8 reduce GHG emissions in non-traded sectors (gas use); and reduce energy generation costs in traded sectors Energy demand shift: smart metering will enable suppliers to offer more Time-of-Use (TOU) tariffs to customers, where the cost of electricity/gas varies according to the time of day (such as Economy 7) or network conditions (e.g. level of demand or wholesale price of energy). The wider use of TOU tariffs can lead to significant shifts in energy use from peak to cheaper off-peak periods and could lead to bill savings for consumers. 5. Meter readings benefits for customers: Manual meter readings will no longer be required as information is sent directly to suppliers from smart meters. This will save customers time as, for example, their time will no longer be occupied by a meter reader, or they will not have to spend time and money on submitting a meter reading over the phone or online. 6. Pre-payment benefits for customers: Households and businesses on pre-payment will benefit from more flexible payment options. For example more widespread direct debit or online payments would save customers time by reducing the need for customers to travel to a retailer to top-up their pre-pay card/key. 7. Competition benefits: competition in energy markets will mean benefits to suppliers from smart metering are likely to be passed on to customers. In addition smart meters will further enhance competition in the energy market by making it easier to switch suppliers, enabling new services (TOU tariffs), improving transparency of energy costs and encouraging energy usage efficiency among customers. 8. Market development: increasing awareness of energy use and costs due to smart metering can help to increase customers focus on energy efficiency. This can stimulate demand for and development of energy efficient products/services such as energy efficient appliances and home insulation. 9. Smart Grid: smart metering is a key component in the development of a smart grid in the UK, in which the different parts of the energy network (customers, suppliers, network operators and generators) form an integrated, reliable and secure network which delivers energy at minimum cost and with a minimal impact on the environment. 6 Emissions resulting from the generation of electricity are part of the EU Emissions Trading Scheme (ETS). A fall in electricity use and generation will therefore not lead to a reduction in carbon emissions as the permission to emit would be traded (sold) to another company. The benefit of reduced electricity consumption is therefore a financial (cost) saving. 6

9 Some of the benefits mentioned above are possible to quantify while others are more difficult to quantify, either because of a lack of data, methodological issues or lack of information at this stage as to the nature of the impact (e.g. tariff types that will be offered to customers). Table 2.1 presents estimates of benefits from smart metering for those areas which could be quantified and highlights those areas which are non-quantified. Table 2.1: Benefits to GB from smart metering, cumulative Benefits to GB cumulative, discounted present value, milions, 2011 prices Household meters Small business meters Total Energy demand reduction 8,978 2,227 11,205 Efficiency savings for energy market 10, ,703 Carbon-related savings 2, ,207 Energy demand shift (consumer savings) Non-quantified Non-quantified Non-quantified Meter reading customer benefits (time only) Pre-payment benefits for customers Non-quantified Non-quantified Non-quantified Competition Non-quantified Non-quantified Non-quantified Market development Non-quantified Non-quantified Non-quantified Smart Grid Non-quantified Non-quantified Non-quantified Total (of quantified) 21,819 3,499 25,317 Source: Oxford Economics, DECC The total of quantified benefits is equal to 25.3 billion in present value terms 7 from (2011 prices). Energy demand reduction and efficiency savings account for the vast majority of benefits at 11.2 billion and 10.7 billion respectively. Carbon-related savings will be an estimated 3.2 billion (present value) over the period, while consumer time savings from the end of meter readings will amount to 203 million. The following sections discuss each of the benefits in more detail, and where relevant explain the methodology and evidence used to quantify the benefit. 2.1 Energy demand reduction A large body of empirical evidence exists on the impact of smart metering and related technology (IHD) on energy reduction. Based on a review of the literature (see Section below) this study assumes a 5% reduction in gas and electricity use for households from smart metering in GB. This accounts for the impact of real-time feedback from IHDs, as well as the savings induced by indirect feedback such as (accurate) historic billing, comparative billing and personalised energy savings advice. Energy use reductions for smaller businesses are 4.7% and 4.3% respectively for electricity and gas, based on a study by the Carbon Trust (2006). These energy savings were applied to meter numbers, smart meter roll-out profile and energy use profile (i.e. KWH per meter for households and businesses) 7 Present value estimates apply a discount to future benefits and costs. The discount rate used is 3.5% consistent with official guidance ( The Green Book, Appraisal and Evaluation in Central Government, HM Treasury). 7

10 which are consistent with DECC assumptions as reported in their April 2012 Impact Assessments on smart metering (see Appendix A for more details). This gave an estimate of total energy saved from smart meters, which was valued according to official guidance 8. The estimated value of energy savings benefits from smart metering is a cumulative 11.2 billion from in discounted present value terms. This consists of 9.0 billion accruing from household energy savings and 2.2 billion from small businesses Literature review of energy reduction from smart metering Household energy reduction The smart meter roll-out in GB will involve IHDs (in-home displays) providing real-time feedback on electricity and gas consumption. Smart metering therefore has the potential to reduce energy consumption through the following channels: 1. Real-time feedback of energy use via IHDs: Real-time displays mean customers are aware of the monetary cost of every-day electricity and/or gas use, inducing behavioural changes e.g. switching lights off, not boiling the kettle more than once. 2. Indirect feedback: Smart meters allow accurate and more frequent billing, avoiding the need for estimated bills, while energy use can potentially be disaggregated by appliance or use type (e.g.lighting, cooker, etc). This enables more effective historic feedback on energy use, in which information/advice on past consumption is provided to consumers which may be split by week/month/quarter/year. It is also enables more effective comparative feedback, in which household/business energy use is for example compared to the average of a relevant household/business type. Historic and comparative feedback are key components of personalised advice. 3. Time of Use (TOU) tariffs: Smart meters will make time variant (e.g. peak and off-peak) tariffs more widely available to customers. Studies invariably find that TOU tariffs lead to shifts in energy demand from peak to off-peak. However some studies also find evidence that overall consumption energy is reduced. The evidence for energy savings from each of these three channels is discussed in turn in the following sections. 8 Official guidance on the valuation of energy is based on the opportunity cost of supplying a unit of energy measured by the wholesale price of gas/electricity plus the cost of transmission and distribution. The impact assessments conducted by DECC are consistent with this treatment of energy use/savings. This method treats energy use as an opportunity cost to society, such that reduced energy use means fewer units of energy need to be supplied and society s resources can be re-directed to other uses. See: Valuation of energy use and greenhouse gas emissions for appraisal and evaluation, HM Treasury & DECC,

11 Past research on the international (non-uk) experience of real-time feedback has mostly focussed on electricity use. This research includes: - Darby (2006) 9 : Referencing mainly studies on household electricity usage in North America this review finds savings are typically of the order of 10% for relatively simple (real-time) displays. - Fischer (2008) 10 : Review of past research finds a wide range of savings for households with respect to electricity consumption usual savings are 5% to 12%. - American Council for an Energy-Efficient Economy (ACEE 2010) 11 : Average of 7% savings for real-time feedback and 14% for real-time disaggregated feedback (i.e. by appliance) from studies around the world. - Empower Demand (European Smart Metering Industry Group, 2011) 12 : Trials of real-time displays reduce energy consumption by 10% on average in Europe; 7% in USA and 12% in Canada. In Ireland the results of smart metering trials were recently published by the Commission for Energy Regulation (CER) 13. The household trials found the following average savings (relative to a control group with no smart metering): - 3.2% electricity savings from a plan which combined a smart meter with an electricity monitor, bimonthly billings and an energy usage statement % gas savings from a plan combining a smart meter with an in-home-display, bi-monthly billings and an energy usage statement. In Great Britain a major trial of smart meters was undertaken by OFGEM and DECC the Energy Demand Research Project (EDRP) 14. The trials were launched in July 2007 and involved four energy companies: EDF Energy Customers Plc, E.ON UK Plc, Scottish Power Energy Retail Ltd and SSE Energy Supply Ltd (EDF, E.ON, Scottish Power and SSE). The trials consistently found around a 3% reduction in energy consumption for households with smart meters and real-time displays. In the case of electricity it appeared that the IHD was the major factor in energy reduction, while with gas consumption it was having a smart meter with little additional effect from the IHD. This may be explained by electricity consumption being connected to more regular activities (such as boiling a kettle) where cost effects are transparent from IHDs. While gas consumption is associated with uses which are judged over a longer-term (e.g. heating), and therefore having smart meter which enables accurate bills is the determining factor. 9 Darby S, The effectiveness of feedback on consumption. A review for DEFRA on the literature on metering, billing and direct displays ; Fischer C, Feedback on household electricity consumption: a tool for saving energy ; Energy Efficiency; Advanced metering initiatives and residential feedback programs: A meta-review for household electricitysaving opportunities ; American Council for an Energy-Efficient Economy, The potential of smart meter enabled programs to increase energy and systems efficiency: a mass pilot comparison ; VaasaETT Global Energy Think Tank, Commission for Energy Regulation, Energy Demand Research Project: Final Analysis ; OFGEM,

12 The EDRP also reports research by Boyd (2008) 15 on the introduction of keypad meters with real-time display functionality in Northern Ireland, where a 1% reduction in electricity usage was found compared with baseline consumption. UK and Ireland studies therefore appear to find impacts which are in the lower range of estimates found internationally. This may be due to the more extreme climates in many international studies which mean there is greater scope for energy reduction from smart metering. A number of studies from North America have been in hotter climates where air conditioning forms a significant part of energy use, while many European studies have been focussed on the colder region of Scandinavia (Norway, Finland, Denmark). Based on the review of the literature this study assumes that the smart meter programme in GB will lead to electricity and gas savings of 3% from smart meters and IHD real-time feedback alone. Note the 3% assumption may be considered a conservative estimate of energy savings that will be realised, as it does not account for additional savings achievable due to the expected introduction of appliance-specific feedback, where real-time energy use feedback for customers is broken down by major appliance (e.g. washing machine, dishwasher etc). Past research has found evidence that appliance-specific feedback can boost energy savings from smart metering 16. As with real-time displays a range of effects has been found in the literature with respect to indirect (historic and comparative) feedback. ACEE (2010) finds enhanced billing interventions, which includes historic and comparative feedback, reduce electricity use by an average of 5.5% in a review of international studies. Meanwhile a literature review performed for the EDRP concludes that supplementary interventions that increase engagement could double or triple the benefit of RTDs, where engagement could include energy efficiency advice, time-of-use tariffs and savings targets. We assume that factoring in indirect feedback (in addition to real-time effects) will raise electricity and gas savings to 5%. Finally, turning to TOU tariffs, studies invariably find these affect peak and non-peak consumption (for example see Faruqui et al (2010) 17 ). However evidence of the impact on overall energy consumption appears to be mixed. That is households may shift their consumption to take advantage of cheaper energy in off-peak periods but their total energy consumption remains the same. In light of this uncertainty we take the conservative view that TOU tariffs do not increase overall energy savings over and above that generated by direct (real-time IHD) and indirect feedback. Small business energy reduction The mechanisms behind energy savings effects for business are similar to those for households. A key difference for small businesses is that IHDs are not mandated in the smart-meter roll-out. However it is envisaged that businesses will be provided with the facility to access accurate and timely information of their energy use, possibly via online tools. For example British Gas s Business Energy Insight TM 15 Boyd J (2008) Managing residential electricity demand: learning from experience in the UK and Ontario. Presentation to UKERC seminar, May See for example ACEE study (footnote 9). 17 Unlocking the EURO53 billion savings from smart meters in the EU: How Increasing the adoption of dynamic tariffs could make or break the EU s smart grid investment, Faruqui et al (2010). 10

13 (described below) already offers customers online information on daily energy consumption and costs. However it is unlikely smaller businesses users would monitor energy use on a real-time basis to the same extent as households, and information would be viewed on a more discretionary on-demand basis. Past research on the scale of energy reduction achievable from smart metering is limited however. One relevant study was a trial of advanced metering for Small-Medium Enterprises undertaken by the Carbon Trust (2007) 18. Of note is that accurate billing was not offered to most smaller business sites as part of the trials and they continued to receive estimate bills. The trials tested three different types of schemes: 1. Data Only: Consumption data was usually via a website, with online tools provided to allow basic analysis of consumption profiles. 2. Data and Advice: As above but in addition a review of energy use and basic energy savings advice were also provided via Personal Contact: Provided consumption data and detailed discussion of energy use via site visit or phone-call along with site-specific recommendations. The Data Only scheme led to the smallest energy savings, with identified (i.e. potential) savings of 10% and implemented savings of 3%. The Data and Advice scheme resulted in identified savings of 15% and implemented savings of 7.5%, which was higher than that achieved under the Personal Contact scheme which saw corresponding savings of 12.5% and 5%. Thus, interestingly simpler, generic advice delivered by appeared to be more effective than personalised advice involving a site visit or phone-call. Overall, across all sites 19, the study found average identified (i.e. potential) savings of 12.1% for electricity 7.2% for gas, while actual implemented savings were 4.7% for electricity and 4.3% for gas. Research has also been undertaken recently on the impact of Business Energy Insight TM, which is a British Gas web-based service allowing businesses with smart meters to track their energy usage, view reports on historical energy usage and receive tailored advice on energy use reduction. This research suggests much higher savings can be realised than those seen in the Carbon Trust study. British Gas experience also suggests that on-site visits plus tailored advice can make a significant difference to business energy savings, and thus the Carbon Trust s findings that personalised advice is less effective than generic advice does not appear to be universal. This study assumes the implemented energy savings from the Carbon Trust (4.7% for electricity and 4.3% for gas) to quantify energy benefits from smaller businesses. This may be considered a conservative view as the Carbon Trust results are towards the lower range of savings found in the two studies described above. 2.2 Meter reading savings for customers Another potentially significant area of benefits is the time and money savings for households and businesses from the ending of meter-read visits and/or self-meter reads. For example people will no 18 Advanced metering for SMEs, Carbon and cost savings, Carbon Trust, Presumably across all schemes. 11

14 longer have their leisure time taken up by meter read visits from suppliers, or if they miss a meter-read visit no longer have to submit a reading by phone or online. In addition, enquiries connected to estimated bills by households and businesses will stop, saving time and money (e.g. phone bills). DECC reports that inbound call volumes could fall by 30% based on evidence from suppliers. With 43 million domestic gas/electricity credit meters and 3.8 million smaller business meters in GB (and meters being read up to four times a year in many cases) the benefits may be significant. Households This study quantifies the time savings (in monetary terms) of meter reads no longer occurring. As the pure monetary savings are not quantified (e.g. reduced phone bills from no longer having to call suppliers with self-meter reads) the estimated benefit of smart metering from this channel may be considered a conservative estimate. If a household s meter is located outside and/or accessible to the meter reader without having to disturb the household s occupants then we assume no time savings result from smart metering. Otherwise, if the meter is located inside the premises, we assume one of two outcomes can occur when a meter reading is attempted: 1. The meter reading visit is successful as someone at the property is present. In this case we assume that someone in the household has his/her leisure time taken up by the visit (i.e. to let the meter reader into the premises, show the meter reader where the meter is etc.). It could be argued that the visit requires minimal action from the householder, as he/she does not actually have to read and note down the meter reading. However, the householder is occupied for the duration of the meter read, and given a choice the householder would not have elected to spend their leisure time on the meter read visit. We therefore assume that the visit takes away from the householder s leisure time at a (conservative) rate of 2 minutes per meter reading visit i.e. smart metering enables a time saving of 2 minutes. 2. The meter reading visit is unsuccessful as no-one at the property is present. In this case a number of scenarios may follow: a. A meter reading is submitted by a member of the household via the internet. This involves reading the meter, logging into the household s internet user account and submitting the reading. b. A meter reading is submitted over the phone. Similar to online meter read submissions the householder must read the meter, call the supplier (and wait to get through) and give the meter reading. c. A meter reading is written on a card provided by the supplier and left for the meter reader to collect. d. There is a second meter read visit attempt by the supplier and the household arranges for someone to be present for the new visit. In many cases this may involve people changing their schedule to be at home for example working from home. So there may be costs from the inconvenience of the re-arranged visit, as well as the time costs of the meter reading itself. For scenarios a) through d) above we assume conservatively that each costs a householder 2 minutes of leisure time i.e. smart metering leads to a saving of 2 minutes. It may be considered 12

15 conservative particularly with reference to the inconvenience of someone changing their schedule to be present at a second attempted meter read. In addition we do not account for the monetary cost for households of submitting meter reads by phone. Key data sources for the valuation of time savings from reduced meter reads include: - The number of smart meters from The proportion of meters located outside (estimate provided by British Gas). - Estimates of the number of unsuccessful meter readings are based on ONS data on the numbers of working/non-working households, on the assumption that working households are normally unoccupied during the day. - Figures published by OFGEM suggest around 55% of households are dual fuel customers. We assumed this halves the time taken to read an electricity or gas meter for these households, as the electricity and gas reading can be taken and/or submitted at the same time. - We assume two meter readings a year for a non-smart meter, which is a conservative assumption as for example British Gas aim for four readings per year. - The value of leisure time ( per hour) is consistent with official guidance 20. Overall, we estimate that the cumulative time saving benefits to households from reduced meter reads from is equivalent to 172 million in present value terms. Businesses As with households, visits by suppliers to read non-smart business meters may be successful or unsuccessful. If a meter read is successful, an employee on or connected to the premises would likely have used their work time to allow the meter reader on to the premises and/or show the meter reader where the meter is located (if the meter is located inside). If a meter read attempt is unsuccessful the employee may then have to submit the relevant readings themselves online or over the phone. Either way some part of the working time of an employee on the business premises is likely to be taken up by the meter read. With smart metering and automatic meter readings this employee time is freed-up. Effectively, the employee on the premises would have more time available for other work (assuming the total working time of an employee remains unchanged). We assume that businesses utilise this extra employee time. Thus this freed-up employee time is productive time and creates value for the economy. Key data sources and assumptions for the valuation of time savings from reduced business meter reads include: - The projected number of smart meters from We assume two meter readings a year for a non-smart meter, which as with households is a conservative assumption as for example British Gas aim for four readings a year. - We assume a (non-smart) meter reading takes up two minutes of the time of an employee on the business premises, from either having to accompany the meter reader to the meter (successful visit) or submitting self-reads online or via phone (unsuccessful visits). 20 Values of Time and Operating Costs, TAG Unit 3.5.6, Department for Transport,

16 - Data from British Gas on the proportion of their smaller business customers who have dual fuel plans. We assume this halves the average time taken to read an electricity or gas meter for these businesses, as the electricity and gas reading can be taken and/or submitted at the same time. - The value of the additional productive time is assumed to be equal to the value of working time ( per hour) consistent with official guidance 21. Overall, the estimated cumulative time saving benefits to smaller businesses from reduced meter reads from is equivalent to 31 million in present value terms. 2.3 Carbon savings Lower energy demand from smart metering reduces the amount of electricity generated and gas used for consumption in GB, decreasing the associated carbon emissions. The valuation of these carbonrelated benefits and the impact on overall emissions depends on whether the relevant energy sector is part of the EU Emissions Trading Scheme (ETS): - Electricity generation is a traded sector falling under EU ETS. The emissions allowances saved from lower electricity generation will be traded (sold) under EU ETS such that total global emissions remain unchanged. The allowances saved constitute a financial saving for electricity generators. Following official guidance (and consistent with DECC impact assessment methodology) this study values such traded emissions reductions according to the traded price of emissions Gas consumption by households and small businesses is a non-traded sector. A reduction in gas combustion will therefore lead to an overall reduction in overall global carbon emissions. Following official guidance (and consistent with DECC impact assessment methodology) this study values non-traded emissions reductions according to the non-traded price of emissions 23. Carbon-related benefits from smart metering are reported in Tables 2.2 and 2.3. The total value of carbon-related benefits is 3.2 billion from (discounted present value and 2011 prices), consisting of 2.6 billion from household benefits and 0.6 billion from smaller business benefits. Carbon-equivalent emissions from electricity generation fall by 32.3 million tonnes from However, as noted there is no reduction in overall emissions as this sector is part of EU ETS. Carbonequivalent emissions from gas combustion fall by 49.4 million tonnes, which corresponds with an overall reduction in emissions. 21 Values of Time and Operating Costs, TAG Unit 3.5.6, Department for Transport, Valuation of energy use and greenhouse gas emissions for appraisal and evaluation, HM Treasury & DECC, See footnote

17 Table 2.2: Carbon-related benefits to GB from smart metering, cumulative (present value), milions, 2011 prices Households Small businesses All Electricity (traded) Gas (non-traded) 1, ,260 Total value 2, ,207 Source: Oxford Economics Table 2.3: Carbon (allowance) savings from GB smart metering, cumulative CO2 equivalent savings/allowance savings, , million tonnes Households Small businesses All Electricity (traded) Gas (non-traded) Source: Oxford Economics 2.4 Energy demand shift - consumer savings Smart metering will increase the scope for suppliers to offer customers Time-of-Use (TOU) tariffs, where the cost of electricity/gas varies according to the time of day (such as Economy 7) or network conditions (e.g. level of demand or wholesale price of energy). Suppliers will be able to offer a wider and more innovative range of TOU tariffs to more customers. Customers will therefore potentially benefit from lower bills by shifting their energy consumption to cheaper periods. A number of studies have found significant shifts in energy consumption from peak to off-peak periods as a result of TOU tariffs - for example see Faruqui and Segici (2009) 24. Many of these studies may not be applicable for GB as they are based on trials in North America where the hotter climate and greater use of air conditioning means there may be a much greater scope to change consumption behaviour. Of studies relevant to GB, EDRP trials of smart metering in GB did find evidence of reductions in peak demand of up to 10% for those customers placed on TOU tariffs. In addition the EDRP study reports a study by Boyd (2008) which found a 10-11% peak-time saving in Northern Ireland from TOU tariffs. It is highly likely therefore that smart metering will lead shifting of consumption from TOU tariffs. However without knowledge of the tariff structures that are to be offered or the likely take-up rates it is not possible to robustly quantify potential customer bill savings. 24 Faruqui A & Sergici S, Household response to dynamic pricing of electricity a survey of the experimental evidence,

18 2.5 Efficiency savings for the energy industry Efficiency savings for energy suppliers, network operators and generators are based on estimates published in the latest DECC smart meter impact assessment reports 25. DECC estimates of these benefits are based on extensive consultations with industry experts. We therefore take the view that they are the most robust assessment of industry benefits associated with the smart meter programme in GB. An important consideration is that a significant part of these benefits may be passed on to consumers due to competitive pressures in the energy industry. This is relevant to supplier and generation benefits as competition is present in these two sectors of the market. This issue is discussed in more depth in Section 2.6. Benefits are reported in Table 2.4. Benefits accrue from domestic (household) meters and non-domestic (smaller business) meters. Cumulative industry benefits are 10.7 billion (present value terms and 2011 prices), with domestic metering accounting for the large majority of the total. Explanations of individual benefit in Table 2.4 can be found in Appendix B. Table 2.4: Energy industry benefits from smart metering, cumulative Energy industry benefits from smart metering (present value), milions, 2011 prices Households Small businesses Total Avoided site visits (meter reads, safety inspections) 3, ,334 Reduction in customer enquiries 1, ,088 Reduced customer service overheads Improved management of customer debt 1, ,095 Pre-payment service savings 1,063-1,063 Avoided site visits from remote disconnection Improved detection of energy theft Switching savings 1, ,676 Reduced losses Network capacity investment savings from demand shift Reduction in customer minutes lost Operational savings from fault fixing Improved investment decisions for network operators* Avoided cost of voltage complaints Reduced customer outage enquiries Generation cost savings from demand shift Generation capacity investment savings from demand shift Total supplier/network/generation benefits 10, ,703 Source: "Smart meter roll-out for the domestic sector (GB)" and "Smart meter roll-out for the non- domestic sector (GB)", DECC, April 2012 *Benefits accrue from domestic and non-domestic roll-out but are accredited to domestic sector. 25 Smart meter roll-out for the domestic sector (GB) and Smart meter roll-out for the non-domestic sector (GB), DECC, April

19 2.6 Competition benefits Competition in the GB energy market means that industry savings from smart metering (Section 2.5) are likely to be passed on to consumers. The market for the supply and generation of electricity and gas was liberalised in the 1990s and as a result the GB energy market is considered one of the most competitive in Europe. OFGEM (2008) 26 stated that liberalised markets and independent regulation has brought significant benefits to British consumers, citing a BERR study which found that Britain s energy market is the most competitive in Europe. Meanwhile a recent assessment of the energy market by HM Treasury and DECC (2010) 27 found that liberalisation of the GB market had delivered increased choice in tariffs and services, and highlighted a switching rate of 18% which was the highest in Europe and of any sizable competitive energy market in the world. The assessment also noted that retail prices had generally followed wholesale prices, while suppliers net margins on customer bills have generally been low and suppliers have not been making excess profits in recent years. Smart metering will also enhance competition in the energy market by simplifying and speeding up the process of switching suppliers. It is envisaged that the DCC (Data Communications Centre) will take on registration functions which will create a new centralised system for managing supplier switching requests. This will greatly reduce the time and convenience costs of switching suppliers for customers. In addition energy use and costs become much more transparent to consumers through accurate billing and IHDs, and smart metering will increase customers focus on energy savings. These measures will encourage customers to compare the prices of different suppliers and to seek better deals. Furthermore, smart metering enables suppliers to develop a wider range of services (e.g. TOU tariffs) which can be offered to every household in the country. The above factors combined will increase the potential for switching and drive further competition between energy suppliers. 2.7 Market Development By increasing awareness of energy use and cost, and thus encouraging energy savings, smart meters will help to increase customers focus on energy efficiency. This can stimulate demand for and development of energy efficient products or services such as energy efficient appliances and home insulation. A DECC customer survey 28 on smart metering found that IHDs had an important role in identifying and replacing culprit appliances and fittings that used high amounts of energy, e.g. an ageing fridge freezer. Views expressed by members of the public in the DECC survey on energy efficiency included: We had an old fridge freezer, 30 years old, never realised it was using so much electricity, I worked out it was using 30-40p a day. We replaced it and it s paid for itself in a year. I made a mental note to question all white goods on energy used in the future. 26 Memorandum by the Office of Gas and Electricity Markets (OFGEM), Select Committee on Business and Enterprise, Energy Market Assessment, HM Treasury & DECC, Smart Meters: research into public attitudes, DECC,

20 A study by the Centre for Sustainable Energy 29 found that customer strategies for cutting consumption through switching to lower powered alternatives included looking for energy efficient ratings when buying new appliances. Further evidence of smart metering s ability to drive demand for energy efficient goods and services can be found in a British Gas survey. Based on 700, 12-minute interviews conducted over the telephone, 65% of recent smart meter customers stated that they had undertaken energy efficiency improvements in the home since smart meter installation (48% had installed efficient light bulbs). 2.8 Smart Grid The objectives of a smart grid are based around a reliable and secure network which can deliver energy at minimum cost and with minimal impact on the environment. The Electricity Network Strategy Group s definition of a smart grid is an electricity network that can intelligently integrate the actions of all users connected to it - generators, consumers and those that do both - in order to efficiently deliver sustainable, economic and secure electricity supplies. Successful implementation of a smart grid involves the introduction and upgrading of technology in all parts of the UK energy infrastructure (network, homes, suppliers and power stations) to achieve an energy network with the following characteristics (as set out by DECC 30 ): Observable it will be possible to view a wide range of operational indicators in real-time, including where losses are occurring, the condition of equipment, and other technical information. Controllable it will be possible to manage and optimise the power system to a far greater extent than today. This can include adjusting some demand for electricity according to the supply available, as well as enabling the large scale use of intermittent renewable generation sources in a controlled manner. Automated the network will have a certain level of intelligence and will be able to make certain automatic demand response decisions. It will also respond to the consequences of power fluctuations or outages by, for example, being able to reconfigure itself. Fully integrated smart grid components must work with existing systems. They will also be compatible with other new devices such as smart consumer appliances. Smart meters are thus a critical component of a smart grid due to the previously discussed benefits such as encouraging energy use reduction, energy demand shifting and enabling two-way communications between homes/business and the network. In addition smart meters have export capabilities, enabling measurement of energy delivered into the network from homes/businesses into from renewable sources (e.g. solar or wind power). This support of microgeneration will encourage renewable energy and contribute to meeting the environmental aims of smart grid. 29 Exploring consumer preferences for home energy display functionality, Centre for Sustainable Energy, The opportunities offered by a smarter grid, DECC

21 3 Benefits of the supplier-based approach to smart metering roll-out Box 3.1: Key points The planned supplier-led roll-out means each energy supplier will be responsible for delivering smart meters and IHDs to their own customers. The supplier-led approach means firms have commercial incentives to reduce costs and maximise consumer benefits from smart meters, which would not be achieved under a network approach. A supplier-led approach is thus consistent with customer benefits being at the heart of the case for the smart metering. This section discusses the benefits of the proposed supplier-led approach to rolling-out smart meters, compared to a network-led approach in which roll-out functions are undertaken by a single network body for all customers. A supplier-led roll-out means each energy supplier will be responsible for delivering smart meters and IHDs to their own customers. While a co-ordinated network approach has potentially lower cost implications as meters may be rolled out street by street, in practice it can only be partially achieved in any rollout model. This is because 50% of meters must be replaced randomly as a result of geographically dispersed customer demand/asset life expiry. In addition new legislation and multi-party agreements (between over twenty separate Network Owners and all energy suppliers) would have to be drawn up which may delay the deployment of smart meters and the associated benefits. Those countries that have chosen to roll-out smart metering via network companies have not had the option of a liberalised energy supply market. Many European network led roll-outs have ignored consumer side benefits, leaving them disengaged. In contrast, GB suppliers operating in the present competitive market have commercial incentives to reduce costs and maximise consumer benefits from smart meters. Suppliers would be able to respond to consumers that request smart meters early, thereby delivering benefits sooner and potentially providing role models for friends and neighbours. A supplier-led approach would thus be consistent with customer benefits being at the heart of DECC s case for the smart meter roll-out. 19

22 4 Costs of smart metering Box 4.1: Key points Estimates of smart metering costs are based on figures published by DECC in their April 2012 impact assessments. Total costs in present value terms are expected to be 11.5 billion from (2011 prices). Estimates of the costs of smart metering are taken from figures published in the latest DECC smart meter impact assessment reports 31. DECC cost estimates have been informed by extensive consultations with stakeholders and industry experts regarding the relevant cost elements and the magnitude of such costs. We therefore take the view that they are the most robust assessment of costs associated with the smart meter programme in GB. Table 4.1 summarises DECC cost estimates. Total costs in present value terms are expected to be 11.5 billion from (2011 prices). Further descriptions of each cost element can be found in Appendix C. Table 4.1: Costs to GB of smart metering, cumulative Costs to GB (present value), milions, 2011 prices Household meters Small business meters Total Meters IHDs and equipment cost 3, ,107 Installation of meters 1, ,672 Operation and maintenance of meters Communciations equipment cost 1, ,239 DCC capital expenditure* DCC operational expenditure* Communciations service charge 1, ,392 Suppliers' IT capital expenditure* Supplier operational expenditure* Other industry IT capital expenditure* Other industry IT operational expenditure* Energy cost of smart meters Meter disposal costs Increased cost of manual meter reads Legal and organisational costs* Marketing costs for suppliers* Total 10, ,461 Source: "Smart meter roll-out for the domestic sector (GB)" and "Smart meter roll-out for the non- domestic sector (GB)", DECC, April 2012 * Costs accrue from domestic and non-domestic sector but are accredited to domestic sector 31 Smart meter roll-out for the domestic sector (GB) and Smart meter roll-out for the non-domestic sector (GB), DECC, April

23 Chart 4.1 presents the DECC annual cost profile from The figures shown are undiscounted values (as opposed to discounted estimates reported in Table 4.1). A detailed breakdown of annual costs is not available from the April 2012 Impact Assessment report. However it is reasonable to infer that annual costs increase over the roll-out period due to the initial roll-out of meters, IHDs and as capital and operational expenditure (for suppliers and DCC) kick-in. Post roll-out costs decline but are still significant and can be inferred to be due to operational costs, communications service charges (for households), energy costs (as smart meters consume more energy) and continued installation costs (as meter numbers continue to grow). Chart 4.1: Annual costs of smart metering to GB, Annual costs, millions, present value, 2011 prices 1,400 1, , Source: DECC

24 5 Net benefits of smart metering to GB Box 5.1: Key points Smart metering is expected to generate a positive NPV of just under 14 billion to GB from Undiscounted cumulative net benefits rise throughout the assessment period to reach almost 21 billion by Table 5.1 presents annual benefits, costs and net benefits on an undiscounted basis. Undiscounted cumulative net benefits are reported in the last column. The final row shows discounted net benefits (Net Present Value) from (cumulative). Smart metering is expected to generate a positive NPV of 13.9 billion to GB from (2011 prices). Undiscounted cumulative net benefits meanwhile rise to 20.9 billion by 2030 (Chart 5.1). Table 5.1: Net benefits to GB of smart metering, Undiscounted values ( millions, 2011 prices) Benefits (annual) Costs (annual) Net benefits (annual) Net benefits (cumulative) , , , ,040 1, , ,256 1,146 1,109 3, ,324 1,132 1,191 4, ,403 1,099 1,305 5, ,450 1,082 1,368 7, ,506 1,065 1,441 8, ,583 1,051 1,532 10, ,651 1,037 1,614 11, ,683 1,022 1,661 13, ,745 1,004 1,741 15, , ,804 17, , ,868 18, , ,940 20,861 Discounted Net Present Value ,858 Source: Oxford Economics, DECC 22

25 Chart 5.1: Net benefits of smart metering to GB, cumulative , undiscounted Cumulative net benefits, undiscounted, millions, 2011 prices 25,000 20,000 15,000 10,000 5, ,845 10,231 8,699 7,258 5,890 4,586 2,285 3,394 1, ,506 15,248 17,052 18,921 20, Source: Oxford Economics 23

26 The value of smart metering to Great Britain Appendix A Chart A1.1: Domestic roll-out profile of smart metering Smart meters as % of total Domestic roll-out profile 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Smart meter roll-out for the domestic sector (GB), DECC April 2012 Chart A1.2: Non-domestic roll-out profiles Smart/advanced meters as % of total 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Non-domestic roll-out profile (with GB programme) Non-domestic counter-factual Source: Smart meter roll-out for the non-domestic sector (GB), DECC, April

27 Table A1.1: Domestic smart meter numbers (with GB programme) Domestic smart meters (millions) Electricity credit Electricity pre-pay Gas credit Gas pre-pay Total Source: Oxford Economics estimates based on public information from DECC. Table A1.2: Non-domestic smart meter numbers (with GB programme) Non-domestic smart/advanced meters (millions) Electricity Gas Total Source: Oxford Economics estimates based on public information from DECC 25

28 Appendix B Descriptions of the individual benefits to energy suppliers, networks and generators quantified by DECC are presented below. Avoided site visits (meter read and safety inspections): Costs saved by suppliers due to the end of regular and special meter reading visits. An adjustment is made to account for an increase in the cost of regular safety inspections which will no longer be able to be performed as part of meter reading visits. Reduction in customer enquiries and overheads: Based on evidence from suppliers that inbound call volumes could fall by around 30% producing a 20% saving in call centre overheads. Pre-payment service savings: A number of savings are incorporated, including: avoided site visits to switch customers from credit to pre-pay or vice versa; reduced maintenance costs of smart pre-pay meters; and efficiency savings related to the credit upload system. Improved management of customer debt: Smart metering will reduce the risk of customer debt by encouraging energy usage efficiency, improving monitoring of customers bills and faster switching of from credit to pre-pay meters to help indebted customers. Reduced customer debt will lower the required working capital of suppliers and thus save on an opportunity cost. Switching savings: Accurate billing can reduce potential costs to suppliers of customer switching. In addition further cost savings will result if DCC takes up data aggregation and registration duties. Assumption in this study (following DECC) is that DCC with minimum scope is in place in 2014, with registration added in 2016 and data aggregation added in Improved detection of energy theft: More accurate and frequent data will improve and/or speed up detection of theft. Avoided site visits from remote disconnection: Smart metering enables the remote connection and disconnection of meters, leading to savings from avoided site visits. Avoided losses to network operators: Improved outage detection and management for network operators: Smart metering will mean outages are more quickly identified and resolved. This will reduce customer minutes lost, lower operational expenditure to fix faults and reduce customer calls/enquiries in relation to outages. Improved investment decisions for network operators: more detailed and accurate energy use data from smart meters will lead to more effective network reinforcement investment Avoided cost of voltage complaints: Smart metering will enable voltage complaints to be investigated remotely and reduce site visit costs Generation cost savings from demand shift: Smart metering will encourage the shift of demand from peak to off-peak periods through TOU tariffs. This smoothing out of electricity generation will reduce average costs as the incremental cost of producing a unit of electricity in a given period rises as total electricity generation increases. Generation capacity investment savings from demand shift: The smoothing of energy demand from peak to off-peak periods due to smart TOU tariffs will lower the required peak generation capacity. This will result in investment savings for generation plants. 26

29 Network capacity investment savings: Energy demand shifts from peak to off-peak due to smart meter TOU tariffs will mean long term network peak capacity, and therefore investment in network capacity, can be reduced. 27

30 Appendix C Descriptions of the various cost elements associated with smart metering are provided below. Smart meter, IHD, communications equipment and installation costs: Costs of meters, IHDs, communications equipment (WAN modem for connection to DCC and internal HAN device to connect IHDs with meters) Operating/maintenance costs of meters: DECC assumptions are operating and maintenance costs of smart meters are 2.5% of meter purchase costs based on OFGEM evidence. Communications service charge: Service charge for households of WAN connection to DCC DCC capital expenditure: Capital costs of establishing the Data Communications Centre, including: IT, recruitment of staff, selection of premises and legal fees DCC operational expenditure: operational costs of Data Communications Centre, including: IT, staff wages and rent Suppliers IT capital expenditure: Suppliers capital costs of upgrading IT systems to handle smart metering. This item Includes IT costs of interim solution prior to establishment of DCC to ensure compatibility of smart meters installed before mass roll-out. Suppliers IT operating expenditure: Suppliers operating expenditure due to smart meter roll-out over and above expenditure under the current system. Other industry IT capital expenditure: IT capital costs for network operators and other industry agents. Other industry IT operating expenditure: Network and other industry agents operating expenditure due to smart meter roll-out over and above expenditure under the current system. Energy cost of smart meters: Smart meters, IHDs and communications equipment will leads to increased energy consumption over and above the current system. Meter disposal costs: additional disposal costs associated with the accelerated replacement of meters under the smart meter roll-out programme. Legal and organisational costs: Organisational costs consist of expenditure related to data protection, ongoing regulation, assurance, accreditation, tendering, programme delivery, trials and testing. Marketing costs for suppliers: Costs associated with individual suppliers customer engagement programmes and central/co-ordinated marketing activities. Responses to government consultations indicated strong support for central or co-ordinated programmes. 28

31 Increased cost of manual meter reads: The per meter cost of reading remaining basic meters is likely to increase as the smart meter roll-out progresses. This is due to inefficiencies as basic meter numbers dwindle they will more geographically dispersed and thus travel costs will increase. 29

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