Report for the Ministerial Council on Energy Smart Meter Working Group

Transcription

1 17 September 2007 Cost Benefit Analysis of Smart Metering and Direct Load Control: Phase 1 Overview Report Report for the Ministerial Council on Energy Smart Meter Working Group

2 Project Team Adrian Kemp Ann Whitfield Brendan Quach Yuliya Hedynach Tara D Souza Daniel Young Greg Houston NERA Economic Consulting Darling Park Tower Sussex Street Sydney NSW 2000 Tel: Fax:

3 Contents Contents Glossary Executive Summary i ii 1. Introduction Background to the Project The Project Team Stakeholder Involvement Invitation for Submissions Structure of the Report Roadmap for the Cost Benefit Analysis Phase 1 Assessment of Smart Meter Functionalities Phase 2 Assessment of Costs and Benefits of Smart Meters and Non-Smart Meter Direct Load Control 8 3. Functionality of Smart Meter Infrastructure List of Functionalities Assessed Core Functionality Additional Functionality Scenarios The Role of Scenarios in the Analysis Description of the Scenarios being Considered Matters Relevant to our Analysis of each Scenario Overview of Phase 1 Cost Benefit Analysis Incremental Assessment Interdependencies between Functionalities Quantitative versus Qualitative Assessment Identification and Treatment of Transfer Payments Key Assumptions Time Period for the Analysis Start Date Discount Rate Assumed Customer Numbers Retail Tariff Structures Modified Load Duration Curve 53 NERA Economic Consulting

4 Contents 7. Assessment of Costs Identification of Costs Impact of Scenarios on Costs Summary of Costs (per meter) Assessment of Benefits Identification of Benefits Impact of scenarios on benefits Summary of Quantified Benefits (per meter) Results of the Cost Benefit Analysis Energy Measurement Functionalities Switching and Load Management Facilitation of Customer Interaction Supply and Service Monitoring Standards and Interoperability Upgradeability and Configurability Conclusions and Recommendations Functionalities Recommended for Inclusion in a Minimum National Functionality for a Smart Meter Functionalities Not Recommended for Inclusion in a Minimum National Functionality for a Smart Meter Functionalities that Require further Consideration and Analysis 131 Appendix A. SMWG Functionality Descriptions 133 Appendix B. SMWG Scenario Illustrations 151 Appendix C. List of Stakeholders Consulted/RFIs sent as part of Phase Appendix D. Assumptions on the Impact on Customer Demand from Core Functionality 154 Appendix E. Quantitative Analysis: Methodology 157 Appendix F. Competition in Meter Provision and Meter Data Management Services 164 Appendix G. Cost Benefit Analysis Results 167 NERA Economic Consulting

5 List of Tables List of Tables Table 3.1 Functionalities taken as 'core' for smart meters 12 Table 4.1 Comparison of smart meter scenarios 26 Table 6.1 Assumed retail tariffs associated with core functionality (c/kwh) 50 Table 7.1 Allocation of costs between scenarios 56 Table 7.2 Summary of cost drivers for each additional functionality (NPV of costs per meter) 59 Table 8.1 Summary of benefit drivers for each additional functionality (NPV of benefit per meter) 69 Table 10.1 Functionalities recommended for inclusion in a minimum national functionality 129 Table 10.2 Functionalities not recommended for inclusion in a minimum national functionality 131 Table 10.3 Functionalities requiring further analysis 132 Table A.1 SMWG core functionality descriptions 134 Table A.2 SMWG additional functionality descriptions 137 Table D.1 Preliminary elasticity assumptions 154 Table D.2 Residential - preliminary estimates of the response to TOU and CPP 155 Table D.3 Small commercial customers - preliminary estimates of the response to TOU and CPP 156 NERA Economic Consulting

6 List of Figures List of Figures Figure 4.1 Distributor-led mandated rollout roles and responsibilities 27 Figure 4.2 Retailer-led mandated rollout (using public communications provider) roles and responsibilities 29 Figure 4.3 Non smart meter direct load control rollout by distributors infrastructure assumptions 31 Figure 4.4 Retailer mandated rollout with centralised communications roles and responsibilities 33 Figure 6.1 Modified load duration curve 54 Figure 8.1 Methodology for assessing demand-driven benefits 65 Figure 9.1 NPV of costs and benefits per meter for remote reading (daily): Scenario 1 72 Figure 9.2 NPV of costs and benefits per meter for remote power factor measurement: Scenario 2 76 Figure 9.3 NPV of costs and benefits per meter for import/export metering: Scenario 4 78 Figure 9.4 NPV of costs and benefits per meter for remote connect/disconnect (Case A): Scenario 1 81 Figure 9.5 NPV of costs and benefits per meter for remote connect/disconnect (Case B): Scenario 1 83 Figure 9.6 NPV of costs and benefits per meter for supply capacity control: Scenario 4 85 Figure 9.7 NPV of costs and benefits per meter for load management at meters through a dedicated control circuit (Case B): Scenario 1 87 Figure 9.8 NPV of costs and benefits per meter for load management at meters through a dedicated control circuit (Case C): Scenario 2 88 Figure 9.9 NPV of costs and benefits per meter for interface with other load control devices (Cases A and B): Scenario 2 94 Figure 9.10 NPV of costs and benefits per meter for an interface to home area network using an open standard (Cases A and B): Scenario 2 97 Figure 9.11 NPV of costs and benefits per meter for an interface to home Area network using an open standard (Case C): Scenario Figure 9.12 NPV of costs and benefits per meter for communications with gas and water meters (Case A): Scenario Figure 9.13 NPV of costs and benefits per meter for quality of supply and other event recording: Scenario Figure 9.14 NPV of costs and benefits per meter for meter loss of supply detection and outage alarm: Scenario Figure 9.15 NPV of costs and benefits per meter for real-time service checking: 111 Figure 9.16 NPV of costs and benefits per meter for customer supply monitoring: 113 Figure 9.17 Smart metering system communications chain 115 Figure 9.18 NPV of costs and benefits per meter for remote configuration: Scenario Figure 9.19 NPV of costs and benefits per meter for remote software upgrades: 123 Figure 9.20 NPV of costs and benefits per meter for separate standard base plate: 124 Figure 9.21 NPV of costs and benefits per meter for non meter board installation: 126 Figure 9.22 NPV of costs and benefits per meter for plug and play device commissioning: 127 NERA Economic Consulting

7 Glossary Glossary AEMC COAG CPP CRA DLC EMCa HAN IHD IMO kva MW MCE NEM NEMMCO NER NERA NMI NPV PV SMI SMSWG SMWG TOU USE Australian Energy Markets Commission Council of Australian Governments Critical Peak Price/Pricing Charles River Associates Direct Load Control Energy Market Consulting associates Home area network In-home display Independent Market Operator (Western Australia) Kilovolt-ampere Megawatts (1,000,000 watts) Ministerial Council on Energy National Electricity Market National Electricity Market Management Company National Electricity Rules NERA Economic Consulting National Metering Identifier Net present value Photovoltaic (solar cells) Smart metering infrastructure Smart Meter Stakeholder Working Group Smart Meter Working Group Time of Use Unserved energy NERA Economic Consulting i

8 Executive Summary Executive Summary This report has been prepared by NERA Economic Consulting (NERA) for the Ministerial Council on Energy s Smart Meter Working Group (SMWG) and constitutes the output of Phase 1 of the cost benefit analysis of a mandatory smart meter rollout, together with the accompanying workstream reports prepared by the other consultant teams appointed by the SMWG. Scope of this Phase 1 Report and Overall Project Plan Smart meters are electricity meters that are capable both of measuring and recording energy consumption in short intervals and of two-way communication, enabling energy providers to read and control features of the meter remotely. 1 Smart meters have the potential to provide a range of benefits, arising from changes in patterns and levels of electricity demand, the provision of capabilities that enable cost efficiencies to be achieved for distribution and retail businesses, and through service performance enhancements. These benefits need to be weighed against the costs of a large scale rollout. These costs include the cost of purchasing and installing the meters themselves as well as the cost of upgrading billing and management systems to process and store more detailed usage data. The costs and benefits of a smart meter rollout must also be weighed against the costs and benefits associated with other demand management alternatives. At its meeting in April 2007, the Council of Australian Governments (COAG) endorsed a staged approach for the national mandated rollout of electricity smart meters to areas where benefits for consumers outweigh costs, as indicated by the results of a cost benefit analysis to be competed by the end of In July 2007, the SMWG appointed a team of consultants to undertake the cost benefit analysis required by COAG. The cost benefit analysis is intended to provide the basis for future MCE decisions with regard to smart meters. The Terms of Reference for the cost benefit analysis divided the project into two work phases. Phase 1 and Phase 2 of the analysis are intended to address separate (but related) questions. Phase 1 of the analysis is intended to address the question: What functionalities should be included in a minimum national functionality for a rollout of smart meters? Phase 1 does not assess the merits of a roll-out of smart meters, which will be addressed as part of Phase 2. Phase 2 of the analysis addresses the further question of whether the costs of rolling-out smart meters (or of undertaking an alternative demand management scenario) exceed the benefits, given the particular circumstances of different jurisdictions and regional differences within those jurisdictions (ie, urban, rural and remote areas). This assessment is intended to assist the MCE in determining any specific areas where replacement and rollout may be 1 Meters that are capable of measuring and recording energy in short intervals but do not have two-way communication abilities are distinguished from interval meters. NERA Economic Consulting ii

9 Executive Summary exempted or delayed, on the basis of local factors that are demonstrated to reduce net benefits for consumers. In addition to the cost benefit analysis, Phase 2 of the project will also assess the different smart meter rollout scenarios against the objectives adopted by the MCE. Phase 2 of the analysis will also consider a further scenario related to direct load control, as an alternative to a rollout of smart meters. This Phase 1 overview report constitutes the first output of the cost benefit analysis, and is being released for public consultation. This report has been prepared by NERA and is not endorsed by the SMWG, the SCO or the MCE. The SMWG will consider the recommendations in the report after the receipt of submission from all interested parties. The SMWG will then develop recommendations for further consideration of the SCO and the MCE. This report will be followed by a Final Report combining an update of the Phase 1 analysis (taking into account submissions received from the consultation process) and a report on Phase 2 of the analysis. The Final Report (Phase 1 and Phase 2 findings) is expected to be released for public consultation at the end of December The Consulting Teams The Terms of Reference for this analysis identified six interlinked workstreams required for the cost benefit analysis. Separate consultants have been engaged by the SMWG to undertake each workstream, in parallel. This Phase 1 overview report brings together the different streams of analysis. In particular it summarises the analysis undertaken by each stream and brings the outputs together in order to identify the net benefits of each functionality. The conclusion of this report discusses the implications of our analysis in relation to the minimum national functionality for a smart meter rollout. This Phase 1 report is accompanied by separate reports for each workstream, prepared by each of the individual consultants. The consultants involved in this review and their respective workstreams are: NERA Economic Consulting: Coordination (including responsibility for this Phase 1 overview report and resulting recommendations); Consumer impacts; CRA International: Network impacts; Economic impacts (market and greenhouse modelling); KPMG: Retailer impacts; and Energy Market Consulting associates (EMCa): Transitional implementation costs and their allocation. NERA Economic Consulting iii

10 Executive Summary Invitation for Submissions The SMWG is inviting written submissions on the issues and results raised in this Phase 1 Overview report and each individual workstream report. Submissions are due on 1 November Submissions should be in PDF format and ed to MCEMarketReform@industry.gov.au. We are particularly seeking input from stakeholders in relation to the assumptions that have been made in this Phase 1 report, where they are likely to drive the conclusions that will be drawn from our analysis. We have also highlighted key assumptions that will be required for Phase 2 of the analysis, in order to provide an opportunity for stakeholders to comment on those assumptions ahead of the Phase 2 report. Incremental Analysis of Additional Functionality Phase 1of the analysis is intended to assist the SMWG in answering the question: What functionalities should be included in a minimum national functionality for a rollout of smart meters? Given the short timeframe allowed for the Phase 1 analysis, the approach adopted by the consultant teams in Phase 1 has been to identify a core set of functionalities that are considered to be common to any definition of smart meters. These are the set of functionalities that a meter must have in order to be considered a smart meter, and are therefore expected to be included in any specification of the minimum national functionality. Those functionalities that we have assumed to be core for all smart meters are: half-hourly consumption measurement and recording; weekly remote reading; local reading via both a hand held device and a visual display on the meter; secure transmission of data from meter; tamper detection; remote time clock synchronisation; and load management at meters through a dedicated control circuit, consistent with current jurisdictional arrangements. The Phase 1 assessment has focused on the incremental costs and benefits associated with adding additional functionalities to this core set. This analysis can inform the SMWG decision as to which of the additional functionalities it may wish to include in the minimum national functionality. NERA Economic Consulting iv

11 Executive Summary The incremental assessment has been undertaken in relation to each of three scenarios provided by the SMWG relating to alternative options for a smart meter rollout. 2 The assessment also takes into account how the benefits or costs are likely to accrue to each stakeholder (ie, consumers, distributors, retailers and the wider market). The scenarios have the potential to affect the costs of a smart meter rollout through differences in: the scope for competitive provision of meters and meter data management services; the potential for the achievement of economies of scale; and the infrastructure necessary for implementation. Similarly, the benefits between scenarios may differ due to differences in the incentives retailers and distributors have for product innovation between the retailer-led and distributorled scenarios, including the development of time of use tariffs and critical peak pricing. The different scenarios also impact the allocation of the costs and benefits between retailers and distributors, particularly those costs and benefits associated with the role of meter provider. 3 Changes in the allocation of costs and benefits may change the incentives that either distributors or retailers have to invest in the backend systems associated with potential benefits, absent the inclusion of those functionalities in a mandated rollout. The cost benefit analysis has been conducted at a national level, abstracting from jurisdictional and regional differences that can be expected to impact on benefits and costs. Phase 2 of the cost benefit analysis will however directly consider jurisdictional and regional differences. The Phase 1 analysis does not include an assessment of the costs and benefits of the core functionalities themselves, compared to a counterfactual of a continuation of accumulation meters. This assessment will be undertaken in Phase 2. We note that many of the potential benefits associated with smart meters are in practice likely to arise from the functionalities that the consultant teams have considered to be core. In order to provide stakeholders with an early opportunity to comment on the assumptions that will feed into the Phase 2 analysis, this report sets out the consultant teams current thinking in relation to some of those key assumptions. 2 3 ie, scenarios 1, 2 and 4. These scenarios have been developed to represent points in a spectrum of alternative rollout approaches. Ultimately any rollout strategy will be a matter for the MCE and may include aspects of a number of scenarios. Benefits accruing to the meter provider are allocated to distributors under scenario 1 but to retailers under scenarios 2 and 4. NERA Economic Consulting v

12 Executive Summary Recommendations Functionalities recommended for inclusion in a minimum national functionality for a smart meter Table E.1 outlines those functionalities that we have recommended for inclusion in the specification of a minimum national functionality for a smart meter rollout. Table E.1 Functionalities recommended for inclusion in a minimum national functionality No. Functionality Energy measurement 9 Daily Remote Reading 10 Power factor measurement (three phase meters only) 11 Import/export metering Switching and load management 12 Remote connect/disconnect (Case B) 13 Supply capacity control 14 Load management at meters through a dedicated control circuit (Case C) Supply and service monitoring 19 Quality of supply and other event recording 20 Meter loss of supply and detection Upgradeability and configurability 25 Remote configuration 26 Remote software upgrades 29 Plug and play device commissioning Most of these functionalities are recommended on the basis that the quantitative benefits outweigh the costs, even given uncertainty in the estimates and costs and benefits. Moreover, the results do not change as a result of the scenarios adopted. We have recommended that power factor measurement be included for all three phase smart meters, given that it can be included at almost zero incremental cost, and there is a need to measure power factor within these meters to support existing tariff arrangements. The costs of supply capacity control did outweigh the quantitative benefit. However the cost of providing this functionality at the meter is estimated to be negligible to zero. Given the potential to produce some qualitative benefits, we believe it warrants inclusion in the minimum national functionality, and retailers/distributors can then determine on an individual business case basis whether to invest in the back-end infrastructure necessary to make use of this functionality. NERA Economic Consulting vi

13 Executive Summary Similarly, for both daily remote reading and quality of supply and other event recording, the costs of providing the functionality at the meter are negligible and some benefits were identified, such that despite the lower bound of net benefits being negative, we have suggested that it be included in the minimum national functionality. This will again allow retailers and/or distributors to decide whether to utilise the functionality through investments in back-end infrastructure. The costs at the meter for remote connect/disconnect are the same for both performance levels specified. Given that there is a positive benefit for the higher performance level associated with the avoided cost of prepayment meters, we have recommended the inclusion of this functionality at the higher performance level, so that retailers and/or distributors are able to invest in the systems necessary to realise this benefit where they see value in doing so. Finally, although we have not identified any additional benefits associated with functionality 14 (Case B), this functionality is necessary to support the existing arrangements for dedicated load control in Queensland and parts of NSW and has no incremental cost implications for the meters. Functionalities not recommended for inclusion in a minimum national functionality for a smart meter Table E.2 outlines those functionalities that we recommend are not included in a minimum national functionality for a smart meter rollout. Table E.2 Functionalities not recommended for inclusion in a minimum national functionality No. Functionality Energy measurement 10 Power factor management (single phase meters) Facilitation of customer interaction 17 Provision of an in home display 18 Interface for communications with gas and water meters Supply and service monitoring 22 Real-time service checking Upgradeability and configurability 27 Separate standard base plate 28 Non meter board installation For all of these functionalities, benefits are not expected to outweigh the costs, even once qualitative analysis has been taken into consideration. In most instances, the high cost of providing the functionality is the significant contributing factor for their exclusion. For real-time service checking, while the cost of providing the functionality in the meter was understood to be low, we believe that most of the benefits NERA Economic Consulting vii

14 Executive Summary could be provided through functionality 20, such that the inclusion of this functionality in addition is not required. Finally, the cost associated with the mandatory provision of an in home display (function 17) to all recipients of a smart meter was found to not exceed the likely benefits arising from enhancements to demand response or improvements in business efficiency that may arise. At this stage however whether a smart meter should be capable of communicating with an in home display (function 16) remains uncertain. We believe that further analysis is required before a recommendation about capability of communicating to an in home display can be made. In addition, our analysis has not included the private benefits that retailers may receive from installing in home displays for other commercial benefits. If the capability is included in a smart meter then retailers will be able to offer in home displays on the basis of their own commercial business cases. Functionalities that require further consideration and analysis As part of our Phase 1 analysis, there were a few functionalities where there is remaining uncertainty, as outlined in Table E.3 below. No. Table E.3 Functionalities requiring further analysis Functionality Switching and load management 15 Interface to other load control devices Facilitation of customer interaction 16 Interface to home area network using open standard Supply and service monitoring 21 Customer supply monitoring Standards and interoperability 23 Interoperability for meters/devices at application layer 24 Hardware component interoperability For customer supply monitoring, while the incremental costs and benefits indicate that it will produce positive net benefits, there is some concern as to the practical feasibility of this functionality. For this reason we believe there is merit in further consideration of this functionality prior to its inclusion in a mandatory minimum national functionality. The issue of standards and interoperability is particularly complex. We believe that these functionalities are directly relevant to an analysis of the likely costs associated with providing the core functionalities under each of the scenarios and will therefore consider this issue as part of our Phase 2 analysis. Our initial thoughts are however set out in this report. 4 4 See section 9.3. NERA Economic Consulting viii

15 Executive Summary Finally, the costs and benefits of those functionalities that have an impact on demand, either through direct load control or an enhanced customer responsiveness to time of use tariffs, critical peak pricing or general customer conservation, are particularly uncertain (functions 15 and 16). The uncertainty arises in the magnitude of the demand response, the quantification of other benefits, particularly in relation to other private uses of a home area network, and the particular infrastructure (and associated costs) needed for their implementation. Given the importance of a decision about the inclusion of capability to a home area network as part of a smart meter rollout, we felt that these functions warranted further consideration before a definitive recommendation could be made. We have discussed all of these issues in detail in our report, together with our base assumptions. 5 Again, these issues will require further consideration and analysis as part of Phase 2, as they interact heavily with the benefits anticipated in relation to the core functionality and with the direct load control scenario 6 that will be considered in Phase See section 9.2 Scenario 3 as defined by SMWG. NERA Economic Consulting ix

16 Overview Report Introduction 1. Introduction This report has been prepared by NERA Economic Consulting (NERA) for the Ministerial Council on Energy s Smart Meter Working Group (SMWG) and constitutes the output of Phase 1 of the cost benefit analysis of a mandatory smart meter rollout, together with the accompanying workstream reports prepared by the other consultant teams appointed by the SMWG Background to the Project Smart meters are electricity meters that are capable both of measuring and recording energy consumption in short intervals and of two-way communication, enabling energy providers to read and control features of the meter remotely. 7 Smart meters have the potential to provide a range of benefits, arising from changes in patterns and levels of electricity demand, the provision of capabilities that enable cost efficiencies to be achieved for distribution and retail businesses, and through service performance enhancements. These benefits need to be weighed against the costs of a large scale rollout. These costs include the cost of purchasing and installing the meters themselves as well as the cost of upgrading billing and management systems to process and store more detailed usage data. The costs and benefits of a smart meter rollout must also be weighed against the costs and benefits associated with other demand management alternatives. At its meeting in April 2007, the Council of Australian Governments (COAG) endorsed a staged approach for the national mandated rollout of electricity smart meters to areas where benefits for consumers outweigh costs, as indicated by the results of a cost benefit analysis to be competed by the end of COAG noted that the economic benefits are maximised, and the costs of installation are minimised, if a smart meter rollout is large in scale and based on a consistent national framework and functionality. In July 2007, the SMWG appointed a team of consultants to undertake the cost benefit analysis required by COAG. The cost benefit analysis is intended to provide the basis for future MCE decisions with regard to smart meters. This Phase 1 overview report constitutes the first output of the cost benefit analysis, and is being released for public consultation. This report will be followed by a Final Report combining an update of the Phase 1 analysis (taking into account submissions received from the consultation process) and a report on Phase 2 of the analysis. The Final Report (Phase 1 and Phase 2 findings) is expected to be released for public consultation at the end of December Phase 1 and Phase 2 of the analysis are intended to address separate (but related) questions. In particular, Phase 1 of the analysis is intended to address the question: What functionalities should be included in a minimum national functionality for a rollout of smart meters? 7 Meters that are capable of measuring and recording energy in short intervals but do not have two-way communication abilities are distinguished from interval meters. NERA Economic Consulting 1

17 Overview Report Introduction Phase 2 of the analysis addresses the further question of whether the costs of rolling-out smart meters (or of undertaking an alternative demand management scenario) exceed the benefits, given the particular circumstances of different jurisdictions and regional differences within those jurisdictions (ie, urban, rural and remote areas). This assessment is intended to assist the MCE in determining any specific areas where replacement and rollout may be exempted or delayed, on the basis of local factors that are demonstrated to reduce net benefits for consumers. The coverage of Phase 1 and Phase 2 of the analysis is discussed more fully in Section The Project Team The Terms of Reference for this analysis identified six interlinked workstreams required for the cost benefit analysis. Separate consultants have been engaged by the SMWG to undertake each workstream, in parallel. This Phase 1 overview report brings together the different streams of analysis. In particular it summarises the analysis undertaken by each stream and brings the outputs together in order to identify the net benefits of each functionality. The conclusion of this report discusses the implications of our analysis in relation to the minimum national functionality for a smart meter rollout. This Phase 1 report is accompanied by separate reports for each workstream, prepared by each of the individual consultants. The consultants involved in this review and their respective workstreams are: NERA Economic Consulting: Coordination (including responsibility for this Phase 1 overview report and resulting recommendations); Consumer impacts; CRA International: Network impacts; Economic impacts (market and greenhouse modelling); KPMG: Retailer impacts; and Energy Market Consulting associates (EMCa): Transitional implementation costs and their allocation Stakeholder Involvement Phase 1 In developing each of the workstream reports, the consulting teams have benefited considerably from discussions and input from industry representatives, particularly in response to a series of requests for information (RFIs). We have appreciated that in light of the particularly short timeframe specified for the completion of Phase 1 of the analysis, stakeholders were in many instances unable to provide detailed or complete information to assist in the development of our Phase 1 results. Our approach has therefore been to draw conclusions based on the best evidence available, and make assumptions based on our own experience to complete the analysis. As part of the consultation phase on the Phase 1 NERA Economic Consulting 2

18 Overview Report Introduction analysis we are particularly seeking input from stakeholders in relation to those assumptions, where they are likely to drive the conclusions that will be drawn from our analysis. Despite the short timeframes, we were able to involve stakeholders in the Phase 1 analysis in a number of ways including: participating in a Smart Meter Stakeholder Working Group (SMSWG) workshop held in Sydney on 16 July 2007, to discuss and finalise the scenario specification; in relation to the transitional cost workstream through an RFI package 8 that was distributed to: a selection of retailers and distributors in relation to the transitional cost impact on distributor and retailer systems and communications management; National Electricity Market Management Company (NEMMCO) and the Western Australia Independent Market Operator (IMO) in relation to the costs for meter data transaction management; communication service providers and smart metering infrastructure providers in relation to the costs of communications, meters and in-house systems; in relation to the network impact workstream, through an RFI package that was distributed to all distributors and the subsequent development of a strawman set of working assumptions, which were distributed amongst distributors for further comment and review; in relation to retailer impact workstream, through a series of interviews with retailers to discuss the likely effect of the Phase 1 smart meter functionalities on the retail business; in relation to the consumer impact workstream, through interviews with stakeholders who are conducting smart meter trials including EnergyAustralia, Integral Energy, Country Energy, ETSA Utilities and ENERGEX as well as six customer focus groups involving consumers in Brisbane, Melbourne and Adelaide; through a workshop on demand response issues, held in Sydney on 23 July 2007 involving representatives from Origin Energy, EnergyAustralia, Integral Energy and the Consumer Utilities Advocacy Centre; through a series of interviews and discussions with retailers, distributors, communications providers, NEMMCO, WA IMO and smart metering infrastructure providers in relation to each of the workstreams as relevant; 8 For a more detailed description of the information request process see section 3.3 in EMCa, Cost Benefit Analysis of Smart Metering and Direct Load Control Workstream 6: Implementation Costs for Additional Functionality, Phase 1 Report, September 2007 (herein referred to implementation costs report ). NERA Economic Consulting 3

19 Overview Report Introduction through a workshop to discuss communications approaches and costs, held in Melbourne on 28 August 2007; and through a workshop outlining preliminary Phase 1 results for stakeholder feedback, held in Melbourne on 29 August A complete list of stakeholders interviewed as part of Phase 1 is provided in Appendix C Phase 2 We are intending to develop a comprehensive information and data gathering process as part of Phase 2 in light of the information gathering difficulties that emerged as part of Phase 1. This will involve a combination of: structured one-on-one interviews with industry participants including retailers, distributors, metering manufacturers and metering providers; a formal data request; and jurisdictional based workshops to inform our consideration of jurisdictional and rural/regional issues. The consulting team would like to work closely with industry participants in the formulation of its assumptions and analysis, particularly where data limitations and uncertainties require assumptions to be made in relation to inputs to the cost benefit analysis. To assist industry participants to prepare for the Phase 2 information requests an information gathering package will be provided. The package will include: an overview of the project and the relevant contact details of consultants involved; critical data request dates; an outline of the types of data that will be requested; the intended use of data requested; and the approach to confidentiality. It is intended to distribute this information gathering package by the end of September Invitation for Submissions The SMWG is inviting written submissions on the issues and results raised in this Phase 1 Overview report and each individual workstream report. Submissions are due on the date specified in the MCE Bulletin that accompanies the release of this report. Submissions should be in PDF format and ed to MCEMarketReform@industry.gov.au. NERA Economic Consulting 4

20 Overview Report Introduction 1.5. Structure of the Report. The remainder of this Phase 1 overview report is structured as follows: Section 2 discusses the coverage of Phase 1 and Phase 2 of the study; Section 3 presents a high level summary of the different functionalities of smart meters and the potential benefits that may be associated with each functionality. A more detailed technical description of the functionalities assessed in Phase 1 (and the associated performance levels) is set out in the SMWG functionality descriptions attached as Appendix A; Section 4 discusses the four scenarios for the rollout of smart meters (or a demand management alternative) that the SMWG has established for the cost benefit analysis, with particular focus on the role of each scenario in the analysis. The SMWG functionality descriptions have been included as Appendix B; Section 5 presents an overview of the cost benefit analysis in relation to the additional functionalities considered in Phase 1; Section 6 describes the key assumptions for the quantitative analysis; Section 7 presents the assessment of costs including the approach taken to establishing cost estimates and the implication of the alternative scenarios for the costs estimated; Section 8 presents the assessment of benefits including the approach taken to identifying benefits and the a summary of the benefits that have been quantified as part of this Phase 1 analysis; Section 9 presents the results of the cost benefit analysis, including both the quantitative analysis and the implications of the qualitative assessments; and Section 10 presents conclusions arising from the analysis in relation to the minimum national functionality for any rollout of smart meters in Australia. In addition, the appendices provide information on the following: Appendix A: SMWG functionality descriptions; Appendix B: SMWG scenario descriptions; Appendix C: List of stakeholders consulted as part of Phase 1; Appendix D: Assumptions on the impact on customer demand from core functionality; Appendix E: Detailed description of the assumptions incorporated in the cost benefit analysis; and Appendix F: Cost benefit analysis results. NERA Economic Consulting 5

21 Overview Report Introduction The results presented in Appendix F include the net present value of the costs and benefits associated with each additional functionality by stakeholder group, as well as the overall net present value (NPV) of the benefits associated with each additional functionality. In addition, the appendix provides details of the calculation of the net present value of the costs and benefits for each additional functionality in each year over the 15 year time-frame of the analysis and the sensitivity testing that has been undertaken. NERA Economic Consulting 6

22 Overview Report Roadmap for the Cost Benefit Analysis 2. Roadmap for the Cost Benefit Analysis The Terms of Reference for the cost benefit analysis divided the project into two work phases as outlined below Phase 1 Assessment of Smart Meter Functionalities Phase 1of the analysis is intended to assist the SMWG in answering the question: What functionalities should be included in a minimum national functionality for a rollout of smart meters? As part of the COAG commitment to a national rollout of smart meters, it determined that there should be a consistent minimum national functionality applied to any smart meter rollout in Australia. To ensure that the national process does not hinder work being undertaken in Victoria on a smart meter rollout, the MCE wanted to decide upon a smart meter minimum functionality as soon as practical before the end of As a result, addressing the question of what should be included in a minimum national functionality was the first priority of the cost benefit analysis, and is the focus of this Phase 1 report. Given the short timeframe allowed for the Phase 1 analysis, the approach adopted by the consultant teams in Phase 1 has been to identify a core set of functionalities that are considered to be common to any definition of smart meters. These are the set of functionalities that a meter must have in order to be considered a smart meter, and are therefore expected to be included in any specification of the minimum national functionality. The Phase 1 assessment has then focused on the incremental costs and benefits associated with adding additional functionalities to this core set. This incremental approach (which is discussed further in section 5) has enabled the cost benefit assessment in Phase 1 to be focused on which additional functionalities of smart meters are likely to have a positive net benefit. This analysis can inform the SMWG decision as to which of the additional functionalities it may wish to include in the minimum national functionality. We note that the Phase 1 analysis does not include an assessment of the costs and benefits of the core functionalities themselves, compared to a counterfactual of a continuation of accumulation meters. This assessment will be undertaken in Phase 2 of the cost benefit analysis. Many of the potential benefits associated with smart meters are in practice likely to arise from the functionalities that the consultant teams have considered to be core. In order to provide stakeholders with an early opportunity to comment on the assumptions that will feed into the Phase 2 analysis, this report sets out the consultant teams current thinking in relation to some of those key assumptions. The cost benefit analysis of functionality in Phase 1 has been conducted at a national level, consistent with the terms of reference. This means that the results may not be applicable in all jurisdictions as some of the assumptions made may not be appropriate. We intend in Phase 2 to consider how this national analysis may change the outcomes given specific consideration of jurisdictional issues. NERA Economic Consulting 7

23 Overview Report Roadmap for the Cost Benefit Analysis 2.2. Phase 2 Assessment of Costs and Benefits of Smart Meters and Non-Smart Meter Direct Load Control Phase 2 of the analysis is intended to consider the costs and benefits of a rollout of smart meters across different states and territories in Australia (and across different regions within those states and territories). In addition, it will also involve an assessment of an alternative non-smart meter direct load control scenario, to compare against a smart meter rollout. This analysis will include: an assessment of the net benefit that may be achieved by rolling-out smart meters under alternative implementation scenarios, 9 compared to a counterfactual that includes the continued operation of accumulation meters (including for new installations and replacements). This analysis will allow us to assess the benefits and costs of the core functionality set in combination with those additional functionalities that are found to create a positive net benefit in each of the scenarios as part of Phase 1; an assessment of the net benefit that may be achieved by rolling-out smart meters under alternative implementation scenarios 10, compared to a counterfactual where there is no change to current jurisdictional practices in replacing meters; an assessment of the net benefit that may be achieved by implementing a program targeted at direct load control 11 compared to the same counterfactuals; and the distribution of costs and benefits between different stakeholder groups (ie, customers, network businesses, retailers) under each scenario, in addition to the overall net benefit. In each case the assessment will involve both a qualitative and a quantitative identification of benefits and the calculation of the NPV of the net benefit under each scenario for different jurisdictional and regional areas (to the extent that areas are expected to have materially different costs and benefits). As noted above, Phase 2 of the analysis will consider the costs and benefits associated with the full set of meter functionality, ie, including the set of functionalities that have been assumed to be core for the purposes of Phase 1. This Phase 1 report has identified aspects of that minimum national functionality that we consider will need to be further assessed in Phase 2. We therefore envisage that the Phase 2 analysis will need to consider alternative options for the minimum national functionality. However, the results of the Phase 1 analysis should mean that the alternatives considered can ie, under scenarios 1, 2 and 4 as defined by SMWG. These scenarios are discussed in detail in section 4 of this Phase 1 overview report. ie, under scenarios 1, 2 and 4 as defined by SMWG. This is captured as scenario 3 in the scenarios given to the consultants by the SMWG. NERA Economic Consulting 8

24 Overview Report Roadmap for the Cost Benefit Analysis be focused on those where there is remaining uncertainty, rather than across all of the 29 functionalities identified by the SMWG. In addition to the cost benefit analysis, Phase 2 of the project will also assess the different smart meter rollout scenarios 12 against the objectives adopted by the MCE. Phase 2 of the analysis is due to be completed by the end-december 2007, with a report being presented to the SMWG at that time. 12 The term smart meter rollout scenarios is used in this report to also cover scenario 3, which involves direct load control rather than the installation of smart meters. This shorthand has been adopted purely for ease of drafting. NERA Economic Consulting 9

25 Overview Report Functionality of Smart Meter Infrastructure 3. Functionality of Smart Meter Infrastructure This chapter provides a general description of each of the potential functionalities for smart meters (and their associated communications and data storage infrastructure) that have been assessed in Phase 1 of this assignment, and highlights potential benefits associated with each functionality. The detailed assessment of the benefits arising from each functionality and the results of the incremental cost benefit analysis for each of the functionalities are set out in chapter List of Functionalities Assessed The functionality list evaluated in this Phase 1 report is based on the list provided to the consultant teams by the SMWG. This list of functionalities was developed by the SMWG during the pre-work phase of this assignment, and specifies the required performance levels associated with some functionalities. For the purpose of considering the minimum national functionality for smart meters, the consultant teams have refined the functionality list in some instances, to clarify the nature of some of the functionalities to be considered and/or the performance levels. The refined list of functionalities was provided and circulated for comment to the SMWG at the outset of this project. In discussing the functionality of smart meters it is important to recognise that in most cases the functionality is actually delivered by a combination of the meters themselves and the associated communications and customer data collection infrastructure. In the discussion in this chapter references to the functionality of meters should be taken as being references to the functionality of the overall infrastructure. In costing the alternative functionalities, the entire infrastructure chain has been considered. The remainder of this section provides a description of each of the functionalities evaluated in Phase 1 of the cost benefit analysis. Appendix A to this report provides the more detailed, technical description of the functionalities as set out by the SMWG, including (where relevant) the performance levels assumed. For each functionality this section also sets out, at a high level, the types of benefit potentially associated with each of the functionalities. A detailed evaluation of the benefits associated with each functionality (and an assessment of the extent that benefits are expected to arise in practice) is provided in each of the individual workstream reports accompanying this report, and is summarised in chapter 9 of this report. However, in considering the functionalities it is useful to bear in mind the types of benefits that may flow from each functionality as these potential sources of benefit provide the justification for considering each functionality Core Functionality Given the focus in Phase 1 of identifying the minimum functionality for a rollout of smart meters, the first step has been to consider whether there are any aspects of functionality that are common across all potential specifications of smart meters. Expressed another way, what are the particular functions that a meter has to have in order for it to be considered smart? The answer to this question is then those functions that would feature in all NERA Economic Consulting 10

26 Overview Report Functionality of Smart Meter Infrastructure alternative potential specifications of a minimum national functionality for smart meters. We have termed such functionality as core to any specification of smart meters. We consider that all smart meters must have the following functionality: 1. measurement and recording of electrical energy consumption in half hour intervals 13 ; and 2. secure two-way communications that enables remote reading of interval electricity energy data (the frequency and capacity of this communication may however differ between different smart meter specifications). The core functionality in relation to two-way communications is assumed to be weekly reading, as this reflects the current NEMMCO requirements. 14 In addition to the above, there are functionalities that are required of all electronic electricity meters, such as those related to back-up meter reading capabilities (functionalities 3 and 4), tamper detection (functionality 6) and remote time clock synchronisation (functionality 8). Smart meters must also be compatible with the existing load management arrangements for control of storage hot water heating and space heating using a dedicated control circuit. Any national minimum specification of smart meters therefore needs to incorporate functionality that emulates the operation of existing time clocks or ripple control receivers. This ensures that existing load management capability is not adversely impacted by the rollout of smart meters. 15 We note that the existing load management arrangements using a dedicated circuit differ between distributors, with distributors in Queensland having the capability to remotely control such load via radio, whilst the majority of other jurisdictions have time-clock arrangements. 16 The core functionality that has been assumed in relation to load management utilising a dedicated circuit relates to broadcast turn-on-turn-off commands to dedicated circuits being performed at 99% of all meters within 1 hour (functionality 8). However, the Queensland and NSW ripple systems would require a performance level in excess of this (and more akin to that identified by the SMWG for functionality 14 (Case B)). This is discussed further in section 9.2 under the discussion of functionality 14. The core functionality that has been determined for this Phase 1 assessment is therefore as follows: This is functionality 1 in the SMWG functionality list. Functionality 2 on the SMWG list is for weekly reading, whilst communications and data security is functionality 5. The potential for the more flexible use of existing dedicated control circuits, where that is engendered by a particular functionality of a smart meter, is considered in our incremental analysis, see discussion in section Energy Australia has the ability to remotely reset some timeclocks. See section 4.2 in the customer impact report for a description of the existing arrangements. NERA Economic Consulting 11

27 Overview Report Functionality of Smart Meter Infrastructure Table 3.1 Functionalities taken as 'core' for smart meters No. Functionality Description 1 Half-hourly 17 consumption measurement and recording Meters should record active energy in 30 minute intervals 2 Remote reading (weekly) 18 Data is collected from the meters on a weekly basis 3 Local reading hand-held device Meters are also capable of being read on-site by a meter reader using a special meter reading device (as a back-up in case there is a communications failure) 4 Local reading visual display on meter Meters are also capable of being read on-site by the customer using a visual display (as a back-up in case there is a communications failure) 5 Communications and data security All data from the meter is securely transmitted. 6 Tamper detection The meter system would support detection of attempts to tamper with the meter and would communicate any such attempts remotely. 7 Remote time clock synchronisation Remote setting of the clock in the meter and maintenance of clock accuracy, in order to ensure that half-hourly data reads correspond to actual time of use. 8 Load management at meters through a dedicated controlled circuit Continued support for current arrangements for load management at dedicated control circuits, ie, hot-water control systems (Case A). Allows broadcast of turn-on/turn-off commands to dedicated circuits, with the action performed at 99% of meters within 1 hour. 19 It is important to note that many of the potential benefits associated with the introduction of smart meters arise as a result of the functionalities we have considered to be core to smart meters. Specifically, allowing for the recording of half hourly consumption data and twoway communication provides the potential basis for the introduction of time of use (TOU) tariffs and critical peak pricing (CPP) by retailers. By being better able to measure accurately the time at which each customer consumes energy, and to notify customers in advance of expected peaks in the wholesale energy price, retailers may offer prices to customers that better reflect the price at which they purchase energy in the wholesale market. Similarly, distributors have the ability to better match their network prices to the cost associated with operating their networks at times of peak demand. Where customers face time of use tariffs and CPP options, their level of electricity demand may change. In particular, customers may switch electricity usage away from peak times (thereby enabling the deferral of network augmentation and new generation capacity). They A reference to 'half-hourly' should be read as "in line with the settlement interval in the relevant wholesale market". In actual practice this may be half-hourly or every fifteen minutes. Remote reading on a more frequent basis is considered as one of the additional functionalities assessed in this Phase 1 report. We note that this standard of performance was one of the cases included in the functionality description provided by SMWG. However, it may be that the core functionality would need to have a higher performance (ie, that specified for functionality 14 case C), in order to support current arrangements in Queensland. We consider the overlap between the core functionality 8A and functionality 14C further in section 9.2. NERA Economic Consulting 12

28 Overview Report Functionality of Smart Meter Infrastructure may also reduce the overall amount of electricity they use. Both of these changes in demand will change the electricity market dispatch pattern, resulting in changes in the operating costs of generation and changes in the level of greenhouse gas emissions. The incremental assessment of the costs and benefits of functionalities over and above these core capabilities takes the above benefits as given, and considers what additional costs and benefits may be achieved as the result of adding further functionality into the minimum national functionality of a smart meter. However, this does not mean that the extent of the above benefits will not be assessed as part of the cost benefit analysis. The focus of Phase 2 of the analysis will directly assess the costs and benefits associated with a mandated rollout of smart meters, against the alternative of a continuation of the current arrangements for metering in each jurisdiction. As part of this assessment, we will consider the potential benefits associated with the introduction of time of use tariffs and critical peak pricing, and assess the extent to which these benefits may be expected to materialise in practice Additional Functionality The remainder of this report focuses on the incremental net benefit associated with additional functionality over and above the core functionality discussed above. This section provides a non-technical description of each aspect of additional functionality being assessed, together with a description of the key drivers for the benefits that may potentially flow from each functionality. Appendix A provides the more technical description of each functionality together with a detailed list of the performance levels assumed, as developed by the SMWG. The additional functionalities have been grouped into the following areas: (i) energy measurement; (ii) switching and load management; (iii) facilitation of customer interaction; (iv) supply and service monitoring; (v) standards and interoperability; and (vi) upgradeability and configurability Energy measurement No. Functionality Description 9 Remote reading (daily) Daily remote collection of the previous trading day s 30 minute interval energy data (rather than on a weekly basis, which is assumed in the core functionality) 10 Power factor measurement Half-hourly reactive energy measurement 11 Import/export metering Records active energy flows both into a premise and out of a premise, where the customer has installed local generation (eg, solar cells). The above three functionalities provide either more frequent information on a customer s energy usage or enhanced measurement of energy usage. NERA Economic Consulting 13

29 Overview Report Functionality of Smart Meter Infrastructure Daily (rather than weekly) 20 remote reading of interval energy data has the potential to provide more timely information to retailers, network businesses and customers on energy usage. Whether customers actually receive usage information the following day would depend on the communication channels adopted by the customer s retailer, such as an internet site or an in-home display (IHD). The provision of usage information to customers the following day may enhance customer demand response. For example, when peaks are experienced on several consecutive days and customers are exposed to CPP, knowledge of the extent of the load reduction a customer managed to achieve in critical peak times on the first day (and therefore the extent to which they managed to avoid the higher prices) may influence their behavior on subsequent days. More frequent usage information could also potentially be used by retailers to refine their tariff offerings and/or to underpin more efficient hedging practices. Power factor measurement enables half-hour reactive interval energy measurement and recording. This potentially allows distributors to better monitor the power factor of customers supplies, enabling better targeted power factor improvement programs. The availability of reactive interval energy data would also facilitate the introduction of a maximum demand (kva) charge in customer tariffs. Import/export metering enables energy flows both into and out of a customer s premise to be recorded on a half hourly basis, where the customer has installed local generation capacity (such as photovoltaic (PV) cells). This functionality allows for the accurate metering of energy injected into the distribution network from PV cells installed in customers houses or from other distributed generation. Including this functionality within smart meters would avoid the need to install additional metering where customers choose to install local generation. In addition, the ability to accurately measure the energy being provided to the network (and the time of use of that energy) by half hourly intervals would support changed tariff structures for PV cells and distributed generation. This in turn may impact a customer s incentives to install such generation, resulting in changes to demand for power from the grid. 20 The assumed core functionality is for meters to be read on a weekly basis. NERA Economic Consulting 14

30 Overview Report Functionality of Smart Meter Infrastructure Switching and load management No. Functionality Description 12 Remote connect/disconnect Customers can be connected and disconnected remotely. Case A: For up to 2% of all meters, action completed for 90% of those meters within 30 minutes. 13 Supply capacity control (Note: functionalities 12 and 25 are prerequisites for this functionality) Case B: For up to 2% of meters, action completed for 90% of those meters within 10 minutes Provides the ability to limit power to individual households. This may be a normal supply capacity limit under a contractual agreement with the customer or an emergency supply capacity limit at times of network stress. 14 Load management at meters through a dedicated controlled circuit 21 (Note: functionality 25 is a prerequisite for this functionality) 15 Interface for other load control devices Allows more flexible use of existing load control for hot water. Case B: Commands sent to up to 2% of all individual meters, with turnon/off commands performed at 90% of these meters within 1 hour Case C: Broadcast commands can be sent to 99% of meters within 1 minute Allows electric devices in the home to be cycled at peak times (ie, turned on and off remotely at short intervals), such as air-conditioners and pool pumps. Case A: Action performed at 90% of meters within 1 hour Case B: Action performed at 90% of meters within 1minute The second functionality grouping relates to the ability to control supply and selected loads at customer premises. Remote connect/disconnect functionality allows the power to a customer s premise to be connected or disconnected either locally or remotely. Two separate performance levels have been assessed, relating to the speed with which the majority of connections/reconnections can be achieved. Remote connect/disconnect potentially provides a range of benefits. It avoids the current cost to distributors of manual connections and disconnections, which require a site visit. Remote connect/disconnect also allows for premises to be disconnected when a customer moves out and reconnected when a new customer moves in, which does not currently happen in some jurisdictions. This has potential benefits for retailers in reducing their credit exposure (ie, it lowers the retailer s risk of not being able to recover the value of power used subsequent to a customer moving out and before a new customer moves in and contracts with a retailer). Remote connect/disconnect allows for the faster reconnection of customers who have been 21 The core functionality incorporates load management at meters through a dedicated control circuit with performance levels supporting the existing load control arrangements in each jurisdiction (Case A). The incremental functionality assessed looks at additional levels of performance over and above these existing capabilities. NERA Economic Consulting 15

31 Overview Report Functionality of Smart Meter Infrastructure disconnected for non-payment but have subsequently paid. However, it would also facilitate the faster disconnection of customers for non-payment, once regulatory requirements have been met. Retailers could also use the remote connect/disconnect functionality (under the fast response case (Case B)) to offer prepayment tariff options to customers without the need to install a special meter, where jurisdictional legislation permits such offers. Supply capacity control provides the ability to limit power to individual customers. This functionality requires the smart meter to already have remote connect/disconnect functionality. Supply capacity control can be utilised in two ways. The first is an emergency supply capacity limit following a network outage. Instead of having whole geographic areas blacked out, supply to all customers in a geographic area could be restored, albeit with restricted capacity. The ability to restore supply but at less than full supply capacity provides potential benefits from allowing essential infrastructure to be operational (such as traffic lights and street lights). The second use of supply capacity control is a normal supply capacity limit under a contractual agreement with the customer. This could allow retailers to offer demand based tariffs to customers where they contract for a certain supply capacity. This supply capacity could be set above a customer s current usage level, to provide distributors with increased certainty as to the required maximum network capacity, thereby potentially deferring network augmentation. Retailers could potentially also choose to offer supply capacity products to assist low income customers manage their expenditure, or could adopt supply capacity limits as an alternative to disconnection for defaulting customers. In order to obtain the full benefit from this functionality it would need to be combined with remote reconfiguration (functionality 25), so that supply capacity control settings could be changed remotely. It would also require the meter to have remote connect/disconnection functionality. Supply capacity control also potentially enables cost savings for distribution businesses from the avoided blowing of service fuses and the avoided cost of supply capacity circuit breakers. Load management at meters through a dedicated control circuit relates to the existing arrangement for load control of electric storage water heating and space heating systems. Smart meters could incorporate additional functionality to allow for the more flexible use of these existing systems (rather than simply emulating the existing arrangements, as has been assumed in the core functionality). Two performance levels have been assessed for this functionality. The first (Case B) is the capability to remotely set turn on and turn off times. This functionality would avoid the cost currently associated with site visits when time-clocks or ripple channel settings need to be reset. Again, the meters would also need to incorporate remote reconfiguration (functionality 25), so that the times for controlled switching could be changed remotely. The second performance level (Case C) also encompasses the ability to remotely turn on and off controlled load, however in less than one minute. This performance approximates the performance available from ripple control systems and has potential benefits in relation to the NERA Economic Consulting 16

32 Overview Report Functionality of Smart Meter Infrastructure operation of distributor s networks from being able to shed large blocks of controlled loads quickly where customers are on interruptible tariffs for these loads. The final functionality considered under switching and load management is the ability of smart meters to provide an interface with other load control devices. Smart meters and their associated infrastructure can facilitate load control of a range of electric appliances, such as air conditioners or swimming pool pumps. In relation to the functionality being assessed in Phase 1 it is assumed that the capability to interface with these appliances would be present in all new and replacement appliances (rather than being retrofitted). Under functionality 15 it is further assumed that the devices that provide this capability operate on a propriety rather than open protocol. Direct load control has the potential to reduce peak demand, thereby avoiding network augmentation and peak generation. A reduction in peak demand would also have wider market impacts in relation to generation fuel costs and greenhouse gas emissions. Two levels of performance for this functionality have been assessed, relating to the speed with which load control actions are performed at the meters Facilitation of customer interaction No. Functionality Description 16 Capability to interface with a Home Area Network (HAN) Provides the capability for both direct load control via the HAN and the provision of an IHD. Case A: DLC facilitated by Zigbee. Performance level sets out requirements for messaging capabilities. Case B: DLC facilitated by Zigbee. Faster delivery of messages than for Case A. Case C: DLC facilitated via smart thermostats. 17 Provision of an in-home display An in-home display is provided as part of the smart meter rollout. Case A: 3 Lights. Case B: Free form messaging. 18 Interface for communications with gas and water meters Case C: Capable of providing customer initiated response. Gas and water meters would also be able to be read remotely, via communications installed for the electricity meter. Case A: 3-monthly meter readings. Case B: Hourly interval data (water). Three incremental functionalities have been considered in relation to facilitating customer interaction. The first functionality is the capability to interface with an in-home display or other inhome interface device. Importantly, this functionality does not include the actual provision of the IHD (this is considered as a separate functionality, see below), but focuses on the meter providing an interface to a HAN using an open standard (Zigbee). NERA Economic Consulting 17

33 Overview Report Functionality of Smart Meter Infrastructure The benefits associated with the provision of this capability will depend critically on the assumed uptake of IHDs which then utilise this capability, and the type of display. Some IHDs can provide daily usage information to customers without the need for daily remote reading (functionality 9). In addition, a HAN can also be used to facilitate direct load control (DLC). Under Cases A and B DLC is facilitated by an open standard device installed in all new and replacement appliances. Under Case C direct load control of air conditioning is facilitated by an open standard device installed in a smart thermostat. 22 We have also assessed the provision of an in-home display as one of the additional functionalities of a smart metering system. Given the potential for different forms of display and messaging capabilities to impact customer s behaviour and retailers business strategies differently, we have considered three separate cases: (Case A) a display with different coloured lights at off-peak, shoulder and peak times; (Case B) a display that allows freeform messages to be sent (eg, tariff updates, notification of CPP events); and (Case C) a display that allows for customer interaction (eg, the display beeps to notify a CPP event until acknowledged by the customer). In-home displays may be expected to impact on customer demand and on retailer business strategies (including any decision by retailers to provide other services via the IHD). Changes in customer demand in turn alter the need for network augmentation and peak generation capacity, as well as the level of greenhouse gas emissions and fuel costs. The impact will be greater to the extent that an IHD may be a preferred means of communication for the customer (eg, in being notified of CPP events or reminded of peak times under a TOU tariff) and may therefore result in an incremental change in customer usage patterns over and above those that result from the offer of the CPP tariff itself. There may also be benefits to retailers from IHDs in relation to reduced billing costs, improved promptness of bill payments and reduced customer communication costs. The key difference between providing the capability to interface with an IHD and the provision of IHDs themselves as part of a smart-meter rollout is the impact on retail competition and product innovation which may be engendered by providing the capability but leaving the form of display subject to competitive choice. This in turn may be expected to result in differential impacts on retail product offerings, customer demand and customer education. This Phase 1 report also considers the addition of an interface for communications from gas and water meters as a potential additional functionality. Such an interface may allow the smart metering system operator to offer remote reading of gas and water meters to the respective companies, resulting in a cost saving overall and an additional line of business for the smart metering system operator. Where a customer has an IHD, an interface with gas and water may also allow usage data from these utilities to be provided to the customer via this 22 Case C has been identified by the Consultant Team during this Phase 1 assessment, rather than by the SMWG, and is discussed further in Section 9.3. NERA Economic Consulting 18

34 Overview Report Functionality of Smart Meter Infrastructure display. Two cases have been considered for this functionality: 3 monthly meter readings (Case A) and hourly interval data for water only (Case B) Supply and service monitoring No. Functionality Description 19 Quality of supply and other event recording (Note: functionality 25 is a prerequisite for this functionality) Enables meters to record information in relation to quality of supply events or other events (eg: outage, undervoltage, disconnection, meter loss of supply, change of settings). The event log could then be read remotely. 20 Meter loss of supply detection and outage detection Regular communication with the meters at customer premises would enable a loss of supply to a meter to be detected within one hour (for 90% of meters). The metering systems would also enable system outages to be detected, either at meters or at distribution transformers. Where a loss of supply or an outage was detected, an alarm would be sent. 21 Customer supply monitoring The meter would send an alarm if it detected: reverse polarity at a customer s connection; degradation of the customer s neutral; and degradation of the customer s earth connection (from switchboard to earth). 22 Real-time service checking The meter can be accessed remotely in real time in order to check the presence of supply to a meter. Smart meters can provide the capability for quality of supply & other event recording. Specifically, smart metering infrastructure can incorporate functionality to record data in relation to defined quality of supply events (such as outages or a drop in voltage) and other events (such as a change in meter settings). The meter or the system can record the nature of the event, the date and time at the beginning of the event and the date and time at the end of the event. The full event log for each meter can then be accessed remotely. The performance level assessed for this functionality would allow for the event log from up to 2 per cent of all meters to be accessed within 6 hours (with 90 per cent being accessed within 1 hour), and for the event logs from nearly all meters to be accessed within a week. 23 Where meters also incorporate remote reconfiguration (functionality 25), the thresholds for quality of supply events could be changed remotely, providing greater flexibility. The ability for smart metering infrastructure to record quality of supply and other events would provide a benefit for distribution businesses in being able to better monitor the quality of supply performance, and to detect and react to non-compliance with service standards more quickly. This in turn may reduce the current costs associated with data collection on quality of supply, reduce call centre activity for the distribution businesses and avoid the cost of manually investigating supply quality events. Depending on the regulatory regime, 23 The data from 99.5% of meters could be accessed within 1 week, and 99.9% within 2 weeks. NERA Economic Consulting 19

35 Overview Report Functionality of Smart Meter Infrastructure reducing the cost of service quality improvements may also result in higher performance targets being set for distributors, with customers receiving improved service standards as a result. A further additional functionality assessed is meter loss of supply detection and outage detection. Under this functionality, loss of supply to a customer s meter is detected by regular communications with the meters at a customer s premise (ie, using a regular service ping ). Where a meter fails to respond to a communication, an alarm would be raised, indicating a loss of supply at that meter. 24 Loss of supply detection potentially enables improved monitoring of the network for the distribution businesses, as well as business cost reductions in relation to avoided service call-outs and more efficient fault rectification. It also potentially enables improved response to major outages, through the easier identification of nested outages. This functionality could also provide potential benefits to customers from faster notification of loss of supply (ie, within one hour), and may result in a reduction in call centre costs for both distribution and retail businesses. Smart meters could also incorporate a functionality to enable customer supply monitoring. The meter would send an alarm if it detected (i) reverse polarity at a customer s connection; (ii) degradation of the customer s neutral; or (iii) degradation of the customer s earth connection (from switchboard to earth). Such monitoring would provide improved electrical safety in customers homes (through faster and more accurate fault detection), a reduction in electrical fatalities and cost savings for the distributors from a reduction in network service testing. The final functionality considered in relation to supply and service monitoring is real-time service checking. This functionality is similar to outage detection (functionality 20) and enables a customer s meter to be accessed remotely in real time in order to immediately check the presence of supply to a meter. This would enable customers to ring the call centre if they experienced an outage and to find out while they were on-line whether the problem was a loss of supply to their premise or a circuit interruption within their premise (eg, blown fuse or safety switch trip). Again, this functionality could provide a cost saving for distributors from a reduction in the number of service call-outs. Where customers are charged for these call-outs, this can be considered as ultimately a customer benefit. In addition this functionality may facilitate more effective customer communication for the retailer and a reduction in call centre costs Standards and interoperability No. Functionality Description 23 Interoperability for meters/ devices at the application layer Allows requests and messages to be sent to the system by parties other than the party primarily responsible for the meter, using a standard interface. 24 Hardware component interoperability Hardware components which can operate with components from different manufacturers for example communications modules and meters. 24 A meter may also lose supply on an under voltage event (eg a brownout ). This is considered to be different to an outage. NERA Economic Consulting 20

36 Overview Report Functionality of Smart Meter Infrastructure The above two functionalities relate to the extent to which commands and responses between the different hardware components forming part of the overall smart metering system can be facilitated by a single network management system and the extent to which different hardware components can themselves be sourced from alternative vendors and still operate together. As such, they relate to the potential for competition (and subsequent cost savings) in the installation and on-going operation of the smart meter systems. Interoperability for meters / devices at application layer allows requests and messages to be sent to the smart metering system by parties other than the party primarily responsible through a standard interface (e.g. MV90-type solution). This is achieved through having a standardised application layer utilising known device driver protocols. A common application layer allows one network management system to communicate with multiple smart metering systems. This ensures that the smart meter system operator is not locked into a separate proprietary network management system for each smart meter system. This has the potential to facilitate competition between manufacturers of network management systems. Interoperability at the application layer may also allow parties other than the meter owner or smart meter operator to access data from the smart meter. This may result in improvements in the customer transfer process. Hardware component interoperability allows each hardware component for a smart metering system to be sourced from different vendors and still work together. This has the potential to allow greater competition for the supply of hardware components, resulting in a lower cost for that hardware. NERA Economic Consulting 21

37 Overview Report Functionality of Smart Meter Infrastructure Upgradeability and configurability No. Functionality Description 25 Remote reconfiguration Enables meter settings to be remotely changed. Settings would include, for example: times for controlled load switching; thresholds for quality of supply events; and supply capacity control settings. 26 Remote software upgrades The software in the meter can be upgraded remotely by the responsible person over the communications link, without the need for a site visit or action from the customer. 27 Separate standard base plate The provision of a base plate into which the meter can be plugged. It may be possible for the communications unit to be plugged into the base plate as well. Future upgrades to the meter or communications unit could then be undertaken by plugging in the new units, rather than replacing the whole installation. 28 Non meter board installation Instead of the meter mounted on the wall of the premises it is mounted elsewhere (eg, on the power pole supplying the premises). 29 Plug and play device commissioning Allows meters to be activated and registered on the system remotely once installed, rather than manually. The next five smart meter functionalities relate to alternative installation options for the meters and the ability to upgrade or reconfigure the meter settings remotely in future. These functionalities therefore affect the costs of installation and the potential future costs of any required upgrades. Remote reconfiguration allows the meter settings to be changed remotely. This functionality therefore enables the more flexible use of some of the other meter functionalities, in particular load management (functionality 14), supply capacity control (13) and quality of supply recording (19). The ability to allow remote software upgrades reduces the cost that would be associated with manually upgrading the software installed in the meter over the meter s life. Similarly, the provision of a separate standard base plate would enable future replacement of the smart meter by unplugging one meter and plugging in a new meter, rather than disconnecting wiring from meters as is currently the case. This would result in labour cost savings at the time a meter is replaced. Non-meter board installation could avoid some of the costs associated with installing meters in the existing meter boards, especially where asbestos is likely to be present in the existing meter boards. By installing the new smart meter on a power pole or some other location other than the customer s meter board, existing meters can be left in place and the customer s meter board and wiring not disturbed. NERA Economic Consulting 22

38 Overview Report Functionality of Smart Meter Infrastructure Finally, plug and play device commissioning of meters allows the meters to be activated and registered on the system remotely once they are installed, thus avoiding the costs of manual registration Direct load control functionality No. Functionality Description 30 Signal receiver and switch located on appliance Signal receiver and switch located on high energy use appliances (air conditioners, pool pumps, etc), with no smart meter intermediary. 31 Uniquely addressable signal receiver Capability to identify and contact signal receiver through a unique address. 32 Load /supply capacity control Capacity to set kva limits on particular sites independent of the presence of a smart meter, via direct contractual arrangements with participating customers. The final three functionalities are related to options to facilitate direct load control rather than to the functionalities associated with smart meters. Signal receiver and switch located on appliance allows those appliances to be subject to direct load control, without the need for a smart meter intermediary. As a result, peak demand can potentially be reduced, potentially avoiding the need for network augmentation and peak generation capacity. Demand changes will also have impacts on greenhouse gas emissions and the cost of energy market dispatch, depending on the extent of peak demand that is avoided altogether, and the extent of peak demand that is switched to off-peak periods. Inclusion of a uniquely addressable signal receiver provides the capability to group demand response into appliance type, customer type, or region, as needed. This may provide a benefit to the distributor or retailer controlling the direct load control, as a result of the ability to more specifically target that load control. It also facilitates the addition and removal of customers from demand management program without site visits. Finally, load/supply capacity control provides the capability to set kva limits on particular sites independent of the presence of a smart meter, via direct contractual arrangements with participating customers. This in turn can facilitate the introduction of demand limited tariffs as discussed under functionality 13, with potential benefits from the deferral of network augmentation and/or customer benefits from being offered tariffs that assist with managing energy expenditure. These three functionalities are relevant in considering Scenario 3, which includes direct load control as an alternative to a rollout of smart meters. These functionalities are not considered further in this Phase 1 report, as our analysis in this report focuses solely on the functionalities that may be included in a minimum national functionality for a rollout of smart meters. They will however be considered in Phase 2 of the analysis which will directly assess the costs and benefits of the direct load control scenario, in comparison to those that may arise from a smart meter rollout. NERA Economic Consulting 23

39 Overview Report Scenarios 4. Scenarios For each of the functions outlined in Chapter 3 we have been asked to analyse the costs and benefits in relation to four alternative scenarios. The scenarios were developed by the SMWG in consultation with interested stakeholders from each of the jurisdictions and provided to the project team. While there are an almost limitless number of alternative approaches to implementing the rollout program, the scenarios have been developed to represent points in a spectrum of possible alternative approaches to provide an indication of the range of costs and benefits associated with a mandatory smart meter rollout. Importantly the actual rollout strategy adopted may differ from any of the four scenarios presented here. The consultants will not be advising on the rollout strategy to adopt as part of the current project. There are three scenarios relating to a smart meter rollout and one scenario involving the retrofitting of direct load control devices in the absence of a smart meter. These scenarios are: Scenario 1: distributor-led rollout where each distribution network service provider is given the responsibility for owning and installing meters and associated metering data services within its area of operations and there is no scope for competitive provision of these services; Scenario 2: retailer-led rollout where retailers have responsibility for procuring the installation of meters and data management services within a competitive market for these services; Scenario 3: non-smart meter direct load control device rollout which does not involve the installation of smart meters, and distributors have responsibility for retrofitting direct load control devices on high energy using appliances such as air conditioners, hot water systems and pool pumps; and Scenario 4: 25 centralised communications as part of a retailer-led rollout where the entire Australian smart meter communications system is provided by either a new centralised agency or an existing market operator. The remainder of this chapter outlines the role of the scenarios in Phase 1 of the project before describing each of the scenarios in greater detail. There are a number of matters that are relevant to our assessment of the costs and benefits of each scenario and these are also discussed briefly below. 25 Scenario 4 could be a retailer or distributor led rollout and is presented here as a retailer led rollout for exposition purposes only. NERA Economic Consulting 24

40 Overview Report Scenarios 4.1. The Role of Scenarios in the Analysis The scenarios that are being considered as part of the cost benefit analysis represent alternative approaches to rolling out smart meters. The scenarios have the potential to affect the costs of a smart meter rollout through differences in: the scope for competitive provision of meters and meter data management services; the potential for the achievement of economies of scale; and the infrastructure necessary for implementation. Similarly, the benefits between scenarios may differ due to differences in the incentives retailers and distributors have for product innovation between the retailer-led and distributorled scenarios, including the development of TOU tariffs and CPP. The different scenarios also impact the allocation of the costs and benefits between retailers and distributors, particularly those costs and benefits associated with the role of meter provider. Changes in the allocation of costs and benefits may change the incentives that either distributors or retailers have to invest in systems associated with potential benefits, absent their inclusion in a mandated rollout. Each of the smart meter scenarios assume that the rollout of smart meters is mandatory across all small customers. The reason for considering a mandatory rollout is due to the market failure arising from the benefits of smart meters accruing to both distributors and retailers, such that neither distributors nor retailers would invest optimally in a smart meter rollout on its own. The reason why our analysis has been structured to consider the relative costs and benefits across both distributors and retailers is to allow us to examine this issue in detail and to recommend where the costs may outweigh the benefits, considered overall. The consideration of scenarios in the analysis is not intended to inform a view as to the relative merits of one scenario over another. Rather the results provide some insight into what the costs and benefits might be in particular circumstances (such as the competitive provision of metering), allowing for different views as to the validity of those circumstances to then be considered. Each scenario should therefore be considered illustrative of the costs and benefits associated with a particular rollout approach. They allow the sensitivity of the costs and benefits of a smart meter rollout to changes in the regulatory environment and ownership to be examined. Net benefits may be maximised however through combining elements of a number of scenarios as part of the final rollout decision. The results will therefore inform further subsequent consideration of the relative merits of alternative smart meter rollout approaches, as may be considered for each jurisdiction. There is no intention to provide a recommendation on a preferred scenario as part of our analysis. Ultimately any rollout decisions will be a matter for each jurisdiction as it considers the results from our study. NERA Economic Consulting 25

41 Overview Report Scenarios 4.2. Description of the Scenarios being Considered As indicated above, each of the scenarios reflect different allocations of the roles and responsibilities for each element of the metering infrastructure, the scope for metering competition, and thereby the regulatory environment and ownership of meters. The main differences include: allocation of the roles and responsibilities throughout the metering chain; ownership of the meters; scope for competition in metering services; and communications infrastructure required to provide services. The differences in relation to each of these elements for each smart meter scenario is summarised in Table 4.1 below. Roles and responsibilities Table 4.1 Comparison of smart meter scenarios Distributor-led Scenario 1 Retailer-led Scenario 2 Centralised communications Scenario 4* - responsible person Distributor Retailer Retailer - meter provider Meter provider/distributor Meter provider/retailers Meter provider/retailers - communications provider Meter data provider/distributor Public communications provider/distributor/ third party provider Third party communications provider - local meter data & communications manager Distributor Meter data provider/retailer Third party communications provider - market meter data and transaction manager Market operator Market operator Market operator Ownership of meters Distributors Meter provider/retailers Meter provider Scope for competition in meter service provision to retailers Distributor responsible for the meter provider and meter data manager roles Retailers responsible for appointing meter provider and meter data manager, which can be themselves Retailers responsible for appointing meter provider, which can be themselves Communications infrastructure Distributors would have their own private communications network Multiple open access communications network to facilitate access to meters by all competitive Single shared communications network with open protocols NERA Economic Consulting 26

42 Overview Report Scenarios meter data managers * Scenario 4 could be either a distributor- or retailer-led rollout and is presented here as a retailer led rollout for exposition purposes only. How each of the scenarios affects the costs and benefits of each functionality is discussed further in sections 7.2 and 8.3 respectively. A discussion of each of the scenarios as we have understood them is provided below. Illustrations of the assumed infrastructure architecture associated with each scenario as provided to the project team from the SMWG is attached as Appendix B Scenario 1 distributor-led The distributor-led scenario involves a full rollout of smart meters across all domestic customers. As its title suggests, distribution network service providers are obligated to rollout smart meters for all customers within its area of operations, with the costs included as part of regulated charges passed through to customers in retail tariffs. In this way the meter assets are owned by the distributor and would be included as part of the regulated asset base for each of the businesses. The metering rollout is required to be completed by 31 December This scenario obligates the distributor to install the entire infrastructure necessary to provide metering services to retailers. This includes the infrastructure from the meter at the connection point with a customer, the associated communications network and management system and the data management systems. This infrastructure is assumed to provide retailers with access to information on customer usage for the purposes of billing, however it also assumes that the access is provided by the metering settlements and transactions system (MSATS) as provided and operated by NEMMCO, or the IMO in Western Australia and the equivalent in the Northern Territory. Retailers would access the information through existing business-2-business infrastructure. A schematic representation of the roles and responsibilities is provided in Figure 4.1 below. Figure 4.1 Distributor-led mandated rollout roles and responsibilities NERA Economic Consulting 27

43 Overview Report Scenarios Source: Implementation Costs Report, EMCa, pg15. Some of the features of this scenario are that it provides for the ongoing operation of the existing load control systems, for example ripple control of existing off-peak hot water systems. It also allows for the potential for the home area network to be accessed directly from the communications network, to control other appliances within the home. The key distinction between this scenario and the remaining smart meter scenarios is that it assumes that there is no competition in the provision of metering and related data management services, and that each retailer accesses this information from the MSATS system (or equivalent in WA and the NT). There would remain competition in meter manufacturing. The meters and communications network across a distributor s area would be common, such that there is potential for efficiencies to be gained through the common provision of the meters and associated infrastructure across a particular area. These might arise from efficiencies in meter installation, or through the market power associated with purchasing meters in bulk from metering manufacturers and being able to optimise this with a single metering data management system for a distributor s area. Finally, we have assumed for the purposes of this scenario that all necessary changes to the National Electricity Rules (NER) as they apply to the National Electricity Market (NEM), and as applied in Western Australia and the Northern Territory are made to allow for this scenario to be implemented. This means that we have not explicitly considered the regulatory or reform costs associated with implementing any particular scenario as part of our analysis. Under this scenario, the distributor would remain the responsible person as provided for in Rule of the NER Scenario 2 retailer-led The retailer-led scenario places an obligation on retailers to rollout smart meters to their customers by 31 December Given that the rollout would be mandated on retailers, there would be a need to consider how the cost of the rollout was recovered from customers (whether through a regulated charge, or some other mechanism). However because all retailers would be required to rollout meters to their customers, it should not impact adversely on end-customer price competition amongst existing retailers. It is anticipated under this scenario that whilst retailers would have the obligation to provide metering services to customers, there would be scope for retailers to appoint third party meter providers and meter data aggregators to provide these services on their behalf. This means that the meter infrastructure and communications infrastructure could be either owned and operated by each retailer, or owned and operated by competitive meter providers and meter data aggregators. Under either approach this might be achieved through utilising the communications infrastructure of public telecommunications providers using cellular technologies, for example GPRS or 3G. As with the distributor-led rollout, retailers could also access information through NEMMCO s MSATS system. There would also be scope to access information directly from a meter data aggregator. A schematic representation of the roles and responsibilities under scenario 2 is provided in Figure 4.2 below. NERA Economic Consulting 28

44 Overview Report Scenarios Figure 4.2 Retailer-led mandated rollout (using public communications provider) roles and responsibilities Source: Implementation Costs Report, EMCa, pg16. The key feature of the retailer-led scenario is the scope for competitive provision of communications and data management services, and metering provision within an area of operations. As with the distributor-led scenario, existing load control systems can still operate. The retailer-led scenario therefore assumes that there is a competitive meter provision market and market for meter data services. In this way a retailer can choose between a number of alternative providers of these services and it is this competitive pressure that leads to incentives for the reduction of costs in the provision of services. This is in contrast to the distributor-led scenario that relies on regulatory oversight to provide incentives for efficient provision of these services. In addition, this scenario provides flexibility to retailers to compete in the end-customer market through seeking lower cost metering provision, or alternatively offering different meter information or services to its customers. Retailers could choose to package information in different ways to its customers, and choose to offer some smart meter functionalities and not others to customers according to its own views of the incremental costs and benefits of these functionalities. This might allow retailers to differentiate electricity supply services as they compete for customers. The competitive pressure in the meter data aggregator and meter provider markets is also expected to provide stronger incentives for service provision to retailers compared with a regulated service provision requirement where these services are provided by a distributor. Ultimately a retailer could choose to source metering services from an alternative provider if NERA Economic Consulting 29

45 Overview Report Scenarios expectations are not satisfied. It is this competitive pressure that is anticipated to provide lower costs for service provision. Finally, this model assumes that it is feasible to facilitate transfer of customers between retailers such that it does not impede competition in the end-use market amongst retailers. We understand that there are a number of options for this to occur, including entering into agreements between a number of meter data aggregators or meter providers to minimise meter churn. We discuss this issue in greater detail in section As with the distributor-led rollout, we have also assumed that all necessary changes to the NER and the rules applied in Western Australia and the Northern Territory are made to allow this scenario to be implemented. As indicated earlier, this means that we have not considered the costs associated with regulatory changes and reforms that would be needed to implement this scenario. Under this scenario, the retailer would be the responsible party as provided for in Chapter 7 of the NER Scenario 3 non-smart meter direct load control rollout by distributors Unlike the other scenarios, this scenario is an alternative to a mandated rollout of smart meters as it involves placing an obligation on distributors to construct the infrastructure necessary to support direct load control devices. It also places an obligation on distributors to offer customers DLC enabling devices on all existing air conditioners, pool pumps or other large energy using devices where practical. The scenario places an obligation on DNSPs to have made an offer to install DLC enabling devices on all applicable appliances by 31 December Whilst it would be possible under this scenario to also undertake a smart meter rollout, for the purposes of comparison, this scenario has been limited to circumstances where no smart meter rollout occurs. This allows a comparison of the relative benefits associated with retrofitting DLC enabling devices to large load appliances compared with the smart meter rollouts. The infrastructure required by a distributor to implement such a rollout is outlined in Figure 4.3 below. NERA Economic Consulting 30

46 Overview Report Scenarios Figure 4.3 Non smart meter direct load control rollout by distributors infrastructure assumptions In Home Display Existing Controlled Load (HW) Ripple etc DB responsible Computer Intelligent Thermostat Customer Load Management Home Area Network Utility Control of other Loads Meter Communications Network CommsNetwork Management System DB Systems MDMS Systems VSE MSATS -CATS -MDM -MDS Profiling & -B2B Aggregation Retailers Systems Not in scope for this scenario Source: SMWG As this scenario is an alternative to the mandated smart meter rollout it does not include much of the infrastructure necessary for the collection and recording of meter data. The infrastructure is therefore only that necessary to provide control functionalities to applicable appliances. The key distinction between this scenario and the direct load control functionality enabled by smart meters in the other scenarios is the underlying assumptions about uptake of these devices. This scenario assumes that distributors are obligated to offer to install DLC enabling devices in all applicable appliances. Distributors would be expected to develop new tariffs or financial incentives to encourage customers to participate in a DLC program. In comparison, in each of the smart meter rollout scenarios, the scope for providing direct load control is assumed to be completely retailer/distributor and customer driven. There are no mandatory requirements on distributors to offer DLC enabling devices, and DLC is presumed to only apply to new air-conditioners, pool pumps and electric hot water systems. This means that the uptake of customers with DLC enabled devices for each of the smart meter scenarios is expected to be lower compared to that assumed as part of this scenario. The potential benefits from this scenario compared against the smart meter scenarios arises from the retrofitting of appliances with DLC enabling devices compared with fitting DLC enabling devices to new devices only. The costs between this scenario and the smart meter scenarios are expected to differ due to differences in the infrastructure required to support the DLC functionality. As with the other scenarios, we have assumed that the rules allow for distributors to implement this scenario, and we have not separately examined the likely costs of reforming existing rules to facilitate the implementation of this scenario. NERA Economic Consulting 31

47 Overview Report Scenarios Finally, for the purposes of Phase 1 we have chosen to not explicitly estimate the costs and benefits of this scenario, as it does not impact on the recommendations about the minimum national functionality for a mandated smart meter rollout, which is the focus of this Phase. This scenario is relevant to a consideration of the relative merits of a mandated smart meter rollout compared against the retrofitting of DLC devices to large energy using appliances. It is this second question that will be the focus of our work as part of Phase 2 of this project Scenario 4 retailer-led with centralised communications This scenario involves an obligation for a retailer to provide a smart meter to all of its customers by 31 December It is assumed that retailers would procure meters from competitive meter providers, with a single centralised communications and data aggregating system being provided by a third party. All meter providers would be required to ensure that their meters were capable of being read by the centralised communications and data aggregating infrastructure. The centralised communications and data aggregating infrastructure in this scenario differs from that provided in the distributor-led scenario because it assumes that common infrastructure is installed across all distributors. Whether this would be implemented by NEMMCO or a new single agency is immaterial to the analysis of the costs or benefits associated with this scenario. This scenario therefore has the potential for significant economies of scale arising from the provision of a single communications and data aggregating function, whilst allowing retailers to choose meter providers. This scenario captures some of the potential economies of scale and density associated with the distributor-led rollout, whilst also providing flexibility to retailers on meter provision. Figure 4.4 below provides a schematic representation of the roles and responsibilities associated with this scenario. NERA Economic Consulting 32

48 Overview Report Scenarios Figure 4.4 Retailer mandated rollout with centralised communications roles and responsibilities Source: Implementation Costs Report, EMCa, pg18. As indicated above, the key feature of this scenario is the potential cost savings associated with providing the communications and data aggregating infrastructure by a single entity. This allows us to examine the extent of the economies of scale and density associated with the provision of these elements of the infrastructure necessary for the smart meter rollout. To the extent that there are not significant economies of scale and density, then it might be appropriate to ensure that an environment is created to promote competition in the provision of these elements within the infrastructure chain, to provide competitive pressures to lower costs. As with the previous smart meter scenarios, we have assumed that all necessary changes to the NER and to the rules applied in Western Australia and the Northern Territory are made to allow this scenario to be implemented. We have therefore not considered the regulatory or reform costs that may result from implementing this scenario as part of our analysis. Under this scenario, the responsible person as provided in Chapter 7 of the NER would be the retailer Matters Relevant to our Analysis of each Scenario Scope for the achievement of economies of scale One of the potential differences between the scenarios is the scope for the achievement of economies of scale. In particular, it may be that under a distributor-led scenario the scope for economies of scale in the purchasing of meters and their subsequent installation may be greater than under a retailer-led scenario, as a result of the larger number of retailers. NERA Economic Consulting 33