April 2000 saw the opening of the UK electricity metering market to competition. The ramifications of this move are unclear. Datamonitor energy analyst Salman Wasti outlines the decisions faced by the electricity supply companies.
With competition introduced into the fully liberalized UK electricity metering market in April 2000, companies are now deciding on their position in each of the various segments. Obviously the decisions reached by the Public Electricity Suppliers (PESs) will be on a case by case basis, and a report by Datamonitor suggests the options that PESs are likely to adopt, and the credible future scenarios that could result by 2005.
While the full ramifications of deregulation in the sub-100 kW market for metering are as yet unclear for most meter service providers, competition affects all those in the non-hourly market as well as those in other segments of the metering market, and so companies are reassessing their strategies.
Figure 1. Decision time for PESs on metering in the UK electricity market
All the PESs operate metering services that already cater for the hourly market. However, the absorption of competitive non-hourly metering services presents significant changes for the PESs. They are now faced with the decision to either outsource their metering operations or compete in the market.
The additional costs incurred in establishing the parameters set out by the regulator, Ofgem, could find a number of suppliers either contracting out their metering functions to a third party meter service provider for just non-hourly metering, or potentially for all metering functions, due to anticipated cost savings.
From the price review carried out by Ofgem, with the transfer of responsibility for metering functions from distribution to supply and the operational costs involved, some electricity companies are feeling the financial pinch. Some PESs may feel that it will not be cost effective to carry out these functions in-house in the future. For some PESs this is an opportune time to seek to sell their metering arms and attain a premium price for the business. PowerGen is currently in the process of investing in its metering arm through new technology and asset base infrastructure, to provide a competitive metering service that seeks to combine best practice business processes and technology to expand the business.
Conversely, the opportunity of providing metering functions has the potential of greater revenue streams for some PESs, let alone present and potential independents. Most PES metering players have an established infrastructure and have developed, or are in the process of developing, new technological advances to take advantage of the liberalization in the metering market. This again may be dependent on whether the metering business component resides either inside or outside the company’s core assets. Northern Metering Services Limited is inside for Northern, whereas Eastern Metering Services was outside Eastern’s core business activities and has now been sold to Siemens.
Figure 2. Percentage of respondents purchasing and/or developing new technology, February 2000
The increased competition that seeks to remove regional PES metering dominance may find some PESs caught in a halfway house. With the option to either compete nationally as a metering service provider or to assess the financial costs for metering activities and decide to operate in niche metering markets or to outsource. As companies will soon be unable to cross subsidize between distribution and supply they will be unable to lower supply cost overheads.
Datamonitor recently surveyed key metering directors and managers in both the hourly and non-hourly market to ascertain their predictions and commentary on competition in the UK market. Respondents to the survey represented 70 per cent of the UK metering market by value.
Datamonitor’s survey seeks to ascertain the meter service providers’ current positioning in the market, and which companies are demonstrating best practice in meter reading, data collection and meter operations in the hourly and non-hourly metering market. It builds from the future development survey the future strategies of players, the growth and value of the total UK electricity metering market and that of the hourly and non-hourly markets.
Four key players left by 2001: Of the meter service providers surveyed, 43 per cent predicted that the industry will be dominated by just four key players by 2001, against the 17 players currently in operation, as PESs deliberate whether or not their metering operations will achieve a suitable level of profitability. In this case, a national player is defined within various fragmented sectors within the UK electricity metering market, including meter asset management, meter asset provision, data retrieval, data collection and data aggregation.
Figure 3. Potential growth of hourly metering market in the UK
New technology will become the main driver: New technology is an important element driving the business forward. This has been evident in the hourly market with the advent of energy management software, which has become a valuable business stream in generating further revenue for meter service suppliers and for customers in reducing their bills. The Datamonitor questionnaire asked respondents if they had embarked upon in-house development in order to capitalize on such technology for revenue streams and cost efficiency, and if the purchase of technology has brought them rapid competitive advantage.
Of the respondents, 89 per cent were seeking to develop their data collection and data aggregation functions in-house. This may stem from the belief that the data and its processing holds real value for the PESs in general, and the functionality of this data for numerous operations of the business. This has also been realized by non-suppliers who feel that this is an angle of the market that they can also seek to exploit.
Other in-house technological developments that respondents cited they were conducting were in energy management software, meter reading, sub metering and generator metering. These functions tie into the competitive hourly market, and suit the needs of customers calling for these technical requirements.
PLT technology was the last on the list for investment in-house, with 22 per cent. This corresponds to its early development as a revenue generator for electricity companies, but could well see greater investment in the future if trials by other companies begin to see lower cost and faster speeds of delivery.
However, the respondents still regarded energy management software and meter reading technology as prime spheres in which to purchase technology, recording 44 per cent. For energy management this is understandable as the market is developing fast.
In order to capitalize on the potential of energy management, companies are currently buying in the technology, but have intimated to develop this technology in-house to make it more functional for their customers. In meter reading, PESs are looking to cut costs and are likely to accommodate resources presently to accumulate data for the competitive supply business.
The lower responses aggregated from meter service providers in these functions for purchasing new technology is likely to relate to the financial constraints on the companies, that may see less willingness to purchase when potentially the technology can be developed in-house. However, how many R&D resources are actually in place at present both financially and operationally is open to question.
The future of the market is unpredictable. This is mainly due to the reliability of new technology that could bring down the threshold of financially viable hourly meters, from 70 kW to a hypothetical 25 kW. Industry sources feel that 40/50 kW is achievable over the next five years.
That in turn would vastly increase the size of the market, and so its value, for meter service providers and those assessing entry into the market. Therefore, the forecasts projected seek to remain fixed on current tangibles of known values than the harder to predict intangibles.
From the estimated volume of meters in both the hourly and non-hourly markets, the value of the market can be determined. As stipulated, factors accounting for inflation, GDP growth, SME growth and other intangibles are not included in these forecasts, but must be noted when taking these estimates into account.
Figure 4. Forecast of total UK metering market value, on low and high case scenario, 1999-2005
The number of meters forecast by Datamonitor can be used to determine the value of the UK metering market providing a low and high case scenario to the value of the market.
The value of the total UK metering market as of 1999, was estimated to be £454.2 million (euro dollars 717.7m). Of this, 90.7 per cent is allocated to the opening of the sub-100 kW electricity metering market with the remaining 9.3 per cent designated to the greater growth potential and related metering services. Under Datamonitor’s low case scenario, the value of the market is forecast to rise at an average annual rate of 0.6 per cent, reaching £470.6 million by 2005. Under the high case scenario, the growth rate increases to 1.48 per cent, to reach just under £500 million.
If this were to decrease further then the market size of the hourly market would increase proportionally to the larger percentage of customers in each demand bracket. Presently the value of the hourly meter market is 35 times the size of the non-hourly meter market.
The growth of the hourly market has seen a tiered effect as the threshold of hourly metering has decreased from 100 kW to the accepted 70 kW as a cost effective option for customers looking to install such meters to regulate their energy consumption.
The industry anticipates this threshold will decrease, with lower costs associated with the hourly meter from new and cheaper technology is provided by the meter manufacturers. As this threshold decreases, due to the developments in the market, a greater number of customers can use this to reduce their energy costs.
The uptake by potential customers between demand bands will smooth out showing a greater uptake as the demand threshold falls as more potential customers can benefit from hourly metering.
The future of the metering market is at present one of confusion and re-appraisal. Many traditional players are faced with hard decisions on both their strategy and operations. Given the continued fragmentation in metering services from meter reading through data, collection aggregation and presentment, and technological developments, a coherent rationalization may take time to appear.
What Datamonitor’s survey demonstrated was that the industry itself is unsure as to the direction it may take, but at the moment the number of players is unsustainable. What most foresee is a smaller number of players operating in distinct markets, driven by the different requirements of operating in each. How and when they get there, will be interesting to see.
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